While tabling the Union Budget 2020 in the parliament, Finance Minister Nirmala Sitharaman threw light on 8 main areas- Aspirational India, Economic Development, Caring Society, Paradigm shift in Governance, Financial Sector, Fiscal Management, Direct & indirect tax.
With delivering the longest budget speech in history, Nirmala emphasized on providing relief on working capital requirements for MSMEs and easing the peculiarity of ESOP (Employee Stock Ownership Plan) for startups.
Below are the major announcements made by Finance Minister, we can compare it with the previous tax provisions 2019-20 here
What we got for SMEs? Let’s have a look!
To improve the cash flow within the SMEs, Sitharaman reiterated that invoice financing app will be launched. Businesses will be able to borrow funds through invoice financing equivalent to the amount due from their customers.
This will not only help in having cash flow in an organization but aid in payment of services, assets, salaries, and others. Before, the businesses were required to wait for the payment from the customers’ side.
Turnover Threshold for Audit
Present Scenario: Businesses that have a turnover of more than 1 crore are required to get their accounts audited.
After the budget 2020: Sitharaman has proposed to raise the threshold to 5 crores which will reduce a lot of burden on small enterprises. Perhaps, this would be only beneficial for businesses that hold less than 5% of the transaction in cash.
GeM or Government-e-Marketplace
GeM is a platform where the procurement of goods and services takes place & is looking forward to enabling & creating a single platform for the same. Finance Minister added that the present government has proposed to increase its turnover to 3 lakh crore.
Restructuring of debts
RBI had permitted the restructuring of debts till March 31, 2020, last year. This year, the government has proposed to extend the window for 1 year that March 31, 2021, so that a large pool of MSMEs can benefit.
10% reduction in overall tax incidence
The Finance Minister paid homage to Arun Jaitley by calling him the architect of GST and how it has benefited MSMEs by way of enhanced threshold & composition limits. Sitharaman added that effective tax incidence on almost all commodities came down & it amounts to a 10% reduction in overall tax incidence.
She also briefed about how GST faced certain hurdles during the time of maturing and how the GST council has always been dynamic & motivated towards it.
Single window e-logistics market
Sitharaman said that national e-logistics policy will be released soon & the roles of Union, State, & Key Regulators will be clarified in the same. She also reiterated that a single window e-logistics market will be created which will benefit MSME & make them more competitive, generate employment, & boosts the skills of people.
This will help MSMEs to ideally have an advantageous position over others and erase any kind of hindrance.
Factor Regulations Act, 2011, subordinate debts for MSMEs’ entrepreneurs
Sitharaman claimed that Government would make amendments to the Factor Regulations Act, 2011 which will aid NBFCs to raise an invoice financing to MSMEs via TReDS.
This will help MSMEs in maintaining their financial stability.
Though the Government has taken various initiatives to help MSMEs maintain working capital credit, it still raises a concern. Understanding this, FM proposed to bring a scheme of providing subordinate debts for MSMEs’ entrepreneurs. These subordinate debts will be counted as quasi-equity & it will be guaranteed by CGTMSE.
Increase in Custom Duty on Items like Footwear
As cheap & low-quality imports were being a hindrance to MSMEs’ growth, FM announced that custom duties will be raised on items like footwear & furniture.
Some key amendments have been proposed in the corporate tax regime in order to ease the process:
Removal of Dividend Distribution Tax
This budget has proposed to remove dividend distribution tax on dividends declared by companies and mutual funds. Now, if the proposal is accepted, then the dividend earnings will be added to recipients (investors) & taxed at the applicable rates.
Widening of Tax Collection at source
According to the proposed budget, a seller holds the right to collect tax collection at source from a buyer on the sale of goods worth more than 50 lakhs per annum. Also, the percentage of tax collection should be 0.1 and if the buyer doesn’t have a PAN or AADHAAR then the rate will be 1 percent.
TDS on E-Commerce Transaction
Finance Minister proposed that 1 percent tax deducted at source (TDS) should be levied on e-commerce transactions.
Other proposals were:
- Vivad se Vishwas dispute resolution scheme
- Deferment of Significant Economic Presence (SEP)
- Changes in transfer pricing and income attribution provisions
- Amendment to residency rules for individuals
- Introduction of concessional rate of tax for individuals and cooperative societies
what we got for Start-ups?
ESOP – Employee Stock Ownership Plan
ESOP is a great way to retain talent in startups. Under this, the company provides a limited amount of stocks to its employees so that they remain in the company and feel the ownership as well. It concludes or ends only when the power is vested, the employee exercises it, or leaves the company.
Present Scenario: ESOPs are taxable at the time when they’re being exercised. This proves to be an impediment for employees who keep their shares for a longer period.
After the budget 2020: Sitharaman proposed that the tax on employee stocks should be deferred by 5 years or until they leave the country, or sell the shares, whichever happens early.
Well, this move wasn’t much appreciated by startups as FM has only proposed to defer (postpone or extend) the tax payment rather than removing it.
If the employee leaves or sells the share before 5 years, he/she will be requested to pay the tax in any condition.
Turnover limit from 25 crores to 100 crores
Present Scenario: If a startup has a turnover of 25 crores then it is allowed to have a deduction of 100% of its profit for 3 years out of 7. However, this only implies if the turnover doesn’t exceed the limit of 25 crores.
After the budget 2020: FM proposed to extend the limit up to 100 crores as many startups can benefit from this. Following the same, she proposed to extend the eligibility period from the existing 7 to 10 years.
Early-life funding & seed funding
To support ideation and the whole developmental process of a budding startup, Sitharaman proposed to provide early-life funding and seed funding.
Earlier, Prime Minister Narendra Modi had announced that his government aims at creating an INR 20K crore seed fund while reading the party’s election manifesto. Well, it is unknown whether the budget talked about the same seed fund or not.
Eventually, seed funding will render support to a lot of budding startups that die in their early phase due to a lack of funds.