An additional five years to carry forward MAT credit will not bring much relief, instead start- ups hope for incentive to improve their balance sheets.
By Alok Bansal- Co-Founder and CFO, Policybazaar.com
The eagerly awaited Union budget was announced on 1st of February 2017 with an agenda to transform, energize and clean India. The overarching theme of the budget was to promote a balanced growth in the economy by ushering transparency in the ecosystem and a strong push to financial inclusion and digital revolution. The government has exquisitely put together small but influential announcements in order to strike a right balance. The vision is clear right from the outset to develop a cashless economy and rise of Indian Start- Up ecosystem for more job creation and to boost entrepreneurship spirit. After a year of turmoil for Indian startups, there were expectations of favourable push in the budget announcement. However, the budget only offered marginal gains while holding back major expectations.
The Finance Minister Arun Jaitley started with relaxation on profit linked deductions. The companies incorporated post 31st March 2016 can now avail three-year tax holiday in the first seven years of their inception instead of five years earlier. We welcome the decision but this will only attract a margin relief for startups. We were hoping for competitive dynamics in the system which could turn out to be real incentives and empower Start-ups. Instead, the government would have looked at increasing the tax holiday to minimum seven years. The initial years are crucial for any startups; the focus is more on the growth than profitability. A marginal relief in the tax burden could have helped to create conducive environment.
In addition, the startups were expecting relief from the Minimum Alteration Tax (MAT). In the last union budget, it was announced that startups will not be liable to pay tax on profits incurred for the first three years but they will be liable to pay MAT as soon as they start registering book profit. MAT was introduced to replace corporate tax, which then, was a huge relief to the start-ups. This year, we expected the government to relax MAT limits to further incentivize startups. However, the government proposed to enhance MAT credit limit from existing 10 years to 15 years. An additional five years to carry forward MAT credit will not bring much relief, instead start- ups hope for incentive to improve their balance sheets.
Talking about the ESOPs (Employee Stock Ownership Plans), which are given to employees as perks above the salary are taxable when the employees decide to sell them off. It would have been a path-breaking initiative by the government to make ESOPs tax-free. However, there was no mention about ESOPs in the budget announcement made by the Finance Minister.
Moreover, young companies in the financial services sector especially Fintech companies are poised for the age of innovation. It has turned out to be a missed opportunity to recognise the efforts, boost their morale and provide a competitive advantage to them. High growth startups have the potential to boost economic growth. Currently, in India, winding down of non-functioning businesses is a cumbersome process. If we take the example of any country where start-up models have been successful, focus is more towards business than compliances. We do not expect radical transformation in the system and processes but the ease of doing business is a must to build the successful startup culture in India.
(This is an opinion piece)