Feb 21, 2013 03:52 PM IST | Source:

Budget 2013-14: Govt needs to boost entrepreneurship for SMEs

The days are closing in for the Union budget 2013 and the finance minister must be doing his best to reach out to all sections of the economy. The government will have a political agenda to fulfill as well.

Kripananda Chidambaram
Fintotal Insights and Resources

The days are closing in for the Union budget 2013 and the finance minister must be doing his best to reach out to all sections of the economy. The government will have a political agenda to fulfill as well.

In this balancing act the government should not miss out on one potential growth engine of the economy i.e. small business entrepreneurs.  In fact the whole world has acknowledged the importance of small businesses and the role they play in the sustainability of the economy.

I hope the government this year lays a strong foundation to make India a country of start-ups.
Small and Medium Enterprises (SMEs) have been among the most powerful generators of new jobs in the past. Hence we need to focus more on supporting these small businesses and creating an amicable environment for them to prosper.

Though start ups may not qualify as SME in the exact sense, but eventually they become one of them. The risk of starting up in India is very high; failures discourage future attempts and create some sort of mis-culture.  Though there is no record per se, it can be said that only about 5 percent of startups become successful. Government here can play a huge role by creating an ecosystem for entrepreneurship to grow and prosper.

Entrepreneurship should be given a step up and encouraged to the fullest. The current uncertainty surrounding the economic climate may have prompted many business owners and would-be entrepreneurs to put off on plans. Though they are generally known to take higher risks, the current situation looks more risky with less potential rewards.
Broadly start ups need support in the following areas:

Easy access to bank and risk capital
Private capital should be encouraged to flow freely into start up firms. Hopefully there will be full clarity on the last budget’s proposal on taxing investments made by angel investors as other income.

The budget should provide for further tax breaks in long term capital gains tax on sale of share for domestic and foreign VCs alike.

Bank lending: Many startups are deprived of funding from proper banking channel.  Unlike large businesses, which have access to capital markets for funding, many startups have few formal channels of financing. It is extremely difficult to obtain bank loans unless the business owners’ real estate assets are kept as collateral.

The government should create a central startup loan guarantee portfolio that shall act as collateral for small business loans. This shall encourage both private and PSU banks to actively lend to start up businesses.

Favorable corporate tax policy encouraging new start ups

Start ups should be exempt from payment of direct taxes for the first three years of their existence. This will help them retain vital cash within their business for future growth and expansion.

Similarly start ups should be exempt from paying any sort of service tax in the first three years of business. This will encourage large companies to avail services of startups as they shall have a cost advantage over other established players. Even further, large companies should be allowed 110% value of invoice raised by a startup as expenses. Startups should be exempt from VAT and this will make their products cost competitive.

Tax breaks for employees working in startups:

Acquiring and retaining talent is one of the biggest challenges a startup company has to deal with. Tax breaks can be given to employees working in a startup. The tax breaks can be in the form of higher exemption limit. Say up to Rs 5 lacs the tax rate can be nil. This will attract experienced and highly qualified talent.

Creating clusters in the lines of SEZ:

Similar to SEZs, clusters for startups should be created. Tax breaks should be given to various service providers in the clusters. For example, rent earned from a property in the cluster can be tax exempt. Similarly power and other infrastructure service providers would get tax breaks.

Loop holes: I fully agree that this will create huge opportunity for unscrupulous players to split their business into smaller units and come in the market disguised as startups but that cannot be an excuse for making an attempt at this.

We can look at a separate entity for a startup similar to Pvt Ltd, may be SUP. SUP will be valid for 3 years and it will automatically become any other entity.

Here is how it should look like:
One has a business plan- applies for registration- presents it to the panel-get an SUP certificate- sets up an office in the cluster-attracts risk capital and bank funding- hires talent- gets preference purchases- gets to retain cash for 3 years and grows to become a successful company.

Looks too big a dream!
Yes, it may seem a distant dream but if the policy makers can show the will and resolve, this can create a miracle in our economy. The culture of the country can be impacted. We will become a land of innovators and risk takers.  A new breed of workers will emerge. Entrepreneurs are known to be frugal with resources and will extract the most of the limited resources.

Eventually these startups end up becoming SMEs and large enterprise boosting employment growth in the long run.

One more important aspect of smaller business is decentralization of power; perfect antidote to crony capitalism and concentration of powers among a few.

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