With the Finance Minister remarking that the Budget 2021 would be vastly different from former budgets, and the continued down-trend of the economy due to COVID-19, the expectation is that the budget would usher in some bold new changes.
Specifically, with India becoming the third largest start-up nation in the world and start-ups continuing to be on a growth trajectory, high expectations are pinned on the budget to boost the ecosystem. In this backdrop, here are some of the much-anticipated tax-related reforms from a start-up perspective.
Relaxation from withholding taxes resulting in cash blockage: Companies in the start-up space are generally cash-burning/loss-making, and thus, do not have much tax liability at the end of the tax year. However, this aspect is ignored while withholding taxes on payments made to start-ups, causing genuine hardship to start-ups with unnecessary blockage of cash (which is refunded only on completion of tax assessments). Easing out such cash blockage by relaxing such withholding tax obligations on payments made by start-ups is expected, as it would provide much relief and liquidity to the start-up fraternity.
Withholding tax on payments to ‘gig workers’: The conventional business model of a start-up involves engaging the likes of independent contractors, on-call workers, etc., as against a traditional employment model. Further, such ‘gig workers’ generally hail from low-income groups who may have less-to-no tax liabilities (owing to basic exemption limits). However, payments made to such workers have an overarching withholding tax obligation for the start-ups, which also aggravates cash-crunch problems for such gig workers. Relaxation of these withholding tax obligations is expected, or at least bringing the computation mechanism on par with that of TDS on salary.
The ‘gift tax’ provisions: This (meant to be anti-abuse in nature) taxes incoming investors when shares are acquired at less than their fair market value (as per prescribed tax rules). This acts as a deterrent to investors, as many share transfers happen at a genuine discount to their market value, owing to the current economic slump. Accordingly, exempting such genuine secondary transactions at a discounted price would be much appreciated. Additionally, a more objective/clear valuation mechanism is expected for convertible instruments based on book value (like equity).
Relaxations in the ‘start-up exemption’ regime: At present, there is an annual turnover cap of Rs 100 crore for companies to qualify as an ‘eligible start-up’. In order to provide momentum to the start-up sector, this threshold could be increased, which would encourage companies to scale up its operations without fear of losing the ‘eligible start-up’ status.
Clarity in novel tax regimes: As a measure to widen and deepen the tax net, the Finance Act, 2020 had introduced TDS on ‘e-commerce’ transactions and TCS provisions for collection of tax on ‘sale of goods’. However, ambiguities persist regarding the scope and ambit of these regimes, in spite of clarifications issued by authorities. Further, certain types of transactions could be subjected to both of the above regimes (along with other taxes such as TCS under GST laws), thereby causing a cascading effect of taxes. Also, the current economic situation may not be the best time to implement these taxes as start-ups and small businesses have already been affected by COVID-19 stress. Postponement or abolition of such duplicate regimes and providing an easy/less onerous taxation regime for start-ups could be expected.
Other expectations (non-tax/general business perspective): The start-up sector will continue to look for the government’s support in meeting its other outstanding demands, namely, reduced/easier tax compliances, faster and more effective implementation of policies, more relaxed rules for domestic listing, etc. Similarly, immediate fiscal support measures, including grants, soft loans and funding support, need to be provided due to the current economic instability.
With India still coming to terms with the domino effect that the pandemic has had on the business environment, the start-up fraternity is facing an unprecedented crisis. While revival attempts are in full swing, the need for support and encouragement from the government cannot be underlined enough.
It is expected that adequate steps would be taken to create a well-developed ecosystem for incubators, accelerators, and co-working spaces to encourage more innovative start-ups. The government should ensure that start-ups have enough care and backing to successfully recover and thrive, as the start-up industry has vast amounts of untapped potential to generate employment, stimulate spending among the public, generate positive inflows in the form of FDI, etc.