Finance Minister Nirmala Sitharaman announced a slew of reforms for Indian startups and small businesses in her Budget 2021 speech. She highlighted the government’s proposals related to tax holiday and incorporation of one-person companies, and how they will directly benefit entrepreneurs and innovators. How would these measures play out in the current ecosystem?
Context
While presenting the Union Budget for Financial Year 2021-2022, the FM emphasized that the government aims to incentivize startups and give them a much-needed pandemic boost. “I propose to extend the eligibility for claiming tax holiday by one more year, till 21st March 2022,” she said. Further, those investing in startups would not have to pay capital gains tax for another year.
The government also plans to encourage the incorporation of One Person Companies (OPCs), which require single person membership. This is reflected in the relaxations put forth in the budget speech on 1st February. Any OPC registered under the Companies Act, 2013 would be able to convert into any other company and grow without restriction on paid-up capital and turnover. Moreover, non-resident Indians would be allowed to set up an OPC even if they reside in India for 120 days in a year–the earlier residential limit for NRIs was 182 days. This move will ease the compliance requirements for more than two lakh companies, Sitharaman remarked.
While some feel that startups were given a new lease on life, others believe the concessions do not matter much. Let us understand both perspectives.
Changes will ease operations, spur innovation:
According to the Economic Survey, there are more than 41 thousand government-recognized startups in the country, which account for about 4.7 lakh jobs. And the Indian startup economy is currently the world’s third-largest after the United States and China. With 38 unicorn firms, we are now in the running to become a leading hub of such firms. A relaxed business environment, facilitated by tax and regulatory concessions, will only help this sector grow further.
Industry experts agree that the tax holiday would give upstarts a breathing room and the OPC changes will give them a free hand to experiment. Budding entrepreneurs can now pursue creative ideas instead of getting bogged down by compliance roadblocks. A distinct advantage of OPCs is that the company remains separate from the owner’s personal assets and liabilities. And as the business grows, it is possible to easily transition for raising equity funding, unlike in a sole proprietorship.
And then, there is the NRI angle: Silicon Valley veterans can enter the Indian market, invest in startups, and operate an OPC under the eased norms. All in all, the new budgetary measures augur well for the Indian diaspora home and abroad. All this is in addition to the previous startup-focused initiatives like the SIDBI Fund of Funds, the Seed Fund Scheme, and several other indirect measures. When it comes to early-stage ventures, the government’s agenda has always been clear: Create an open, easy-going environment for funding and regulation, reaping the rewards of innovation. Budget 2021 has further cemented this position.
Changes will hardly impact startups:
The critics are of the view that the tax incentive offered by the government would have zero impact on young ventures. IT sector veteran T.V. Mohandas Pai noted that most startups do not make profits for the first few years. “They want to grow very fast and spend on marketing, which causes losses. Tax benefits are not of much use,” he told reporters after the budget speech. The Indian startup ecosystem can flourish on its own, but it just needed a mild nudge from the authorities. A reduction in capital gains tax from 28% to 11%, just like listed companies, would have been a much better solution.
Also, a single person company would fail to meet the purpose of raising institutional funding at the outset. Since an OPC has only one shareholder or director, it would have to be converted to a private limited company to move to the next stage. Even if the relaxations give a leg up to such companies, the proof will be in the pudding, with the real benefits emerging only when the intent is translated on ground. Even though OPC were introduced in Indian policymaking years ago and formalized by the government in 2013, they have not really taken off. As of 2019, there were only a few thousand OPCs across the country. So, it remains to be seen what pitfalls will surface.
A closer examination reveals that there could have been other, more important, relaxations on the registration and licensing fronts. These requirements make the process of incorporation cumbersome, deterring market and investor entry into India. So, the government should have looked into delaying the timeline for such formalities.