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Grant Thornton Budget Explainer: The budget has always been a most sought after event for people running small and medium scale businesses. The founders are always looking to analyse the net impact of policy measures for their businesses and cues on the direction in which the government is trying to ease compliance as well day to day running for them.
As a founder of a startup or an MSME who has faced pandemic-related economic adversities in the form of liquidity crunches over the past 24 months or so, this budget was not any different. Hopes were as high as any other year. And why not? The startups are steadily becoming the backbone of the new emerging digital economy, and the MSME sector has been a major contributor to the socio-economic development of the country.
Let’s sample some more facts to understand the importance of startups and MSMEs for the country. The number of MSMEs in India are growing at a CAGR of nearly 20%. Today, India has the 3rd largest startup ecosystem in the world and is expected to witness YoY growth at a rate of 12-15%. In fact, India is home to 85+ unicorn startups now.
The covid-led lockdown during the first wave had MSMEs struggling and startups unsure on business continuity, however since then the economy has revived, businesses have understood how to work virtually, yet there are certain businesses that require humans to be present in person for work to flow.
Let’s understand the different announcements of the current budget for small and medium business owners, and analyse what it means for them. First things first, to make India an attractive destination for manufacturing, specific provisions were made to allow manufacturing entities pay corporate taxes at a concessional rate of 15% (plus 10% surcharge and 4% cess).
If you are a new manufacturer who has set up and registered your firm after October 1, 2019 but on or before 31 March 2023, this concessional rate scheme was offered. The government has now extended these concessional rates for people who wish to set up a manufacturing company till March 31, 2024.
One of the important incentives provided to start-ups to spur their growth in the early phase of the business is that the eligible ones do not have to pay income-tax on business profits in any of the three selected consecutive years out of the first ten years from its incorporation. One of the conditions to claim this benefit is that the start-up must be incorporated between April 1, 2016 and March 31, 2022.
Now if you are a budding entrepreneur looking to set up a start-up, this can be a great time to take the plunge as the scheme has been further extended till 31 March 2023.
To save you from cumbersome tax litigation, the budget has proposed that the filing of departmental appeals in a particular case shall be deferred if an appeal is pending in an identical question of law before the jurisdictional High Court or the Supreme Court.
For example, there is a litigation before Hon’ble Supreme Court regarding the disallowance of expenses pertaining to deduction of software payments and the same issue is being litigated in the taxpayer’s case as well, say Mr.A, then the department will not appeal against the same issue before the appellate authorities, until the issue in the Supreme Court (in which Mr A is not a litigant) reaches finality.
However in this example Mr. A has to agree that the issue in his case is similar to the issue before the Supreme Court and hence the department can wait for the outcome of the Supreme Court Judgement and not appeal separately for Mr. A’ case.
This step is largely aimed at restricting the scope of departmental appeal on same matters under judicial consideration. This would be particularly beneficial to you if you run a small business enterprise and start-up, since tax litigations can be time consuming and can lead to exorbitant costs
To cite practical experiences, in cases of litigation before any Income-tax Appellate Authority it may on an average entail in the range of 2-4 years or even more due to pandemic delays, to reach finality. Considering extension of litigation to cases before High Court, it might help in avoiding repetitive departmental appeals and also help businesses save huge professional/ consulting fees which can run in lacs.
There are also certain proposals if you are an investor who has invested in unlisted shares of a company including start-ups/MSME. It has been proposed to cap the surcharge rate on Long Term Capital Gains (LTCG) at the rate of 15%. For the uninitiated, tax on LTCG is payable on sale of assets held for more than a certain specified period, which is more than 24 months for unlisted shares. Currently, the surcharge rate is 37% in case of individuals earning taxable income exceeding Rs 5 crores, which translates to an effective tax rate of 43% approximately.
Small business and start-ups have limited resources and there are various compliances and reports to file by the end of the year. It becomes challenging to carry out a proper reconciliation of ITC, credit notes etc. Addressing this, the government has now given additional two months to ease that pressure.
Further, the government has also made changes in the GST portal. It has been seen that in many cases, a business owner has cash balance in one GSTIN but needs to shell out cash in another because transfer of cash balance was not possible. Now with this change proposed, the business owner will be able to utilize any blocked cash balance in one GSTIN by transferring to another if there is GST liability which needs to be paid post utilizing ITC balance, if any.
There are various instances where the business owner makes payment in incorrect GSTIN. To overcome the anomaly, this facility will help in facilitating business owners to transfer available cash balance in the GST portal to other states where there arises output liability. The introduction of fungibility of cash balance available between one GSTIN / State to another GSTIN/ State for the same entity will have a net positive impact on working capital flows for the businesses.
Customs compliances by SEZ units are generally cumbersome and time consuming. The budget proposes to reform Customs Administration of SEZs which will be fully tech driven. This will help businesses and start-ups operating out of SEZ to carry out their customs compliances without any hassles.
On the flip side, the budget has proposed that ITC can only be claimed on the basis of invoices reflecting in Form GSTR-2B (auto-generated table) in the GSTN portal. This may impact your cash flows adversely. There may be situations where the vendor may delay in reporting invoices and consequently you as a business owner are not able to claim credit till the vendor uploads invoices. This will require additional efforts with increased follow ups and coordination with the vendor to ensure that invoices are reported in a timely manner.
The budget has provided several measures to help out the MSMEs and start-ups, with regards to the ease in processes of compliances and tax litigations. For emerging start-ups, the time-period of incorporation to avail tax benefits has been extended. More measures seem to be up in the pipeline to facilitate the ease of doing business. The signs are encouraging going by the proclamations in the budget. One has to wait and watch how the MSMEs and start-ups can access these provisions smoothly.
This article was originally published on The Times of India.