This article is written by Parthesh pursuing Diploma in Business Laws for In-House Counsels from LawSikho.com.

Introduction

Indian Finance Minister Nirmala Sitharaman on 1st February, 2021, presented the Union Budget of 2021 – with a strong focus on digital transformation and the next phase of economic recovery which has gone down due to Covid 19. She also ditched the ‘BAHI KHATA’ which became a major talking point during the speech. Of the longest budget ever made last year, he walked away with a ‘Made in India’ tablet. Apart from this, there has been a strong focus on key sectors in the digital economy through increased spending on health care, education, and productivity in manufacturing and infrastructure.

The primary focus areas of the budget 2021 were healthcare and generating jobs by increasing the government’s expenditure across different sectors and industries even as the country struggles to bounce back from a pandemic brought downturn.

Key points for start-ups from the Union Budget 2021

• Businesses that fall under the definition of ‘small’ companies have a reduced liability under the Companies Act, 2013. The definition of ‘small companies’ is proposed to be expanded to include companies with paid shares of up to Rupees 2 crore and profits of up to 20 crore rupees.
• Changes are proposed for One Person Company
• Allow non-resident Indians to set up an OPC
• Remove ceiling on paid-up share capital
• Flexibility for subsequent conversion to any other form of company
• Standards for residency of a person setting up an OPC are reduced to 120 days
• Tax holiday for start-ups but only those can avail this exemption provided that annual turnover does not exceed INR 25 Cr in any financial year.

India has now started to become a start-up hub globally with considerable funding, modernized and evolving technologies, and a massive population which always results in enormous demand in the market. Such factors attract more and more amount foreign investments. The increasing number of start-ups in the market has turned the market competition which benefits the economy as it creates huge employment opportunities. 

Here are some key takeaways from Union Budget 2021-22 For Indian start-ups.

• Tax holiday for start-ups

In Union Budget 2021, the Finance Minister has extended by one more year, tax holiday for start-ups. The decision has provided much-needed relief to some as after the pandemic it may give a boost to the start-ups. According to Union Budget 2021, the start-ups will get capital gains exemption by one more year that is till 31st March 2022. The benefit is in addition to the seven years tax holidays the start-ups would get if their turnover is not exceeding INR 25 crores in a financial year.

The tax holiday will help the start-ups in their starting and developing period as more funds will also help them to stand stable in the competitive market. Before this, Section 80 of the Income Tax Act provided a 100% deduction of the profits from an eligible start-up for 3 consecutive years out of 10 years, incorporated before 1st April 2021. The eligible start-ups are those who have registered on start-up India portals. Only those start-ups can avail of this exemption provided that their annual turnover does not exceed INR 25 crores in any financial year. Also, the government has proposed to allow capital gain exceptions to everyone who is in a start-up for a minimum period of one year.

• Tax relief on ESOPs from start-ups

The Union Budget has recommended a host of incentives for India’s start-up ecosystem. One of these included tax deductions levied on employee stock ownership schemes (ESOPs). Currently, employees pay taxes when exercising their options. They also pay taxes when they sell their shares.

The Union’s budget has now proposed a reduction of tax payments on the use of ESOPs by five years or until the employee leaves the company; or when selling shares, any past. However, in some cases employees will have to pay double tax. For example, if an employee holds the shares for a long time awaiting a return agreement, the number of shares redeemed will be taxed at 20%, subject to the Finance Act 2018 as a long-term benefit.

• Faceless Income Tax appellate tribunal and easy reassessment openings

The Union’s budget suggested that with the exception of high tax evasion cases, that is, more than 10 lakhs, the screening process in all other cases would only be open for up to three years, compared to a six-year term. The Union 2021 budget also proposed the National Faceless Income-tax Appellate Tribunal Centre. The Tribunal will deal with all cases of the second phase of appeal. Therefore, all DRC continuity is empty and powerless. This will reduce litigation and give impetus to small and medium taxpayers to resolve disputes in the early stages

• The time limit for assessment and reassessment reduced

To reduce the burden of compliance and to provide assurance to taxpayers, the time frame for reopening the analysis is proposed to be reduced to 3 years from the current 6 years from the end of the relevant audit year. Reopening of exams up to 10 years will only be allowed if there is evidence of an undisclosed amount of Rs 50 lakhs or more per year. In addition, the power of re-opening is now being eliminated, and from now on reopening will only take place in identified data analysis cases, Comptroller and Auditor-General’s disputes, and where there is evidence of tax evasion in search and litigation.

• The threshold of a ‘small company’ changed

To reduce the burden of compliance under the provision of company law, in order for a company to qualify as a ‘small company, the budget increases the amount paid from Rs 50 lakhs to Rs 2 crore and the income limit from Rs 2 crore to Rs 20 crore.

• Changes in company law

By gaining momentum, the government has proposed a change in the provision of corporate laws in India. The first is that an Indian citizen living in India for a period of 120 days (which is 182 days) can establish individual companies. According to the new budget 2021, non-resident Indians can incorporate single-person companies. In my option, this decision will be a breakout for lots and lots of business owners as now a lot more can register themselves as start-ups and can avail all the benefits provided to them by Indian governments.

In addition, FM has introduced a new OPC, One Person Company, the requirement to forcibly convert into a private company or public company. Eliminate PUC enforcement in excess of Rs 50 lakh or profits in excess of Rs 2 crore over the three consecutive years.

Now, One Person Companies will be able to grow beyond the above limits and this move will provide flexibility for developers to change OPC at any time.

• Fintech digital transformation

The budget has proposed the allocation of Rs 1,500 Cr to increase access to digital payments. It aims to increase investment. In this regard, Finance Minister, Nirmala Sitharaman also proposed the establishment of a “world-class” fintech hub near the Gujarat capital Gandhinagar in GIFT City (Gujarat International Finance Tec-City). In my opinion, this decision will help the country to transform into a greater and advanced digitalized society.

• FDI boost to the insurance sector

The Union Budget 2021 proposes amendments to the Insurance Act, 1938. It aims to increase the legal FDI from 49% to 74% in insurance companies. Therefore, it will allow foreign ownership and control of insurers in the country with certain protections. One of the protections is that most of the directors on the boards and senior officers must be Indians living there. In addition, 50% of directors should be independent directors. These companies should also keep a percentage of a certain profit as a standard income. This decision will attract a countless number of foreign investments in the insurance sector which will eventually result in the development of the sector but also it has its cons such as lesser control on market, etc.

• Dedicated early-stage start-up fund

The Start-up India Seed Fund Scheme will provide Rupees 20 Lakhs to start as a Proof-of-concept grant. They can also earn another 50 lakhs through flexible conversion or credit or instruments linked to sales credits. The fund will continue to provide financial assistance for the start of the Proof-of-concept, model development, product testing, market entry, and trading.

So, to get this fund, you will have to register yourself on the Start-up India platform. After that, in selected incubators, you can apply for a seed bag with the appropriate documents.

Conclusion

Prior to the budget, government hands were committed to balancing COVID-19-related packages with depleted resources and financial intelligence. Given this, one can be thankful that no additional tax/compliance has been introduced while providing infrastructure investment and capital expenditure. This will empower growth and demand and will help start their careers.

However, the expectations of the start-up community such as compliance with eco-systems, restructuring processes, etc., remain unfulfilled. Other long-term expectations such as allowing financial ‘circulation’ at the very beginning also remain unanswered in this budget 2021.

As per my personal opinion, until the start-up ecosystem issues and genuine expectations of the community remain unanswered, start-ups’ will continue to face significant challenges in innovating and taking Indian businesses to the world.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.