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Budget 2013 : Impact on Start-ups

Budget 2013 has brought with it many happy surprises for start-ups, student enterprises, and those who wish to be part of such organizations across India.  Team Arkay & Arkay attempts to lay down the important updates for your reading pleasure.

Non-Tax measures

[su_highlight bg=”#99e2ff” color=”#000000″]MSME benefits to continue up to 3 year after MSME threshold has been crossed. [/su_highlight]

Micro, Small and Medium scale Enterprises (MSME) are businesses with aggregate investments in plant and machinery as below :

For Those engaged in manufacturing
A micro enterprise Where the investment in plant and machinery does not exceed twenty five lakh rupees 
A small enterprise Where the investment in plant and machinery is more than twenty five lakh rupees but does not exceed five crore rupees
A medium enterprise Where the investment in plant and machineryIs more than five crore rupees but does not exceed ten crore rupees
For those Enagaged in Rendering of Services
A micro enterprise  Where the investment in equipment does not exceed ten lakh rupees
A small enterprise                Where the investment in equipment is more thanTen lakh rupees but does not exceed two crore rupees
A medium enterprise Where the investment in equipment is moreThan two crore rupees but does not exceed five crore rupees

 

Such enterprises enjoy a number of benefits from a tax and regulatory perspective. However, such benefits are phased out, even if the enterprises cross the threshold by a minute percentage. This move aims to reduce the shock on such small businesses, allowing them to enjoy benefits upto 3 years after they graduate into different categories.

[su_highlight bg=”#99e2ff” color=”#000000″]Refinancing capacity of SIDBI raised to Rs 10,000 crore. Another sum of Rs 100 crore to be provided to India Microfinance Equity Fund.[/su_highlight]

SIDBI is the lender of choice for small businesses around India, the extension of refinancing capability of SIDBI means that more small borrowers will be able to utilize credit infusions into their businesses.

[su_highlight bg=”#99e2ff” color=”#000000″]Ministry of Corporate Affairs to notify that funds provided to technology incubators located within academic Institutions and approved by the Ministry of Science and Technology or Ministry of MSME will qualify as CSR expenditure.[/su_highlight]

As per provisions of the new companies bill, which is expected to be ratified by the upper house of parliament during this budget session, companies are required to spend 2% of their profits on Corporate Social Responsibility  (CSR) projects. With this new announcement, it is certain that many of these companies will chose to invest such monies in technology incubators which will most certainly lead to fostering of innovation of the development of Student enterprises in the country. While the Rules for CSR spend are not set as yet, it remains to be seen if such businesses will be able to take equity in the enterprises nurtured by such incubators and include the cost of such equity in the CSR spends.

[su_highlight bg=”#99e2ff” color=”#000000″]Re-classification of foreign investments where an investor has a stake of 10 per cent or less in a company, it will be treated as FII and, where an investor has a stake of more than 10 per cent, it will be treated as FDI will be laid. Further, there are special tax rates in place for FIIs registered with SEBI[/su_highlight]

This is an interesting development, the rules  and compliances that govern FIIs and investments by such FIIs are different from those governing FDI inflows into domestic companies. As the FM has indicated in a separate comment, this is a broad principle based move and a committee will provide further details with respect to its application.

[su_highlight bg=”#99e2ff” color=”#000000″]SEBI to prescribed requirement for angel investor pools by which they can be recognised as Category I AIF venture capital funds. [/su_highlight]

Venture capital funds that Funds that invest in start-up or early stage ventures or social ventures or Small Medium Enterprises (SMEs) or infrastructure or other sectors which the government or regulators consider as socially or economically desirable are classified as Category 1 Alternate Investment Funds (AIF). All AIFs are required to mandatorily register with the SEBI and enjoy tax “pass through” benefits bestowed upon them by section 10 (23 FB) of the income tax act which states that such income will be taxable not in the hands of the funds but rather in the hands of the investors.

[su_highlight bg=”#99e2ff” color=”#000000″]Small and medium enterprises, to be permitted to list on the SME exchange without being required to make an initial public offer (IPO). [/su_highlight]

This is great news for investors and start-ups alike, given that is allows them a cheaper exit mode. However,  The caveats attached with this regulation state that only “Suitably informed investors” can  invest in such enterprises. Do expect plenty of activity in this space soon.

Tax

[su_highlight bg=”#99e2ff” color=”#000000″]Surcharge of 10 percent on persons (other than companies) whose taxable income exceed Rs 1 crore to augment tax revenues.[/su_highlight]

This move makes LLPs and partnerships more tax inefficient as compared to companies. Since surcharge is applicable only on companies whose taxable incomes is above Rs 10 Crores, it means that other entities as mentioned earlier shall end up paying additional taxes of upto Rs 15 lakhs if their taxable incomes fall in the Rs 1 to 10 crore bracket.

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