Govt gives tax break to MSMEs, little news for start-ups

FM Jaitley reduced the income tax rates for such enterprises as part of his budget announcements

In a major relief to Medium, Small and Micro Enterprises (MSME) across the country, Finance Minister Arun Jaitley on Tuesday reduced the income tax rates for such enterprises as part of his budget announcements.

Arguing that MSME companies don't receive too many exemptions, FM Jaitley said that they end up paying tax at a higher effective rate as compared to much larger companies. "Therefore, the corporate tax rates for companies with turnover up to Rs 50 crore has been reduced to 25%", he said.

The Finance Minister added that according to government estimates, currently companies with turnover greater than Rs 500 crore paid an effective tax rate of about 25% while those MSMEs with turnover up to Rs 50 crore got taxed at more than 30%.  

The new declaration is a move by the government to make MSMEs more viable and encourage incorporation by smaller firms as companies. For MSMEs with turnover up to Rs 2 crore, Jaitley said that the presumptive tax will be lowered from 8% to 6%, thereby lowering the financial burden on small merchants.

The government has slowly moved its focus on MSMEs after widespread dissatisfaction was reported from this sector in the wake of demonetisation. Senior government officials said the sector represented a huge capacity for labour absorption and job creation. 

On December 31, Prime Minister Narendra Modi had also announced an increase in the bank credit guarantees for MSMEs from Rs 1 crore to Rs 2 crore.

The move is expected to improve the liquidity issues faced by such businesses. However, economists warned against expecting the move to make any major impact in the near future such as pushing up borrowings or leading to significant job growth as demand conditions remain low in the country. 

“With so low demand prevalent in the market currently, no one is going to engage in capacity addition. It will take around 6 months for any impact to become visible.” Devendra Pant, chief economist at India Ratings said.

The government currently underwrites loans given by banks to small businesses through the Credit Guarantee Fund Trust for Micro and Small Enterprises.

On the other hand, precious little was announced in the budget for another sector touted as a mega job creator — start-ups. While start-ups had been clamouring for tax incentives, the Finance minister announced that they will have to pay taxes for three out of seven years (up from five last year), on profits made. 

Also, the pet peeve of many a business - the Minimum Alternative Tax (MAT), was not reduced. However, companies have been allowed to carry forward their MAT to 15 years from the present period of five years. This provides the companies an additional five years before they become liable to pay their dues.

The issue of carrying forward the losses of start-ups, the condition of the continuous holding of 51% of voting rights has been relaxed subject to the condition that the holding of the original promoter/promoters continues.

Regarding tax concessions granted to startups under the Start-up India policy, only eight start-ups were allowed to avail the tax rebate in 2016 out of 111 applications received, according to data on the Start-up India website.