Budget 2016: Impact on Startups

Startups were awaiting anxiously for Mr. Jaitley to come with bonanza for them. Few years have been happening for them and companies started by new breed of entrepreneurs have attracted huge investment from domestic as well as foreign investors.

Modi’s emphasis on “Make in India” and “Standup India” had raised expectations to peak. Even the FM speech gives an impression of fresh blood infusion by offering various tax sops to start-ups. FM mentions in his budget speech (Para 125) to assist Startups by allowing 100% deductions of profits in 3 out of 5 years of their start. However, let’s have a look at the fine print of various provisions of Finance Bill, 2016.

Startups have been defined by way of conditions:
1. It has to be company incorporated on or after 01.04.2016. It is a known fact that incorporating Company involves high cost than other forms of businesses like Proprietorship firm, Partnership firm or LLP. Even the regular compliance cost is much higher than other forms.

2. The total turnover should be capped at Rs.25 Crores in any of the five years from incorporation. It appears to be misplaced provision as turnover is usually huge while profit may or may not arise. For eg. Cab aggregator may have turnover of Rs.100 Crores but are in losses.

3. After these financials restrains, Bill defines “eligible business” of start-ups must involve innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property. Hence, companies have to first prove before an Inter-Ministerial Board of Certification(to be notified) about their products or processes. This appears to be cog in wheel as products or process or service should be new is very hard to prove, also there is no definition of “new”. Further, intellectual property is nowhere defined leading to new round of litigation.

Intellectual property generally means Patents, Trademarks, Copyrights, Designs and Geographical Indications in India. Indian Intellectual Property laws doesn’t require compulsory registration for all. For instance, Copyright doesn’t require compulsory registration and law provides protection to author who can prove his creation to be oldest.

Now, if the government is talking about Patents then their own Report says 98% of Patents granted in 2015 were more than 5 years old. Surprisingly, one patent was applied 19 years back. So going by the record we can conclude that startup will wait for 5 years and by that time deduction under proposed Section 80-IAC will subside. After, seeing this apathy it appears to be an eye wash.

Secondly, if an individual or HUF also invests from sale of residential property in equity of such a startup company can claim benefit from capital gain which otherwise would be pretty high.

However, if this is unintended then the Finance Ministry should co-ordinate with Ministry of Commerce which oversees Intellectual Property in India and come out with provisions which propagates start-ups at root and doesn’t rot them.

About Author
Nipun Singhvi is a Corporate Lawyer who is a Chartered Accountant, Company Secretary and holds Masters in Corporate Law. He is an avid speaker at various professional forums, business associations and banks. He is involved closely in start-up consultancy and has nurtured many SME to grow.

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