- Date : 17/02/2020
- Read: 6 mins
While, in Budget 2020, the stimulus package did not materialise, it does offer hope for SMBs reeling under a credit crunch and slowing demand. Read on to know more.
The much anticipated Union Budget 2020 has proved to be a mixed bag for startups and entrepreneurs. For businesses that were banking on a government bailout to sustain operations in the middle of a severe liquidity crunch, it offered little cheer.
However, there is no denying that Budget 2020 has several pro-growth initiatives that can have a more positive impact on investor sentiment compared to the interim budget of 2019.
Combined with the successive interest rate cuts by the RBI over the course of the last year, these moves have the potential to shore up flagging demand and drive exports for Small and Medium Businesses (SMB).
Incidentally, SMBs – which account for more than 95% of employment opportunities in the country – has been declared a priority sector by the government in terms of investment. The government’s emphasis on job creation and the need to maintain the competitiveness of Indian SMBs on a global scale necessitates it.
Read on for a review of the hits and misses of Budget 2020, how they affect startups and entrepreneurs, and the impact on business fortunes in the upcoming financial year.
Let’s start with the hits:
Employee stock options (ESOPs)
The government has decided to defer taxes on employee stock ownership plans (ESOPs). These reduce the tax deducted at source (TDS) liability for employees of startups and mitigate the liquidity problems faced by them by way of paying taxes immediately after exercising ESOPs.
ESOPs are now taxable in the hands of employees as per the following scenarios:
- After five years of share allotment
- On leaving the organisation
- On the sale of stock options as capital gains accrued
For startups looking to retain talent and control cash flow fluctuations, this provision is a welcome step.
Simplification of GST
The GST council will continue reviewing exempted items and rationalise rates on an ongoing basis. Higher threshold and composition limits are expected to allow startups and SMBs to save a significant amount of money. The current tax regime has consolidated and simplified taxes for SMBs across the country. This, in turn, will boost compliance rates and collections.
Seed fund for entrepreneurs
To boost overall consumer demand in the economy, job growth is essential. With this in mind, Budget 2020 has announced the creation of a seed startup fund for early stage startups. To remove the procedural bottlenecks faced by entrepreneurs, the government has announced plans for an investment clearance and advisory cell and an online portal for protection of intellectual property rights (IPR).
Recognising that India possesses the talent for developing advanced technology solutions but lacks the institutional framework for commercialising it, Finance Minister Nirmala Sitharaman announced a series of measures for the technology sector. These include investing in emerging technologies such as Artificial Intelligence (AI), Machine Learning (ML), and quantum computing to the tune of Rs 8,000 crore in addition to developing BharatNet, a nationwide broadband data network. The Budget also cleared the decks for building data centre parks, which will give SMBs access to world-class IT infrastructure and boost cyber security.
Private equity/venture capital funds
In a bid to allay the concerns of institutional investors, including private equity/venture capital funds that have made substantial investments in the SMB sector, the government has decided to do away with dividend distribution tax (DDT). This move is likely to attract greater interest from investors, allowing Indian startups to raise funds from global markets competitively. This comes on the back of a recent cut in corporate taxes that has served to energise businesses in the country.
From greenfield airports to an expanded network of highways, railroads, and coastal waterways, Budget 2020 is pulling out all stops to put Indian companies on the fast lane to growth. Announcing an investment of Rs 1.7 trillion, the FM emphasised the logistics and storage benefits this will have for SMBs, particularly in the agro-based and manufacturing sectors. A comprehensive national logistics policy is also being drafted to provide end-to-end logistics services to businesses across the country.
And now, for the misses:
Struggling with declining sales and poor capacity utilisation, the auto sector was pinning its hopes on Budget 2020 for a reprieve. However, the imposition of tariffs on the import of electric vehicle (EV) batteries as an anti-dumping measure has complicated matters for the auto industry. While the government’s intention to encourage automotive companies to source batteries from local suppliers is laudable, the demand for commercial EVs – other than electric three wheelers – is not considered big enough to currently justify large-scale investment.
With the deadline for the implementation of BS6 emission standards looming on the horizon, the auto industry is still at the crossroads regarding the adoption of new technology while protecting its margins.
The ongoing NBFC sector has starved real-estate developers of much-needed funds to complete under-construction projects and bid for new ones. While demand in the retail real-estate sector is expected to remain lukewarm in the foreseeable future, realtors had been eyeing affordable housing projects under the Pradhan Mantri Awas Yojana (PMAY). However, the lack of a clear policy regarding future projects has left developers disappointed.
For SMBs engaged in the production of construction material such as bricks, tiles, pipes, etc, which were anticipating a rationalisation of GST levied on their products, Budget 2020 had nothing to offer. The silver lining, however, is the National Infrastructure Pipeline (NIP), which can provide some respite to the construction materials industry.
While Budget 2020 has attempted to tread a fine line between appeasement and economic growth quite well, the manufacturing sector could have done with some financial support, as is the case in many Western countries. Whether Union Budget 2020 turns out to be a booster dose for startups, however, remains to be seen. Here are some financial tips that every entrepreneur must know about.