TO PROMOTE entrepreneurship, the budget for 2016-17 announced a number of incentives for start-ups, including allowing 100 per cent deduction of profits for three out of five years for start-ups set up during April 2016 to March 2019. Individuals and Hindu Undivided Family (HUF) setting up start-ups by deploying capital gains from sale of residential property will also get tax relief.
The lure of profit deduction was, however, dampened by a levy of Minimum Alternate Tax that will be imposed on the start-ups. The budget also proposed to establish a Fund of Funds to raise Rs 2,500 crore annually for four years to finance the start-ups.
“With a view to providing an impetus to start-ups and facilitate their growth in the initial phase of their business, it is proposed to provide a deduction of one hundred per cent of the profits and gains derived by an eligible start-up from a business involving innovation development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property,” said the Union Budget documents released on Monday.
In order to boost the start-up ecosystem, the government has also proposed to provide exemption from capital gains tax if the long term capital gains proceeds are invested in notified funds. The gains will have to be invested for at least three years to claim exemption, while the investment in the units of the specified fund shall be allowed up to Rs 50 lakh.
The government has also decided to extend provisions of Section 54GB of the Income Tax Act, which would provide significant incentives to start-ups. This section provides tax relief to an individual or Hindu Undivided Family (HUF) willing to set up a start-up company by selling a residential property to invest in the shares of such company.
“It is proposed to amend Section 54GB so as to provide that long term capital gains arising on account of transfer of a residential property shall not be charged to tax if such capital gains are invested in subscription of shares of a company which qualifies to be an eligible start-up,” as per the Budget documents. This relief will be subject to the condition that the individual or HUF holds more than 50 per cent shares of the company and such company utilises the amount invested in shares to purchase new asset before due date of filing of return by the investor.
The government has also expanded the list of new assets wherein such funds can be deployed.
The existing provision of Section 54GB requires that the company should invest the proceeds in the purchase of new assets which includes new plant and machinery but does not include computers or computer software. But the amendments proposed would allow investing funds for start-ups buying computers or computer software.
These amendments will take effect from April 1, 2017 and apply in relation to the assessment year 2017-18 and subsequent assessment years, the government said.
The government also lowered the holding period for getting benefit of long-term capital gains in case of unlisted companies to two years from three years. This move too will benefit start-ups.
Rs 500 cr fund for SC/ST and women entrepreneurs
The budget has also set aside Rs 500 crore for the Stand Up India initiative, which seeks to promote entrepreneurship among Scheduled Castes and Scheduled Tribes.
The government will also set up a national hub in the Ministry of Micro Small and Medium Enterprises in partnership with industry associations to provide professional support to Scheduled Caste/Scheduled Tribes (SC/ST) entrepreneurs, Finance Minister Arun Jaitley said in his Budget speech.
“The Scheduled Caste and Scheduled Tribes entrepreneurs are beginning to show considerable promise in starting and running businesses… I am happy to inform you that the Union Cabinet has approved the Stand Up India scheme to promote entrepreneurship among SC/STs and women Rs 500 crore has been provided for this purpose,” he said.
The scheme will facilitate at least two such projects per bank branch and will benefit at least 2.5 lakh entrepreneurs in this category, the minister said.