A shower of love: why direct taxes were aimed to please in this Budget

Several key states are going to the polls and the BJP Government needs a majority in the Upper House (Rajya Sabha) of Parliament to get several pending reforms through. So this year’s Budget is all about the farmer and his farm, especially when states like Tamil Nadu and Uttar Pradesh are going to elections soon. However, the Union Budget 2016 does not disappoint because it has made some direct tax announcements, which could benefit the small businessman or a startup.

“The fine print shows that it is a good budget. It is focused on entrepreneurs to an extent, but largely focused on agriculture and the social sector,” says Ganesh Prasad of Khaitan and Company. Yes, there were disappointments because the Central government did not define the taxable nature of e-commerce and market place companies. This means that the bout between state governments and e-commerce companies, over indirect taxes being levied on marketplaces, is not going to see an early end.

But let us look at how small businesses can benefit from direct taxes and let us also look at a withholding tax that confuses us.

• Startups registered from this new financial year need not pay taxes for three years: While this seems like a good move, startups are not likely to make profits to pay taxes for three years. Lawyers and analysts say that this makes sense only if there was a ten-year tax holiday for startups.
• SMBs, whose revenue is less than Rs 2 crore need pay only 8 per cent presumptive tax and need not file or maintain books of accounts. Earlier, this scheme was only available to SMBs whose business was less than Rs 1 crore.
• Taxing consultants, whose revenues are Rs 50 lakhs per year: Startups work with a lot of consultants and this comes as a boon to many of these individuals. Say a startup pays an Android developer, who is registered as a consultant Rs 50 lakh If this is the total revenue of the consultant, and if 50 per cent is the gross profit, then only this amount will be taxed and not the total earnings. “This move benefits every startup because there are so many consultants helping small businesses independently,” says Preeti Khurana, Chief Editor of ClearTax.
• Tax for new manufacturing companies: If you are a manufacturing startup, then you pay only 25 per cent plus a surcharge. However, one must avail the benefits provided in the Make in India campaign to qualify for this tax levy.
• 1 per cent tax reduction for companies with revenues of less than Rs 5 crore: There is a 1 per cent reduction in Corporate Tax to 29 per cent, plus surcharge, to small businesses in the Rs 2 to Rs 5 crore bracket.
• “In order to tap tax on income accruing to foreign e-commerce companies, from India, it is proposed that a person making payments to a non-resident, who does not have a permanent establishment, exceeding in aggregate 1 lakh in a year, as consideration for online advertisement, will withhold tax at 6 per cent of gross amount paid, as Equalization levy. The levy will only apply to B2B transactions.” These were the exact words of the Finance Minister. But this simply means that advertisements in foreign websites, from Indian businesses, will result in a 6 per cent withholding tax. But this is only limited to B2B transactions. Perhaps advertising agencies and real-time programmatic bidding ad-platforms like VServ, Vizury and Near will have to bear this tax. This is where clarity is required on the nature of such transactions.

Sriram Ramaswamy, Partner - Mergers & Acquisitions - Tax & Regulatory Services at PwC says,

"In line with the Start-up India Action Plan, the Union Budget 2016 provides for a 100 percent income tax exemption for a period of three consecutive years out of a five year period for startups set up on or after 1 April 2016 but before 1 April 2019. While this comes as a welcome move, tax exemptions for existing start-ups remain unaddressed. Further, given that start-ups usually incur losses in the initial years given the investment in technology and other development costs, one would have hoped for concessions in terms of an extended period for carry forward of losses which could be used for set-off against future profits."

The lukewarm Budget 2016 presents a welcome change as the first budget to clearly earmark tax benefits for small businesses. Hopefully, by the next budget, Goods and Services Tax would be implemented along with a defined tax code for market places.