Monday, February 29, 2016
Startups and E-commerce: Tax sops and new patent regime to promote innovation
The Union Budget announced a slew of initiatives for startups, including 100% tax exemption for 3 years and allocation of Rs 500 crore for SC/ST and women entrepreneurs, aimed at facilitating growth for these new businesses.

Budget Provisions

Deduction of 100% of the profits and gains derived by an eligible startup

Budget proposed deduction of 100% of the profits and gains derived by an eligible startup from a business involving innovation development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.

This benefit will be available to an eligible startup which is setup before April 1, 2019

New patent regime

To promote innovation, a special patent regime has been proposed with a 10% rate of tax on income from worldwide exploitation of patents developed and registered in India. 

'Start Up India Action Plan'

Under the 'Start Up India Action Plan', the proposal is also to establish a 'Fund of Funds' which intends to raise Rs 2,500 crore annually for four years to finance the startups.

Rs 500 crore for scheduled caste, scheduled tribes and women entrepreneurs in the Budget under the Stand Up India scheme. 

Lower corporate tax for small companies

Another positive step seen is the proposed lowering of corporate income tax rate for the next financial year of companies to new companies with turnover not exceeding Rs 5 crore to 29% plus surcharge and cess.

Besides, to tap tax on income accruing to foreign e-commerce companies from India, the Budget proposes a person making payment to a non-resident without a permanent establishment to withhold tax at 6% for amounts exceeding Rs 1 lakh in a year for online advertisement. 

This equalisation levy will only apply to B2B transactions. 

3 year tax exemption

The Budget also proposes to insert a new Section 54EE to provide exemption from capital gains tax if the proceeds are invested in units of such specified fund, subject to the condition that the amount remains invested for 3 years failing which the exemption shall be withdrawn. The investment in the units of the specified fund shall be allowed up to Rs 50 lakh. The 3-year tax exemption will reduce compliance burden and cash outflows, allowing ventures to invest in product development and scaling-up the businesses.

Outlook

The Budget proposal will help startups with better incubation, talent and capital. The ease of registration process and the hope to complete the task in one day is a welcome measure along with the three year tax holiday for startups. The budget partially covers industry's wish list on policy bottlenecks, including ease of business, nurturing start-ups, products and e-commerce sector.

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