What Start-Ups want from the Union Budget 2016?

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What Start-Ups want from the Union Budget 2016?

Startup India

An ideal gift is one that does not cost the donor even though it benefits the receiver. The next best is the gift that which costs the donor a fraction of the benefit the receiver gets. Will the Union Budget 2016 have the heart and pocket to accommodate both the gifts for the start-up?

Government bosting Liquidity of Start-Ups at No-cost
By definition, start-ups are in their gestation period. During this period, they use the money raised from shareholders in creating a profitable and growing business. Their only source of income in this early stage is the interest earned on their cash balance. A risk and hassle free instrument for start-ups is to invest it in bank fixed deposits.

The current IT law requires banks to deduct 10% of the interest paid to start-ups as TDS or tax deducted at source. Once this amount is deducted, a start-up has to file its Income Tax returns and wait for the assessment to be completed before this deduction is refunded to the start-up, a process which can take anywhere between 6-10 months after the yearend. This means the start-up loses liquidity for an average of 12-20 months as it earns interest right through the year on which tax is deducted.

What are the implications of this TDS?

  1. Start-ups loose liquidity
  2. Banks incur a cost on deducting and paying TDS
  3. Government only saves the interest on TDS deducted till it is refunded, but incurs the cost of assessment and refunds.

Given the economics of TDS, by giving start-ups exemption from TDS on interest income from banks could the government give start-ups liquidity without any cost to itself?

Given the proposal of our government to exempt start-ups from Income tax in its first three years, TDS exemption could also be extended to all other incomes received by a start-ups thereby giving a tremendous boost to liquidity in start-ups.

Government enhancing the Capital of Start-Ups
While the ability of start-ups to create employment is accepted beyond doubt, there is definitely some skepticism on the stability of the employment they generate. The reason for this is not hard to see as the failure rate of start-ups is quite high and visible.

The most common reason why start-ups fail is that they erode their net worth before their idea can be successfully translated into a business. Can the government supplement the net worth of start-ups and provide them a grace period for proving their ideas?

Start-up by virtue of their costs exceeding revenue have losses which are valuable as tax shields. Start-ups can use their tax shield only when they turn profitable. Given this catch-22 scenario where start-ups cannot use their tax shields, can the government permit start-ups to ‘trade their taxable losses’?

‘Trading in taxable losses’ is not a novel idea as there is precedence with some states in the USA permit it. Structured well, it can benefit all the parties concerned, i.e. the government, the buyer of tax losses and the start-up. As an illustration, with a marginal tax rate of 33%, the buyer could be given a set off of only 25%, thereby the government gaining 8%. Since the tax loss is traded in the market, the buyer would not pay the full 25% tax saved and will want a share of it, say 5% and the start-up on selling the loss will gain a cash flow of 20%

This simple provision for trading in tax losses can enhance the capital of start-ups and increase their success rate. A possible by-product of this would be to encourage more entrepreneurs to start ventures.

By | 2017-04-13T05:33:16+00:00 September 4th, 2016|Uncategorized|0 Comments

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