India pushes for startup growth, but is it enough?

Mar 23, 2016

While Union Budget 2016 was aggressive on certain sectors, it was lukewarm to the others. One of the sectors most likely to benefit from the budget proposals is startups and small and medium enterprises (SMEs), the backbone of the Indian economy which accounts for 45% of the total manufacturing output and 40% of exports.

A slew of policies and measures have been announced, all of which aim at supporting, nurturing and boosting this critical sector. From creating a favorable environment for the sector to lowering taxes, from removing hurdles that SMEs face to facilitating the ease of doing business to removing bottlenecks; all steps seeking to propel the sector on a trajectory of high growth.

Reducing Tax Burden on SMEs

Budget proposes to lower the corporate tax rate to 29% for the next financial year for relatively small enterprises, that is, companies with turnover not exceeding Rs. 5 crore, along with surcharge and cess.

No Tax on Startup Income

Aiming at promoting growth in the sector, the finance minister announced a 100% deduction of profits for 3 out of 5 years for startups set up between April 2016 and March 2019. This concession is subject to certain conditions.

Single-day Registration of Companies

Giving wings to the aspirations of millions of entrepreneurs, the government has made provisions for 1-day incorporation of companies. This will improve the ease of doing business, transforming the country into an investment-friendly destination.

Shot in the Arm for Innovation

Investment in Research and Development is a must if India has to emerge as a global power. To make India a hub of innovation, the Budget has proposed 10% tax on income derived from worldwide exploitation of patents developed and registered in India by a resident. This will make innovations competitive, encouraging enterprises to set up R&D facilities and stem the outflow of intellectual property. The announcement brings India in line with a number of countries such as China, UK, etc. which have low tax regimes to boost patents and support innovation. (This aspect can be elaborated and can form a separate article, please suggest.)

“I am happy that the government has realized the importance of this sector. But a lot of questions linger in my mind: If I want to get a company registered today, can I get that done by the end

of day? How do I avail of the various government schemes? Who do I contact? All the schemes will have to translate into reality and implemented on the ground. We need to wait and watch,” says Shashank Dixit, CEO of Deskera, a leading software solutions company in the Asia-Pacific region, with headquarters in Pune and Singapore.

SME Growth Trajectory

The SME sector has shown exponential growth over the past several years. Source for the data shown below is the Ministry of Micro, Small & Medium Enterprises Development.

working enterprises graphic

This sector is critical to the generation of employment in the country. It employs around 40% of the country’s workforce and generates millions of jobs, especially at the low-skill level.
employment graphic

With several initiatives, the government wants to bolster the sector that employs around 40% of the country’s workforce and generates millions of jobs, especially at the low-skill level. The sector alone accounts for 45% of the total manufacturing output and 40% of the total exports.

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