Budget 2021 is around the corner and everyone is wondering what will be on offer by FM Nirmala Sitharaman. To know it all, everyone will have to wait till Februrary 1. However, till then, every segment wants to highlight its top needs and requirements and here we reveal a few:
1- Healthcare Startup perspective:
By Himani Khanna (Co-Founder & Director) & Puja Kapoor (Co-Founder & Director) of Continua Kids :
With every year’s budget approaching, each one of us has huge expectations from the government not only at personal level but at professional level as well. The past year has taught us so much again to trim the expenses to basic, bootstrap the organisation to keep oneself afloat. Once the vaccine is introduced, we expect the government will try to ensure that the economy is back on track.
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Despite making all the noises around innovation, a huge number of start ups have failed in the past 1 year due to funds crunch, investment deprivation and many other reasons.
We as a start up in healthcare would like to request the government to include in the MSME category to get the advantages which has been offered and to make funding available. We are quite optimistic and can foresee the economy recovering quickly, simultaneously, we would want that technology and healthcare startups should also join the bandwagon for the party.
2- Startup perspective:
a) By Prashant Kumar, CEO and Co-Founder, zingbus:
Last year was difficult for the travel sector. And it’s only now that we are starting to see some green shoots. However rising diesel prices has not allowed intercity bus operators to recover the EMI of buses fully let alone make profits. Any rebate in diesel prices or road taxes/tolls will allow fleet operators to invest more in safety measures (should be govt enforced) which would give confidence to travelers, leading to a snowball effect in demand. At the same time, authorities should enable standardization in the regulations and taxation rules across the sector, which will promote digital first players in the space, increasing GST collection for the government.
b) By Neeraj Dubey, Partner, Corporate Law, Singh & Associates:
Budget 2021 session is right around the corner, and it is all set to be an eventful budget speech by the Finance Minister keeping in mind the extenuating factors brought in by the impact of covid-19. While it would be an interesting budget for all the concerned stakeholders, this document specifically focuses on the expectations by certain identified sectors from Budget 2021. These sectors have seen covid-19 induced dwindling investments, limited workforce, pay cuts, etc. The Budget must take into account the above and bring in measures which provide necessary relief to them.
1. Suspension of Basel Norms for 3 years: The start-ups have seen a decrease in lending by banks due to the covid-19 situation. Banks need flexibility in lending, which can only be brought about by the temporary suspension of Basel Norms. MSME loans in India are linked to corporate loans for which credit rating is required. Rating agencies assign the rating based on the market base of a business, which means that a small enterprise would have an insignificant market base. This would lead to a higher interest rate and would affect bank’s lending flexibility. In this background, the start-ups hit by covid-19 must be able to obtain sufficient borrowings in order to function. Though RBI had permitted reduction in margin to recalculate Drawing Power for working capital facility and simultaneously banks have permitted ad-hoc fund-based facility up to 10% of fund based limits under the Emergency Credit Line Guaranteed Scheme, these measures would end by March 31, 2021 and would require an extension.
2. Reduction of compliance burden: Start-ups have been burdened with onerous compliances under various laws which have affected their operations. Relaxation of stipulations concerning the appointment of independent directors and women directors, and appointment of key managerial personnel under the Companies Act is a step forward in this direction. Compliances under Foreign Exchange Management Act, 1999 must also be streamlined. At present, all inflows and outflows of funds into and outside India are scrutinised rigorously by RBI and need to conform to certain reporting standards. Adherence to such strict requirements affects the flexibility of start-ups to work seamlessly with global players. Therefore, there is a need to simplify the compliances so that the start-ups can compete globally. What is also required is the relaxation of the filing fees for start-ups for most of the forms including levying of any additional fees.
3. Measures to increase FDI: The start-up has seen a reduction in the inflow of foreign investments this past year. Necessary measures need to be taken to attract more investments in key areas. Uniform policies across the nation must be brought in so as to ensure a level playing field for all the players.The flow of capital to manufacturers must be streamlined. Easy availability of capital also needs to be ensured.
4. GST Reforms: Reduction in GST rate would encourage the start-up sector to leverage professional services for business growth and get back on track with their operations. At present, the GST rate on most professional services is 18 percent, which does not give much manoeuvring room to the start-ups. The government has also notified that if the monthly taxable sales of a company are more than 50 lakhs, they shall be obligated to pay 1 per cent of their GST liability in cash. Further, this cannot be set-off against input tax credit. Enterprises are also required to get their offices physically verified by a GST officer.All these requirements increase the compliance costs for start-ups.
5. Tax Reforms: One major tax reform which needs to be undertaken is to abolish the payment of capital gain taxes or dividend taxes. Since enterprises already pay income tax on their income, capital gain tax and dividend tax essentially end up being double taxation on the same profit. Numerous global business centres have done away with these taxes in a bid to attract more foreign investment. Deferred TDS requirement for Employee Stock Option Plans/ESOP also needs to be reformedand be made more start-up sector friendly.
By Neeraj Dubey, Partner, Corporate Law, Singh & Associates:
1. Compliance Overburden: a typical MSME with 1 factory and 1 admin office has to comply/file on an average 750 compliances, which includes returns, displays, etc. About 52% of this is related to labour, which has a cost and innovation implication. About 14% of the compliance burden has criminal penalties associated with it. For this, 3 things are needed:
– Digitize– take5-7 key processes like EPF, Tax, Labor compliances and digitize them from start to finish.
– Decriminalize – remove criminal penalties for minor non-compliance and offenses.
– Simplify – reduce duplication in forms and minimize interaction with bureaucracy.
2. Stimulating access to finance for NBFCs and FinTech firms: Given the poor lending practices from NBFCs such as IL&FS; banks, flush with liquidityare wary of NBFCs and consequently MSMEs, as a lending segment. Since NBFCs and FinTech firms bring many more ‘new to credit’ MSMEs to formal finance than public and private banks, this risk aversion affects job creation. Furthermore, even those NBFCs with optimized models (e.g., combining physical and digital models that keep costs low while being MSME-centric) charge upwards of 20% in interest, which is expensive for many MSMEs. Together these factors limit the scale-up of innovative and effective NBFCs and FinTech players.
For ‘supplier firms’, this credit crunch is further exacerbated by delayed payments: according to Brickworks, delayed payment only from India’s 1000 largest firms amounts to INR 3.3 lakh crores. The micro-enterprise realizes income from large suppliers ~200 days after invoice submission, which reduces production cycles in a year, increases the cost of goods, reduces the resilience of supply chains, and leads to delayed tax collections.
Constituting a committee for framing guidelines for partnership/ proprietorship by Ministry of Corporate Affairs or IBBA, like the payments due to MSMEs from corporate debtors ahead of, and throughout the Corporate Insolvency Resolution Process inside the ambit of ‘insolvency resolution process costs’, treating offline and on the net sellers at par in GST to allow smaller sized MSMEs to leverage e-commerce, class-1 government officers earmarking particular hour of the day to hear MSME grievances, and more have been amongst other essential recommendations.
Beyond lines of credit from banks, enabling NBFCs and FinTech firms to access capital markets to raise debt, securitise and sell their portfolios to banks, and even insure their portfolios will drive greater penetration of formal credit. To stimulate credit from banks, expanding PSL norms to nano and mass enterprises, and backing this up with credit guarantees will help. Existing mechanisms such as CGTMSE are powerful but need process tweaks to encourage more NBFCs to participate.
3. Targeted schemes designed with a job creator focus: Large scale schemes such as MUDRA have an average ticket size of < INR 50,000 and create one job for every 11 loans granted. Almost half of all job creation through the scheme drove ‘self-employment.’ Bringing greater focus to nano and mass enterprises and expanding deployment channels to include NBFCs, and FinTech firms that work with these segments will create jobs efficiently.
4. Mainstreaming financing platforms such as TReDS and OCEN: TReDS has seen limited uptake from MSMEs and large buyers. Less than 15% of all Central Public Sector Enterprises transacted at least once in the last three months on TReDS. Fewer than 15,000 MSMEs have benefitted from the 3 TReDS platforms. While it is mandatory to register on TReDS for firms with a turnover >500 crores, reducing this to a minimum threshold of INR 200 crores will increase the number of buyers and, consequently, the number of MSMEs on TReDS. If mainstreamed, OCEN, a platform to mainstream cash flow-based lending, would greatly benefit thin file and no collateral MSMEs. For such platforms, incentives and innovations rather than mandates to encourage participation from key stakeholders will help. For example, supporting trade credit insurance via TReDS will enable banks to lend to MSME suppliers of low or un-rated corporates.
5. Felicitating prompt payments: Large corporates make a ‘prompt payment pledge’, an ethical commitment to pay their MSE suppliers in accordance with the The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). Section 15 of the MSMED Act talks about the liability of the buyer, provides that the period agreed between the parties shall not exceed 45 days from the day of acceptance or deemed acceptance of goods or services. This will create a movement around ‘prompt payments’ and encourage corporate boards to both track payment efficiency and link it to CFO KPIs.
Short-term suspension of Basel norms:MSME body Federation of Indian Micro and Small & Medium Enterprises, which represents 740 MSME associations involving 20 lakh members, in India, has sought a short-term suspension of Basel norms on the banking sector to ease lending. The suspension has been sought to permit the needed flexibility amongst banks essential to assistance Covid-hit MSMEs. Basel norms are worldwide norms by the Switzerland-primarily based Basel Committee meant to set a typical normal for banks across nations. It has 45 members comprising of central banks and bank supervisors from 28 nations. FISME recommended exempting banks from Basel norms for 3 years like suspending Bank Loan Ratings to assisting lending in complicated occasions.
Centralized GST Registration perspective:
By Smita Singh, Partner Indirect Tax, Customs & Trade, Singh & Associates
Currently there are 7 rate slabs for goods (0%, 0.25%, 3%, 5%, 12%, 18%, 28%) and 5 rate slabs for services (0%, 5%, 12%, 18%, 28%). In addition, Compensation Cess applies on select goods. Government should consider converging the existing band of GST rates to three in line with international standards. This will help resolve interpretation issues, reduce complexity and probability of disputes.
With the introduction of the decentralized registration process, the cost of compliance and business process development has increased by manifolds. It is recommended that the concept of centralized registration for services as prevalent in the erstwhile service tax regime should be contemplated under the GST regime as well. This will enhance ease of doing business.
India needs to attract FDI in Research and Development activities (‘R&D’) as India lacks cutting edge technology. Receiving prototypes, semi developed tech samples from abroad and Testing activity plays a pivotal role while conducting R&D activities. Such R&D activities are denied to be treated as export of services. Instead taxed under GST@18%, as the place of supply by virtue of section 13(3)(a) of IGST, is the location where the services has been performed i.e. India in this case. This is making the R&D activity uncompetitive and many companies are shying away from further making an investment in India. It is recommended that IGST law may be suitably amended to notify that the place of supply of R&D services provided to foreign service recipients, shall be the place of effective use and enjoyment of service i.e. location of the service recipient.