The Union Budget for the financial year 2024-25 tabled by the Finance Minister Mrs. Nirmala Sitharaman on 23^rd July 2024 has been hailed as a significant step forward for India’s burgeoning startup and MSME ecosystem. With a focus on fostering innovation, encouraging entrepreneurship, and creating a conducive business environment, the budget has outlined a roadmap for the country’s economic growth. The Union Budget 2024 brings several noteworthy developments that can significantly impact startups and MSMEs. This article delves into the key takeaways for the startup and MSME ecosystem from the Union Budget 2024.

Startups and MSMEs are the backbone of any thriving economy. In India, these entities have emerged as significant contributors to GDP, employment generation, and technological innovation. Government initiatives aimed at supporting these sectors are crucial for several reasons including employment generation, GDP contribution, technological advancements, export promotion and attraction of foreign investment in India. In light of the plethora of benefits that startups and MSMEs bring towards a robust and dynamic economy, the Government of India has made the following announcements in the union budget towards fostering the growth of startups and MSMEs.

1. Abolition of Angel Tax:

Angel tax refers to the income tax imposed by the government on funding received by unlisted companies or startups when their valuation surpasses the company’s fair market value. According to Section 56(2)(vii)(b) of the Income Tax Act, 1961 any premium received from selling shares to a foreign investor is classified as “income from other sources” and was therefore subject to taxation. Angel tax was imposed at a steep rate of 30.9% on investments due to which the investing in startups were considered “unattractive” to angel investors. Following numerous appeals from startups, the Indian Government introduced certain relaxations in the 2019 Union Budget. In this budget, the government declared that startups registered with the DPIIT (Department for Promotion of Industry and Internal Trade) would be exempt from such tax.

One of the most significant announcements in the 2024 budget was the complete abolition of the angel tax. This tax, levied on the difference between the fair market value of shares and the issue price, had been a major hurdle for startups seeking funding. The angel tax will be abolished effective April 1, 2025, applicable from the assessment year 2025-26. The removal of this tax is expected to boost investor confidence, encourage angel investments, and facilitate early-stage funding for startups.

• Other Taxation Initiatives:
• Simplified Taxation of Capital Gains: There are now only two holding periods for assets: 12 months and 24 months. The 36-month period has been removed. Unlisted bonds and debentures will be taxed as short-term gains, regardless of how long they are held.
• Corporate Taxes on Foreign Companies: Corporate taxes are imposed on the company’s net income or profit. To attract foreign capital for India’s development needs, it has been proposed to reduce the corporate tax on foreign companies from 40% to 35%.
• Changes in TDS rates: According to the Section 194-O of the Income Tax Act, 1961, an ecommerce operator shall deduct income tax from the gross amount of sale of goods or provision of service, or both, facilitated through its digital or electronic facility or platform. The budget has proposed to reduce the TDS rates on E-Commerce from 1% to 0.1% effective from 1^st October 2024.
• Vivadh Se Vishwas, 2024: Encouraged by the success of the 2020 Vivad Se Vishwas Scheme (VsV) and facing a growing backlog of income tax disputes, the Government has proposed to introduce Vivad Se Vishwas 2024 (VsV 2.0). This scheme of speedy dispute resolution is applicable to disputes/appeals, including writs and special leave petitions (appeal(s)), whether filed by the taxpayer or the tax authorities that are pending as on 22 July 2024 before the Supreme Court, High Court, Income Tax Appellate Tribunal, Commissioner/Joint Commissioner (Appeals), Dispute Resolution Panel (DRP) and Revision petitions pending before the Commissioner of Income Tax.

• Extension of the definition of Startup:

The Finance Minister has extended the definition of “eligible startup” under the Startup India scheme to include entities incorporated between April 1, 2016, and March 31, 2025. This extension allows more startups to benefit from the tax holiday offered under the scheme.

• Credit for MSMEs and New Assessment Model for MSME Credit:
• Credit Guarantee Scheme: The Finance Minister has announced that a Credit Guarantee Scheme will be introduced for facilitating term loans to MSMEs for purchase of machinery and equipment without collateral or third-party guarantee. The scheme will function by pooling the credit risks of these MSMEs. A separately constituted self-financing guarantee fund will offer guarantee coverage of up to ₹100 crore for each applicant, even if the loan amount exceeds this limit. The borrower will be required to pay an upfront guarantee fee along with an annual guarantee fee on the reducing loan balance.
• New Assessment Model for MSME Credit: The budget also specifies that public sector banks will introduce a new assessment model and build their in-house capability for credit evaluation of MSMEs on the basis of their digital footprints in the economy. This is a paradigm shift from the traditional assessment of MSMEs based on their assets and turnover.
• Credit Support to MSMEs during Stress Period: The Finance Minister has announced a new mechanism for facilitating continuation of bank credit to MSMEs during their stress period. In the event that MSMEs account becomes a special mention account, i.e., an account that show signs of turning into a non-performing asset in the first 90 days or even before being identified as an NPA, for reasons beyond their control, credit will be available to such MSMEs through a government guaranteed fund to avoid becoming an NPA and for continuing business operations.

• Expansion of TReDS Platform:

TReDS is an online platform set up to facilitate MSMEs to unlock working capital by converting their receivables into cash. By reducing the mandatory onboarding turnover threshold for the TReDS platform from ₹500 crore to ₹250 crore, the budget enables an additional 22 Central Public Sector Enterprises (CPSEs) and 7,000 companies to participate. This adjustment will also permit medium-sized enterprises to join as suppliers, thereby increasing the working capital available to MSMEs through trade receivables discounting.

• Skill Development and Employment-Related Initiatives:

The budget emphasized the importance of skill development and job creation, with a focus on sectors like manufacturing, electronics, and renewable energy. This aligns with the government’s vision of creating a skilled workforce to support the growth of the startup ecosystem. The following are the initiatives announced by the Finance Minister pertaining to employment and skill development:

1. Employment Linked Incentives – The government will implement 3 new schemes for ‘Employment Linked Incentive’ based on EPFO enrolment:

Scheme A: First Timers – This scheme will provide a direct benefit transfer of one month’s salary in 3 instalments of up to Rs.15,000 to first-time employees in the formal sector registered in the EPFO.

Scheme B: Job Creation in Manufacturing – An incentive will be provided at a specified scale directly to the employee and the employer based on their EPFO contribution in the first 4 years of employment.

Scheme C: Support to Employers – The government will reimburse employers up to Rs.3,000 per month for 2 years based on their EPFO contribution for each additional employee. All additional employment within a salary of Rs.1 lakh per month is included.

• Skilling Program – A new centrally sponsored scheme for skilling will be introduced in collaboration with the industry and state governments. Under this scheme, 20 lakh youth will be skilled over a 5-year period, and 1,000 Industrial Training Institutes (ITI) will be upgraded in hub-and-spoke arrangements with outcome orientation.
• Skilling Loans – The Model Skill Loan Scheme will be revised to facilitate loans up to Rs.7.5 lakh for students with a guarantee from a government-promoted Fund.

• Spacetech Startups:

In terms of sector-specific allocation, the union government will set up a Rs 1,000 crore venture capital fund for investments into the space economy. However, the Finance Minister did not elaborate on which entity will set up the fund, or how the funds will be invested.

• SIDBI Branches in MSME Clusters:

According to the budget, SIDBI will open new branches to expand its reach to serve all major MSME clusters within 3 years and provide direct credit to them. The government has targeted to open 24 such branches as a result of which the service coverage will expand to 168 out of 242 major clusters.

• Increased Limits of Mudra Loans:

Pradhan Mantri Mudra Yojana (PMMY) is a scheme set up by the Government of India (GoI) through MUDRA (a subsidiary of SIDBI) that helps in facilitating micro credit up to Rs. 10 lakhs to small business owners. According to the budget, the limit of Mudra Loans will be enhanced to ₹ 20 lakh from the current ₹ 10 lakh for those entrepreneurs who have availed and successfully repaid previous loans under the ‘Tarun’ category. This will provide access to larger funds for business expansion to entrepreneurs will a proven track record.

1. E-Commerce Export Hubs:

The Finance Minister has announced that E-Commerce Export Hubs in public private-partnership (PPP) mode will be set up to enable MSMEs and traditional artisans to sell their products in international markets.

Summing up, the Union Budget 2024 brings a host of measures and initiatives that can significantly impact the startup and MSME ecosystem. From enhanced tax incentives and increased funding to simplified regulations, the budget outlines a comprehensive strategy to foster entrepreneurship and drive innovation. As startups and MSMEs navigate these changes and leverage the opportunities presented by the budget, they will play a crucial role in driving economic growth and shaping the future of innovation. The key takeaways from the Union Budget 2024 offer a roadmap for startups and MSMEs to capitalize on new initiatives and build a resilient, forward-looking business strategy.