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Budget 2018 – Impact on Businesses

Updated on: Aug 26th, 2021

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5 min read

The government vide Budget 2018 had proposed certain amendments with a special focus on the small and medium enterprises and the start ups. Here are some of the key proposals effecting business discussed in the article

Corporate Tax rate cut & levy of Health and Education Cess

Given the global trend of a lower corporate tax rate, as promised by Finance Minister, the Union Budget 2018 slashed the corporate tax rate from 30% to 25% for companies with a turnover of up to Rs 250 crore during the Financial Year (FY) 2016-17. However, a new cess named “Health and Education Cess is proposed to be levied @ 4% of income-tax including surcharge, if applicable, in place of existing cess of “Education Cess and “Secondary and Higher Education Cess on income-tax” making it an effective tax rate of 26% i.e. 25% Tax Rate plus 4% Health and Education Cess on income-tax.

Impact:

With this move, the micro, small and medium sectors would undoubtedly stand to gain in terms of a lower tax outgo. However, the larger companies would have little impact on account of this rate cut. In fact, many large enterprises have expressed their disappointment as there was no change in the rate for them as assured by the government earlier. No doubt the corporate tax respite will lead to more investible surplus leading to increased employment creation, resulting in higher earnings visibility. However, we are unsure of whether this proves to be an appropriate move given the fiscal squeeze the country is currently into.

Benefits to Startups

Indian start-ups have witnessed surprising growth and innovation in the recent years. To further encourage their growth, the government has, vide Budget 2018, showered some more incentives for start-ups under a proposed amendment to the already existing section 80IAC which currently provides a deduction of 100% profits for 3 out of 7 years to an eligible startup carrying on eligible business.

In the budget, the government has proposed to extend the condition regarding incorporation of startups for claiming the benefit under Section 80IAC. The proposed amendment lays down that the startup should have been incorporated between 1 April 2019 to 1 April 2021 to claim the benefit as against the earlier condition of incorporation between a 1 April 2016 to 1 April 2019.

Additionally, the definition of an “eligible business” has been expanded to include startups engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation. This amendment would apply from AY 2018-19

Impact:

No doubt these changes are a boon to the startup community. However, there was quite a bit of expectation on certain other aspects such as the issue of angel tax, relaxation of MAT applicability for startups etc which also could have been addressed to provide a further boost to the startup community.

Incentive for employment generation – Proposal to amend Section 80JJAA

The government, in the budget has also proposed to extend the benefit of a relaxed threshold of a minimum period of employment of 150 days during a year to not only the apparel industry but also to the footwear and leather industry in order to claim added deduction of 30% over and above 100% under Section 80JJAA, for emoluments paid to new employees. This will be a major booster to innovation and entrepreneurial activity in the e-commerce industry and technology. This amendment would apply from AY 2019-20.

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Quick Summary

The government in Budget 2018 proposed a corporate tax rate cut to 25% for companies with turnovers up to Rs 250 crore while adding a 4% Health and Education Cess. Startups also benefit from tax incentives and employment generation initiative. The amendments aim to boost small businesses and startups while maintaining fiscal stability.

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