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Union Budget (FY 2024-25) Highlights for Startups



“To bolster the Indian start-up ecosystem, boost the entrepreneurial spirit, and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” - Union Finance Minister Nirmala Sitharaman.


The abolition of the angel tax, emphasis on digital public infrastructure, and the digitalization of the economy will greatly benefit the startup ecosystem, encouraging innovation and entrepreneurship across the country.


Following are the key highlights from the union budget for FY 2024-25:


Tax and Investments


1. To pave the way for more start-up investments in the country, the Angel Tax (previously levied at 30.9%) stands to be abolished for all classes of investors.

 

2. Securities Transaction Tax (STT) on Futures and Options Trades (F&O) proposed to be increased to 0.02% for futures (previously 0.0125%) and 0.1% for options (previously 0.0625%).

 

3. Corporate tax rate for foreign companies reduced to 35% (previously 40%). No change in the corporate tax rate for Indian companies.

 

4. Tax Deducted at Source (TDS) on e-commerce operators to be reduced to 0.1% (previously 1%).

 

5. Decriminalisation of TDS defaulters. Creation of simplified Standard Operating Processes (SOPs) for TDS defaults.

 

6. Long-Term Capital Gains (LTCG) increased to 12.5% (previously 10%) and Short-Term Capital Gains (STCG) to 20% (previously 15%).

 

7. Currently, buyback distribution tax is imposed on the company at approximately 23% on the distributed income. The proposal suggests taxing the buyback proceeds in the hands of shareholders as "dividend income" at applicable tax rates. Under this regime, shareholders would be able to claim the cost of acquisition of shares being bought back as a capital loss, depending on the holding period. This amendment is planned to take effect from October 1, 2024.

 

8. Legislative approval is being sought to establish a Variable Capital Company (VCC) structure, aimed at facilitating efficient and flexible financing for leasing aircraft and ships, as well as pooling funds for private equity investments.

 

9. Stamp duty reduction initiatives are aimed at encouraging states to moderate high stamp duty rates and explore additional reductions for properties purchased by women.

 

GIFT – IFSC


1. Tax exemptions extended to Retail Schemes and ETFs

The government proposes to amend the definition of ‘Specified Fund’ under Section 10(4D) to encompass Retail Schemes and exchange-traded funds (ETFs) launched in GIFT-IFSC. This extension would grant Retail Schemes and ETFs in GIFT-IFSC the same favourable tax regime currently applicable to CAT III AIFs.


2. No surcharge on income for Specified Fund

The proposed amendment seeks to eliminate the surcharge rate on interest and dividend income for Specified Funds established in GIFT-IFSC, regardless of their structure, even if not set up as a Trust.


3. Section 68 of Income Tax Act no longer applicable to Venture Capital Funds (VCFs)

Section 68, which addresses unexplained cash credits, empowers tax officers to request explanations regarding the sources of funds used for investments or loans to companies, as per the existing provisions. It is proposed to amend the definition of ‘venture capital funds’ to encompass VCFs in GIFT-IFSC, thereby exempting them from scrutiny under section 68 by tax officers.


4. Finance Companies exempted from complying with ‘Thin Capitalisation’ norms

Section 94B is a provision under the Income Tax Act, 1961. It pertains to the thin capitalization rules that restrict the deduction of interest expense in certain cases where a company is excessively funded by debt from related parties. The proposal to extend this exemption to Finance Companies operating in GIFT-IFSC aims to provide them with similar tax benefits enjoyed by Banks and NBFCs.


5. Exemption granted on specified income generated from the Core Settlement Fund established by recognized clearing corporations

It is proposed to amend the definition of ‘recognized clearing corporations’ under Section 10(23EE) under the Income Tax Act, 1961, to include those established in GIFT-IFSC. This would exempt any specified income from the Core Settlement Guarantee Fund set up by such corporations.

 

MSMEs – Credit Guarantee and Support

 

1. Credit guarantee scheme for MSMEs in manufacturing to be introduced. This scheme is to operate on the pooling of credit risks and the purchase of new machinery(ies) without any collateral.

 

2. Credit availability for MSMEs during stress periods to be provided through government-promoted fund(s).

 

3. SIDBI to open new branches to cover all MSME clusters. 24 new branches are to be targeted this year.

 

4. Increase in Mudra threshold to INR 20 Lakhs (previously INR 10 Lakhs) for MSMEs that have successfully repaid outstanding loans.

 

5. A new assessment model for MSME credit is suggested. Public banks to develop their in-house models – such criteria shall be based on assets and turnover including the digital footprints of MSMEs. This will enable MSMEs without a formal accounting system to avail of credit facilities.

 

6. To encourage a shift to cleaner energy sources, an Energy Audit of MSME in 60 clusters is to be facilitated, and financial support is to be provided to help these clusters to shift to clean energy sources.

 

7. The Union Budget 2024-25 focuses on expanding industrial infrastructure by developing new industrial parks in around 100 cities. Additionally, 12 industrial parks have been approved under the National Industrial Corridor Development Programme.

 

8. The government has proposed the development of Digital Public Infrastructure (DPI) applications at a population scale aiming to foster productivity gains, create business opportunities, and drive innovation within the private sector. Planned focus areas encompass credit, e-commerce, education, health, law and justice, logistics, MSME service delivery, and urban governance.

 

FDI and other updates

 

1.  Foreign Direct Investment (FDI) rules to be simplified:

 (i) to facilitate FDI;

 (ii) nudge prioritization; and

 (iii) promote opportunities for using INR as a denomination for overseas investment.

 

2. Investment in infrastructure by the private sector will be promoted through viability funding and financing mechanisms.

 

3. Venture Capital Fund of INR 1000 Crores to be set up to encourage space technology development by 5 times in the next 10 years. This programme will encourage early-stage businesses and innovation. It also emphasizes the government’s aim to create a vibrant start-up ecosystem in space-tech.

 

4. Basic Custom Duty (BCD) on mobile phones, chargers, and parts reduced to 15% (previously 10%).

 

5. The finance minister applauded the fact that under the new insolvency and bankruptcy regime, the National Company Law Tribunal (NCLT) has recovered INR 3.3 lakh crore to creditors and 28,000 cases involving INR 10 lakh crore are disposed of. The government has proposed the establishment of additional tribunals to decide cases under the Companies Act. This will reduce the burden on the company courts and facilitate fast-track disposal of cases.

 

6. An Integrated Technology Platform will be established to enhance outcomes under the Insolvency and Bankruptcy Code (IBC), ensuring consistency, transparency, timely processing, and improved oversight for all stakeholders.

 

7. Internships will be provided to 1 crore youth in 500 top companies over a span of 5 years, with a monthly allowance of INR 5,000 along with a one-time assistance of INR 6,000. Eligible companies are required to cover training expenses and 10% of the internship costs from their CSR funds.

 

8. The government has allocated INR 1.52 lakh crore to enhance productivity and resilience in agriculture and allied sectors. Additionally, 109 new high-yielding and climate-resilient crop varieties are to be introduced, benefiting farmers and strengthening food security.


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