Union Budget 2021
Every year, we bring the rundown of the Union Budget from the lens of the startup ecosystem through a mix of pre and post budget coverage showcasing the expectations and impact on the ecosystem.
India’s Finance Minister Nirmala Sitharaman on Monday (February 1) presented the Union Budget 2021 — with a sharp focus on digital transformation and the next phase of economic recovery after the Covid-induced market recession. She also ditched the bahi khata that had become a major talking point during the longest budget speech ever last year and went with a ‘Made in India’ tablet. Besides this, the focus was also around key sectors in the digital economy with increased spending for healthcare, education and employment generation in manufacturing and infrastructure.
Delivering her budget address, the FM projected a fiscal deficit of 6.8% of gross domestic product for 2021-22. The current year was expected to end with a deficit of 9.5%, she said, a sharp rise from the 7% expected earlier. Despite this, the FM was bullish about recovery of the Indian economy.
Earlier, the Economic Survey had projected a GDP growth rate of 11% for the fiscal year 2021-22. Whether the government’s spending boost gives the thrust to key sectors to achieve this benchmark remains to be seen. In the meanwhile, here are the key highlights from the Union Budget 2021-21 for startups.
Key Takeaways From Union Budget 2021-22 For Indian Startups
The primary focus areas of the budget were healthcare and generating jobs by increasing the government’s expenditure across sectors even as the country struggles to bounce back from a pandemic-induced recession.
Tax Holidays For Startups; Exemptions For Investors
Besides the new definition for small businesses, Sitharaman also proposed an extension of the tax holiday to startups by another year to March 31, 2022 during her Union Budget 2021 address. Moreover, she also announced that in order to incentivise investment in startups, the government is proposing extending the eligibility period of claiming capital gains exemption for investment made in the startups by one more year to March 31, 2022.
In the Union Budget of 2017, the then finance minister, the late Arun Jaitley had announced that startups that were incorporated after March 31, 2016 could avail a tax holiday for three out of seven years, from the date of incorporation. Startups can avail this exemption provided that annual turnover does not exceed INR 25 Cr in any financial year.
Insurtech Gets FDI Booster Shot
Among the key decisions from the Budget was the proposal to amend the Insurance Act, 1938 to increase permissible foreign direct investment limit (FDI) from 49% to 74% in insurance companies at the Union Budget 2021.
This would allow foreign ownership and control of insurance companies in the country with certain safeguards. However, the majority of directors on the boards of such companies and key management persons will have to be resident Indians, with 50% directors being independent directors and a specified percentage of profits being retained as general income.
With apt support and investment by the private sector these measures will have a multiplier effect and take insurance to a large section of Indian population, the FM said.
Foreign direct investments in insurance companies are currently permitted under automatic route up to 49% with a rider that insurance companies should be Indian owned and controlled, i.e. more than 50% shall be beneficially owned by resident Indian citizens and control of the insurance company shall be in the hands of resident Indian citizens.
Fintech In Focus
The Indian government proposed allocating INR 1,500 Cr to boost the penetration of digital payments as well as other measures to boost financial inclusion.
Finance Minister Nirmala Sitharaman, while presenting the Union Budget for 2021-22, has proposed to set up a “world-class” fintech hub near Gujarat capital Gandhinagar at GIFT City (Gujarat International Finance Tec-City).
Besides this, the government will also introduce a bill to set up development financial institutions (DFI) with an outlay of INR 20,000 Cr to boost credit access for small businesses, MSMEs as well as those working in areas of focus such as manufacturing and infrastructure.
To further facilitate credit flow under the scheme of Stand Up India for scheduled castes and tribes, as well as women entrepreneurs, the government has proposed to reduce the margin money requirement from 25% to 15%, and to also include loans for activities allied to agriculture.
Lowering Compliance Burden On Startups
The FM also proposed to revise definition under Companies Act, 2013 for small companies by increasing their threshold for capitalisation from not exceeding INR 50 Lakh to not exceeding INR 2 Cr and turnover from not exceeding INR 2 Cr to not exceeding INR 20 Cr.
“This will help more than 200K companies in easing their compliance requirements,” said Sitharaman.
By the new definition of small companies under the Companies Act, a large number of startups will be recognised as small companies. Small companies enjoy certain benefits over other companies in terms of compliance requirements. For instance, a small company needs to hold only two board meetings in a year, unlike other companies which are required to hold four such meetings in the same period.
In a separate announcement, which is also expected to ease the compliance burden on startups, Sitharaman proposed to use data analytics, artificial intelligence, machine learning to make regulatory filings more frictionless for businesses and startups in a revamp of the ministry of corporate affairs (MCA) portal. The government had said that the ministry would look to introduce AI-based features in MCA-21 when version 3.0 of the portal is rolled out.
The MCA-21 3.0 is expected to have features such as single source of truth, ease of doing business, e-adjudication, online compliance monitoring, among others. All this is aimed at making the authenticity and comprehensiveness of corporate even better.
For the startup ecosystem, this is crucial as MCA-21 shares crucial information to various stakeholders such as the regulators, investors and companies. All filings under the various laws for companies and businesses in India are submitted through this portal.
Focus On Healthtech; National Health Portal
To bridge the urban-rural healthcare divide, Sitharaman announced a total allocation of INR 2.23 Lakh Cr for healthcare and wellness initiatives in the country during the Union Budget 2021-22. The plan includes a pan-India healthcare portal for digital health management, as well as a Mission Poshan 2.0 for nutrition and diet programmes in rural districts.
The budget allocation increased by 137% over the previous year. The FM also announced Aatmanirbhar Health Yojana with an outlay of INR 64,180 Cr over 6 years. She announced operationalisation of health units at 32 airports, 11 seaports and 7 land crossings.
The budget also allocated INR 35,000 Cr for Covid-19 vaccination. Talking about India’s fight against Covid-19, Sitharaman said the country has two vaccines available, adding that two more vaccines are expected soon.
“Expansion of the integrated health information portal to all states and union territories to connect all public health labs,” said Sitharaman.
Rapid Digitalisation Underway In Agriculture
Sitharaman revealed that around 1.68 Cr farmers have registered on government’s e-agriculture marketplace — eNAM, recording a transaction worth INR 1.14 Lakh Cr.
Further, she stated that the eNAM platform currently has more than 1000 mandis. “With all this, the agricultural infrastructure fund would be made available to AMPCs or Mandis, augmenting their infrastructure facilities,” she added.
Founded in April 2016, eNAM is an e-trading portal that connects with physical wholesale markets through a virtual platform, creating a unified national market for agricultural produce, where farmers can sell their produce at a transparent and competitive price, online.
With the government being at the receiving end of farmers’ ire for the three controversial agriculture reform laws that many believe will hurt minimum support prices (MSPs) in the long run, the finance minister announced measures to allay concerns.
Sitharaman said the MSP regime has undergone a “sea change” to assure price at least 1.5 times of production cost with sharp increase in procurement of foodgrains and payment to farmers. In her budget speech for the next fiscal, she said the procurement of crops like paddy, wheat, pulses and cotton has jumped manifolds in the last six years.
Boost For Electric Mobility; Railways
Finance minister Nirmala Sitharaman proposed 100% electrification of railways by 2030 along with plans to boost the share of public transport in urban areas during the Union Budget 2021 address. The government has announced an outlay of INR 18,000 Cr for the same for the 2020-21 period.
Stressing on the need for greater commercialisation, the FM allocated INR 1,70,000 Cr as budgetary allocation for the transport sector for 2020-21. She added that the National Highways Authority of India (NHAI) will be encouraged to pursue “greater commercialisation of highways to raise finance”.
Besides proposing highway works in several states such as Tamil Nadu, West Bengal, Kerala and Assam, all incidentally poll-bound states, the Minister also talked about bringing in metrolite and metroneo technologies, which are rail-guided urban transport systems with rubber-tyred electric coaches powered by an overhead traction system running on elevated or at-grade sections, in tier 2 and tier 3 cities.
To boost adoption of EVs and modern low-emission vehicles, the government also announced a voluntary vehicle scrapping policy to phase out old and unfit vehicles. “This will help in encouraging fuel efficient, environment friendly vehicles, thereby reducing vehicular pollution and oil import bill,” Sitharaman said.
Vehicles would undergo fitness tests in automated fitness centres after 20 years in case of personal vehicles, and after 15 years in case of commercial vehicles.
Expansion Roadmap or National Education Policy
Taking forward the National Education Policy (NEP) announced in 2020, Finance Minister Nirmala Sitharaman said during the Union Budget 2021 address that the government will extend this programme through specific schools for regional implementation of the policy. The FM also announced measures to enhance skill development initiatives across the country.
More than 15,000 schools will be qualitatively strengthened to include all components of NEP. They will hand hold and mentor other schools in their region. She announced that 100 new Sainik Schools will be set up in partnership with NGOs, private schools and states.
Taking forward the plans to set up a Higher Education Commission announced in last year’s budget, Sitharaman announced that a legislation for the same will be implemented in 2021. It will be an umbrella body for standard setting, accreditation, regulation and funding.