Incentives For Start-Ups and MSME’S In Budget 2020

The Union Budget for 2020-21 was released on 1st February 2020 by the Finance Minister, Ms. Nirmala Sitharaman and had a lot in store for Start-Up’s and Medium, Small and Micro enterprises (MSME).


  • Deferment of tax payment on ESOP’S

In order to encourage startups to employ highly talented employees, by granting them Employee Stock Option Plan (ESOPs), it is proposed to defer the tax payment on these ESOPs by five years or till the employee leaves the company or when the said employee sells those shares, whichever is earlier. Hence, employees will not have to pay any tax at the time of allotment of ESOP’s to them.

  • Extension of tax holiday to large start –ups

It is proposed to increase the turnover threshold for claiming tax holiday from existing Rs. 25 crores to Rs. 100 crores. Further, in order to address the concerns of start-ups which may not have adequate profit in initial years for availing this holiday, it is proposed to extend the period of eligibility for claim of 100% deduction from the existing 7 years to 10 years.

  • Funding for early stage startups

The government proposes to provide early life funding, including a seed fund to support ideation and development of early stage Start-ups.

  • Establishment of Investment Clearance Cell and date center parks:

It is proposed to set up a centralized investment clearance cell for end-to-end facilitation, support, and pre-investment advisory. It is announced that a new policy be formed, to enable the creation of data center parks for private and public sectors, which will provide a major lift to startups that bank heavily on consumer data for their businesses.

  • Ease in registration of IPR’s:

Intellectual Property creation and Protection will play an important role in supporting and encouraging knowledge driven entrepreneurs. Several measures are proposed in this regard ,one of which includes promoting  a digital platform that would facilitate seamless application and capture of IPR’S.


  • Reduction in Compliance Burden of Tax Audit

Currently, businesses having turnover of more than one crore rupees are required to get their books of accounts audited by a Chartered Accountant. In order to reduce the compliance burden on small retailers and traders who comprise the MSME sector, the Government proposes to raise by five times the turnover threshold for tax audit from the existing one crore to five crores. Further, in order to boost less cash economy, the Government proposes that the increased limit shall apply only to those businesses which carry out less than 5% of their business transactions in cash.

  • Changes in custom duty for creating level playing field for MSME and promoting Make in India

In Order to create a level playing field for MSME’s and promoting Make In India, the Government has increased custom duties on many goods pertaining to household sector, electrical appliances, footwear, furniture, stationary, toys , Machinery e.t.c .This is aimed to give a boost to the MSME sector and encouraging them to Make and Manufacture in India.

  • Unified Procurement System

Government e-Marketplace is moving ahead for creating a Unified Procurement System in the country for providing a single platform for procurement of goods, services and works. 3.24 Lakh vendors are already registered on this platform .The Government proposes to take its turnover to 3 Lakh crores, offering a great opportunity for Medium, Small, Micro Enterprises (MSMEs) from which the goods, services and works can be seamlessly procured in a hassle free manner.

  • Generation of employment, skill and making MSME competitive

A National Logistics Policy will be released as per the Budget 2020 which would clarify the roles of the Union Government, State Government, and key regulators. It will create a single window e-logistics market and focus on generation of employment, skill and making MSMEs competitive.

  • Enhancing the Economical and Financial Sustainability
    • Necessary Amendments to the Factory Regulation Act 2011 have been proposed in the Budget 2020 which will enable NBFC’S to extend invoice financing to MSME’s through TReDS, thereby enhancing their economic and financial sustainability.
    • Working capital credit remains a major issue for the MSMEs. It is proposed to introduce a scheme to provide subordinate debt for entrepreneurs of MSMEs. This subordinate debt to be provided by banks would count as quasi-equity and would be fully guaranteed through the Credit Guarantee Trust for Medium and Small Entrepreneurs (CGTMSE). The corpus of the CGTMSE would accordingly be augmented by the government.
    • An app-based invoice financing loan product will be launched. This will obviate the problem of delayed payments and consequential cash flows mismatches for the MSMEs.
    • Many mid-size companies are successful domestically but not in export markets. For selected sectors such as pharmaceuticals, auto components and others, the Government proposes to extend handholding support – for technology up gradations, R&D, business strategy etc. A scheme of 1000 crore will be anchored by EXIM Bank together with SIDBI. Both these institutions would contribute 50 crore each. These 100 crores would be achieved towards equity and technical assistance. Debt funding of 900 crore from banks would be made available.

The MSME and Start Up Sector has emerged as highly vibrant and dynamic over the last five decades. MSMe’s and Start Up’s are vital to keep the wheels of the economy moving. Several measures for the MSME’s have been taken in the last few years and this year was no different. Here’s hoping that the measures proposed by the Government help the MSMe’s to flourish and grow which in turn will benefit the economy in the long run.

Nikita Bhatia
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