In a significant boost to startups, finance minister Nirmala Sitharaman on Monday said the government proposes to incentivize the incorporation of One Person Companies by allowing them to grow without restrictions on paid-up capital and turnover.
In her speech, Sitharaman said, “As a further measure which directly benefits start-ups and innovators, I propose to incentivize the incorporation of One Person Companies (OPCs) by allowing OPCs to grow without any restrictions on paid up capital and turnover, allowing their conversion into any other type of company at any time, reducing the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days and also allow Non Resident Indians (NRIs) to incorporate OPCs in India.”
Currently, only an Indian citizen and resident in India is eligible to act as a member and nominee of an OPC. In case the paid up share capital of an OPC exceeds Rs 50 lakh, or its average annual turnover of the immediately preceding three consecutive financial years exceeds Rs 2 crore, then the OPC has to mandatorily convert itself into a private or public company.
OPCs are combinations of sole proprietorship and a board of directors-linked benefits. "The biggest advantage of a one person company is that its identity is distinct from that of its owner. Therefore the owner will not be sued, only the company will. Another advantage is limited liability. Since the company is distinct from that of its owner, the personal assets of the shareholders and directors remain protected in case of a default,” non-banking financial company Blacksoil’s co-founder Ankur Bansal said.
A proprietorship has unlimited liability, and cannot raise equity funding which is possible for an OPC, Bansal said, adding that an OPC is also eligible for government schemes such as those focused on MSME.
“The reduction of red tape for OPC will give a boost for solo founder startups. This will incentivise the entrepreneurs to quickly incorporate without worrying about paid-up capital and turnover and focus on execution of their idea,” Rasik Pansare, co-founder and CMO, of mobile parking technology startup Get My Parking said.
Under tax benefits, Sitharaman announced an extension in the eligibility for claiming tax holiday for startups by one more year till March 31, 2022. With several startups struggling in a Covid-19 battered economy, an extended tax holiday will likely provide an immediate impact.
To further incentivise emerging businesses in the country, Sitharaman proposed extending the capital gains exemption for investment in startups by one more year till March 31, 2022.
“We have taken a number of steps to support the MSME (micro, small and medium enterprises) sector. In this budget, I have provided Rs 15,700 crores to this sector, more than double of this year’s budget estimate,” Sitharaman said.
“The government has opened more channels of investments in India by providing incentives… While the budget did give a push to the startup ecosystem, issues around Section 80 IAC exemptions for ESOPs and the issue around capital gains tax rate parity for sale of listed and unlisted shares needs to get addressed in the near future,” Nimesh Kampani, president of angel investment platform LetsVenture Plus said in a statement.
Sitharaman also proposed initiatives covering digital payments, the Indian space sector, and deep ocean explorations. She proposed Rs 1,500 crore to promote digital modes of payment and further boost digital transactions in the country.
Separately, with an aim to simplify the Goods and Services Tax (GST), the government said that it is using deep analytics and artificial intelligence to identify tax evaders and fake billers.
Furthermore, Sitharaman said that a revamped version of the Ministry of Corporate Affairs web portal will be launched -- MCA-21 version 3.0 -- driven with data analytics, artificial intelligence, and machine learning.
The union minister also proposed to revise the definition of small companies under Companies Act, 2013 by increasing the threshold for capitalization to not exceeding Rs 2 crore from the current Rs 50 lakh, and turnover to not exceeding Rs 20 crore from the current Rs 2 crore. The government aims to benefit about two lakh companies, with the move.