The Union Finance Minister recently rolled out the Union Budget in the Parliament bringing about numerous notable changes and reforms under, interalia the corporate and securities laws. The Finance Bill, 2021 (“Bill”) proposes to bring about a change in the scheme of affairs which are likely to impact the Start-ups and the MSMEs. The reforms proposed by the Bill includes revamping provisions relating to ‘One Person Company’ with respect to their incorporation and conversion, decriminalization of LLPs, revising the definition of small company, introducing the tech enabled MCA21, allowing Start-up to enter into mergers and amalgamations, allowing NRIs to form OPC etc. The legal update herein deliberates upon such major notable changes and reforms that have being brought about vide the Finance Bill, 2021.
Changes proposed under the Finance Bill, 2021
- The definition of ‘small companies’ has been revised as the upper limit for its paid-up share capital has been revised from 50 lakhs to 2 crores. Moreover, the upper limit for turnover has also been revised from 2 crores to 20 crores. With an increase in the threshold greater number of companies would qualify as small companies and thereafter enjoy the benefits provided to a small company. With this decision the government aims promote operation of the MSMEs and start-ups and thereby putting the pandemic ridden distressed economy back on track.
- In an attempt to incentivize the incorporation of One Person Companies (‘OPC’) the government has allowed OPC to operate without restrictions on turnover and capital. Moreover, there existed a statutory lock in period of two years before voluntary conversion of OPC into other entities, however the same has been done away with vide the Finance Bill, 2021. Now, the OPC is required only to file an e-form INC 6 along with satisfying the basic conditions of qualifying of the entity to which it intends to convert.
- Moreover, the Resident Test for NRIs involved an individual to reside in India for 182 days during an annual year, however the same has now been relaxed to 120 days an annual year along with allowing NRIs to incorporate OPCs.
- The Bill proposes an extension of eligibility for claiming tax holidays for startups along with the capital gains exemption for investment in startups until March 31, 2022, to incentivize funding.
- The Bills proposes to constitute Dispute Resolution Committee/s for resolving future disputes from fresh assessments in case of small and medium taxpayers. The Dispute Resolution Committee (s) shall resolve disputes of such persons or class or persons as may be specified by the Central Board for Direct Taxes (“CBDT”). Since the scheme is introduced only for small and medium taxpayers, it is proposed to only be applicable to those disputes where the returned income is INR 5 million or less and the aggregate amount of variation proposed in the assessment order INR 1 million or less. Such Committee/s shall have the power to reduce or waive any penalty imposable under the Income Tax Act, 1961 or grant immunity from prosecution for any offence under the laws to be specified.
Introduction of start-ups to merger and amalgamation
- Start-ups are the key to India’s economic success and in order to boost their operations the ministry of corporate affairs vide notification no. G.S.R. 93(E), dated 01.02.2021 has notified the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2021 by virtue of which a new sub-rule (1A) has been inserted to the Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. As per the change brought about by the Finance Bill, 2021 merger and amalgamation between two or more start-up companies or between a start-up and small has been allowed. For the purposes of merger and amalgamation between start-ups or two or more small companies a scheme of merger or amalgamation may be entered as prescribed by section 233 (1) of the companies act.
Decriminalisation of offenses under LLP Act, 2008
- In order to strengthen the start-up ecosystem, the issue of decriminalization of certain provisions of the limited liability partnership act, 2008 has been proposed. This proposed step would be an extension of the decriminalization of certain offenses that have been already carried out under the Companies Act, 2012 by the Ministry of Corporate Affairs. A composite impact of these changes would ensure the well being of commercial entities thereby, ensuring that the ease of doing business is increased.
The Union Budget, 2021 has had an impact on multiple facets concerning the governance of OPCs, small companies and start-ups. Overall the budget has brought about numerous reforms in relation to the functioning of the start-ups and small companies and hopefully, the proposed reforms would help the entities reach the intended growth.
