Zero-Based Budgeting (ZBB) is a modern financial strategy that compels businesses to start each budgeting cycle from scratch, with no assumptions carried forward from previous years. Every expense must be justified, evaluated, and approved based on its current relevance and contribution to growth. This makes ZBB particularly effective for startups that often operate with limited capital and need to maximize the return on every rupee spent.

For young businesses aiming for rapid growth, ZBB acts as both a financial discipline and a strategic framework. It helps allocate scarce resources to the most impactful areas such as product innovation, customer acquisition, technology, and regulatory compliance. By cutting legacy costs and aligning every spend with strategic priorities, startups can extend their runway, remain compliant, and accelerate their journey toward scalability and profitability.

In this article, CA Manish Mishra talks about Zero-Based Budgeting for Startups: A Discipline for Rapid Growth.

Core Principles of ZBB for Startups

Zero-Based Budgeting (ZBB) is most effective for startups when applied with discipline and structured processes. Two of its key principles are Decision Packages and Continuous Reallocation, which ensure that every rupee is strategically invested and monitored for impact.

Decision Packages

Under ZBB, every proposed expense is not treated as a routine line item but as a decision package. This package clearly defines:

• Purpose: Why the cost is necessary (e.g., marketing campaign, technology upgrade).

• KPIs: What measurable outcomes will be achieved (customer acquisition, user engagement, cost savings).

• Cost: The actual estimated spend for the activity.

• Owner: The person accountable for execution and results.

These packages are then ranked based on their direct contribution to startup growth such as acquisition (new customers), retention (keeping users engaged), and monetization (revenue generation) ensuring that resources flow toward the highest-impact activities.

Continuous Reallocation

Unlike traditional budgets, which allocate a fixed annual sum, ZBB promotes continuous reallocation. Funds are released in tranches only after reviewing the performance of a decision package against its KPIs. If results are positive, further funding is approved; if not, the expense is cut or redirected to another package with better potential.

This principle builds agility into the budgeting process, allowing startups to quickly respond to market shifts, customer feedback, or compliance requirements. It prevents long-term commitment to underperforming initiatives and ensures that scarce resources are always aligned with the company’s growth trajectory.

Legal Framework in India

While Zero-Based Budgeting is a managerial discipline, in India it operates within a clear legal and compliance environment. Startups and companies must design their budgeting and financial control processes in line with the Companies Act, 2013, MCA rules, and industry-specific cost regulations.

Companies Act, 2013

• Section 134(5)(e) – Internal Financial Controls (IFC): Directors are legally responsible for establishing and maintaining adequate IFCs. Adopting ZBB strengthens IFCs by ensuring that every expense is justified, documented, and linked to performance metrics, thereby reducing misuse of funds.

• Section 177 – Audit Committees: For companies where an Audit Committee is mandatory (e.g., listed entities, large public companies), ZBB supports compliance by providing transparent financial assumptions and decision packages that the committee can review. This aligns budgeting with governance and risk management.

• Section 128 – Books of Account: Companies must maintain books of account at their registered office (or approved location) and preserve them for at least 8 years. ZBB documentation, when integrated with accounting records, creates a strong audit trail for regulators and auditors.

• Audit Trail Rule (effective April 2023): MCA mandated that all accounting software used by companies must have an unalterable audit trail (edit log) of every transaction. This requirement aligns perfectly with ZBB, since each expense justification and reallocation can be digitally logged and tracked for compliance and transparency.

Cost Records & Audit

• Companies (Cost Records and Audit) Rules, 2014: Certain industries like manufacturing, telecom, pharma, and energy—must maintain detailed cost records to track production and service costs. For startups operating in these sectors, ZBB must integrate cost recording requirements into budgeting decisions.

• Appointment of Cost Auditor: If a company’s turnover crosses prescribed thresholds, appointing a cost auditor becomes mandatory. This professional verifies cost records and ensures compliance with statutory norms. ZBB aids this process by providing a structured allocation of expenses and justification for each cost, making cost audits smoother and more transparent.

Taxation and Budgeting

For startups, taxation is not just about paying dues it directly affects cash flow, runway, and compliance credibility. When applying Zero-Based Budgeting, tax liabilities and statutory deadlines must be built into decision packages so there are no surprises.

GST Compliance

• Section 16(2)(aa) of the CGST Act: Input Tax Credit (ITC) can only be claimed if the supplier’s invoice appears in GSTR-2B. This means startups cannot rely on provisional credits anymore. In ZBB, this requires allocating budget for vendor compliance checks, GST reconciliation software, and risk buffers for suppliers who fail to upload invoices.

• E-invoicing (₹5 Crore Threshold): Businesses with turnover above ₹5 crore must generate e-invoices through the GST portal. Startups crossing this threshold must budget for IT upgrades, ERP integration, and staff training to avoid penalties.

• Impact on ZBB: Since GST compliance failures can block ITC and strain working capital, ZBB must account for reconciliation costs and the risk of dealing with non-compliant vendors.

Direct Taxes

• TDS Compliance: Tax Deducted at Source (TDS) is a monthly cash liability, generally payable by the 7th of the following month (with special rules for March). Quarterly TDS returns are also mandatory. ZBB must include cash flow buffers for these recurring payments to avoid late fees and interest.

• Section 80-IAC (Startups): Eligible startups (recognized by DPIIT) can claim a 100% tax holiday for any 3 consecutive years within 10 years of incorporation. In ZBB, this can be treated as a strategic tax shield but only if recognition and compliance conditions are satisfied.

• Section 79 – Carry Forward of Losses: Normally, if there is a change in shareholding beyond 51%, companies cannot carry forward past losses. However, eligible startups enjoy relaxation under Section 79, allowing them to preserve tax benefits despite fundraising. ZBB must factor this into capital-raising decision packages.

• Section 43B(h) – MSME Payments: From FY 2024-25, any dues to MSMEs unpaid beyond 45 days will be disallowed as business expenditure under the Income Tax Act. Startups must prioritize MSME payments in their ZBB cycle, since delays create a double hit cash outflow plus tax disallowance.

MSME Provisions Impacting Budgeting

Startups often engage with micro and small enterprises (MSMEs) for raw materials, services, or outsourcing. Indian laws give strong protection to MSMEs, making timely payment not just an ethical practice but also a statutory obligation. For startups applying Zero-Based Budgeting (ZBB), this means MSME dues must be treated as non-negotiable “must-pay” items.

MSMED Act, 2006

• As per Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, payments to MSMEs must be made within the agreed period, not exceeding 45 days from the date of acceptance or deemed acceptance of goods/services.

• Section 16 of the Act imposes a strict penalty: if payment is delayed, the buyer is liable to pay compound interest at three times the RBI’s bank rate.

• Impact on ZBB: Startups must prioritize these payments in their decision packages, since delays can create heavy interest liabilities and affect vendor relationships.

Income-Tax Act, Section 43B(h)

• Introduced from FY 2024-25, this provision disallows deductions for any outstanding dues to micro and small enterprises that are not paid within the statutory timeline (i.e., within 45 days).

• This means unpaid MSME bills will increase taxable income, leading to higher tax outgo.

• Impact on ZBB: MSME payments must be classified as immediate liabilities in the budget. Deferring them is no longer a cash management option, since tax benefits are lost.

MCA Filings

• Companies must file MSME-1 Return with the Ministry of Corporate Affairs (MCA) to disclose dues to MSME vendors.

  • April–September dues → filing due by 31st October.

  • October–March dues → filing due by 30th April.

• The return requires details of outstanding amounts and reasons for delay. Non-filing may attract penalties.

• Impact on ZBB: Startups should budget for both cash outflow (vendor payments) and compliance costs (filing requirements, professional fees), ensuring timely clearance of MSME dues to avoid reputational and regulatory risks.

FEMA & Startup Fundraising

For startups raising funds from foreign investors, compliance under the Foreign Exchange Management Act (FEMA), 1999 is critical. FEMA, along with RBI regulations, governs how foreign capital enters India and how reporting is carried out. Ignoring these provisions can lead to penalties, compounding proceedings, and delays in future funding rounds. In a ZBB framework, startups must plan for valuation, filings, and professional support as integral budget items.

FEMA Compliance

• Form FC-GPR: When a startup issues shares to non-resident investors, it must file Form FC-GPR on the RBI’s FIRMS portal within 30 days from the date of allotment (not receipt of funds). This filing requires valuation certificates, KYC documents of investors, and board/shareholder resolutions.

• Annual FLA Return: Every Indian company receiving FDI or holding foreign assets/liabilities must file the Foreign Liabilities and Assets (FLA) return annually with the RBI, usually by 15th July of the following financial year. It discloses foreign investment positions and overseas assets.

• Downstream Investments: If a startup that has received foreign investment invests further in another Indian entity (subsidiary or joint venture), this is a downstream investment. It must follow FEMA’s pricing guidelines, sectoral caps, and reporting requirements, ensuring that funds are used in compliance with sector-specific regulations.

ZBB Implications

• Budgeting for Compliance Costs: Startups must reserve part of their ZBB decision packages for valuation reports, legal documentation, professional fees, and statutory filings under FEMA. These costs are unavoidable regulatory obligations and must be treated as priority expenses.

• Linking Fundraising to Regulatory Timelines: The “use of proceeds” from fundraising should be aligned with specific regulatory deadlines. For instance:

  • Allocate funds for Form FC-GPR filing immediately after share allotment.

  • Plan resources for annual FLA filing and professional verification.

  • Track downstream investments with proper budgeting for reporting and pricing compliance.

This ensures that foreign fundraising activities are synchronized with legal timelines and avoid last-minute cash crunches or penalties.

Data Protection and Compliance

In today’s digital economy, startups collect and process large amounts of customer and employee data. With stricter privacy laws and cybersecurity rules in India, budgeting for data protection is not optional it is a legal requirement and a trust-building measure. Under Zero-Based Budgeting (ZBB), startups must treat data protection costs as core decision packages to avoid penalties, reputational damage, and business disruptions.

Digital Personal Data Protection Act, 2023 (DPDPA)

• The DPDPA, 2023 introduces a consent-driven regime for handling personal data. Startups must obtain clear, informed, and revocable consent before processing personal information.

• They are also required to implement security safeguards, ensure purpose-specific data retention policies, and provide mechanisms for individuals to exercise rights such as data access and erasure.

• The government has also released Draft DPDP Rules, 2025, currently under consultation, which propose a phased rollout of compliance obligations. These rules will likely include stricter requirements on cross-border data transfers, data audits, and penalties for violations.

• ZBB Implication: Startups must budget for privacy frameworks, secure storage solutions, employee training, and technology tools to meet DPDPA obligations.

CERT-In Guidelines (IT Act)

• Under the Information Technology Act, 2000, the Indian Computer Emergency Response Team (CERT-In) has issued directives requiring companies to report cybersecurity incidents within 6 hours of detection.

• Startups must also maintain detailed system logs for 180 days, synchronize system clocks with government-approved servers, and ensure that vendors and service providers adhere to the same standards.

• ZBB Implication: Budgets must include cybersecurity audits, incident response systems, vendor due diligence, and monitoring tools. Costs of contracts with cloud or IT providers should also account for compliance with CERT-In rules.

Practical Implementation of ZBB in Startups

Applying Zero-Based Budgeting (ZBB) in a startup setting requires not only financial discipline but also a structured approach that balances growth priorities with legal compliance. Below are the key steps and best practices to make ZBB work effectively.

Steps in Implementation

• Clean Records: Before implementing ZBB, startups must ensure that their books of account are accurate, reconciled, and up to date. This includes GST reconciliations, TDS entries, and clearing old vendor balances. Without clean records, decision packages will be based on flawed data.

• Zero-Based Costing: Instead of rolling forward last year’s expenses, every cost must be justified from scratch. For example, a marketing subscription should only continue if it directly contributes to customer acquisition or retention. This prevents legacy expenses from draining cash.

• Compliance Prioritization: Certain expenses like MSME payments, GST dues, TDS deposits, and statutory audit fees—are non-negotiable under law. ZBB must classify these as fixed “must-pay” items before discretionary costs are considered.

• Performance-Linked Approvals: Funds should be released in tranches, tied to KPIs and ROI evidence. For example, additional ad spend may be approved only if the previous campaign met agreed conversion targets. This ensures money follows performance, not assumptions.

• Audit-Ready Trail: ZBB must leave behind a clear documentation trail. This includes Board approvals, accounting system edit logs (as per MCA’s Audit Trail Rule), and variance reports. Such records not only aid internal reviews but also satisfy auditors and regulators.

Best Practices

• Avoid Starving Long-Term Investments: While ZBB is cost-disciplined, startups must not underfund important long-term assets such as technology, data infrastructure, and product development. Cutting these too aggressively may harm scalability and innovation.

• Build Compliance as “Must-Pay” Packages: Treat compliance costs (taxes, regulatory filings, statutory payments) as priority decision packages, at par with salaries and vendor payments. This prevents penalties, tax disallowances, and reputational risks.

• Align Budget Reviews with Statutory Filings and Tax Cycles: Scheduling budget reviews around GST return due dates, TDS deadlines, MCA filings, and MSME reporting ensures that cash outflows are anticipated. This keeps the startup legally compliant while avoiding liquidity shocks.

Recent Updates Relevant to ZBB

Zero-Based Budgeting (ZBB) must evolve with India’s changing regulatory and compliance environment. Several recent updates directly impact how startups plan, allocate, and prioritize their budgets.

• Section 43B(h) – MSME Dues (Applicable from FY 2024-25): From 1 April 2024, any payments to micro and small enterprises (MSMEs) not cleared within 45 days will be disallowed as a tax deduction. This means unpaid MSME bills will increase taxable income, leading to a higher tax liability. Startups must now treat MSME payments as priority expenses within their ZBB process, ensuring timely settlement to avoid both penal interest under the MSMED Act and loss of tax benefits.

• Audit Trail Compliance – MCA (Effective April 2023): The Ministry of Corporate Affairs (MCA) has mandated that every company using accounting software must enable an unalterable audit trail (edit log) from 1 April 2023. For startups, this makes it essential to integrate ZBB decisions into accounting systems that preserve transaction histories. This ensures transparency, facilitates audits, and strengthens internal financial controls.

• GST Updates – ITC Restrictions & E-invoicing: With the tightening of GST rules, Input Tax Credit (ITC) can only be claimed if the supplier’s invoice is reflected in GSTR-2B. Provisional ITC claims are no longer allowed. Additionally, e-invoicing is mandatory for businesses with turnover above ₹5 crore. Startups must account in ZBB for IT system upgrades, vendor compliance checks, and reconciliation costs, as failure to comply can block credits and increase working capital pressure.

• DPIIT Startup Incentives – Revamped 80-IAC in 2025: The government has continued granting approvals under the revamped Section 80-IAC tax holiday regime in 2025. Eligible startups can still claim 100% income-tax exemption for three consecutive years within ten years of incorporation, subject to DPIIT recognition. Startups applying ZBB should include application fees, compliance costs, and tax planning strategies to fully leverage this incentive.

• Data Protection – Draft DPDP Rules, 2025: Following the Digital Personal Data Protection Act, 2023, the government released Draft DPDP Rules, 2025 for consultation, with phased enforcement expected soon. These rules will likely impose stricter obligations on data handling, retention, cross-border transfers, and breach reporting. Startups must budget under ZBB for data security systems, privacy frameworks, vendor contracts, and compliance audits to remain legally compliant and build customer trust.

Conclusion

Zero-Based Budgeting (ZBB) should not be seen as just another tool to cut unnecessary costs it is a strategic growth discipline tailored for startups. Unlike traditional budgeting, which often carries forward historical spending, ZBB forces founders and management teams to rethink every rupee from scratch, aligning it with the company’s immediate and long-term priorities.

By embedding legal and compliance requirements into the ZBB framework, startups create a system that is both financially efficient and legally robust. Key regulations such as the Companies Act provisions on audit trails and internal financial controls, GST and direct tax rules, MSME payment timelines under Section 43B(h), FEMA filings for foreign investments, and data safeguards under the DPDP Act become part of mandatory decision packages rather than afterthoughts. This integration prevents penalties, strengthens credibility with regulators, and boosts investor confidence.

A well-designed ZBB cycle ensures that every allocation supports growth, minimizes risks, and keeps the company audit-ready, tax-efficient, and investor-friendly. For startups, this discipline can mean the difference between struggling with cash leaks and scaling sustainably toward long-term success.

Frequently Asked Questions (FAQs)

Q1. What is Zero-Based Budgeting (ZBB) and how is it different from traditional budgeting?

Ans. Zero-Based Budgeting requires every expense to be justified from scratch for each budget cycle, unlike traditional budgeting which simply carries forward last year’s figures with incremental adjustments.

Q2. Why is ZBB important for startups?

Ans. Startups often work with limited funds. ZBB helps them eliminate wasteful spending, focus resources on growth-driven activities, and extend their financial runway.

Q3. What legal compliances must startups consider while implementing ZBB in India?

Ans. Startups must align ZBB with laws such as the Companies Act (audit trails, books of account, IFCs), GST provisions (Section 16(2)(aa)), Income Tax (TDS, Section 80-IAC, Section 43B(h)), FEMA filings (FC-GPR, FLA return), and the DPDP Act, 2023 for data protection.

Q4. How does ZBB handle statutory obligations like MSME dues?

Ans. MSME payments must be cleared within 45 days under the MSMED Act. From FY 2024-25, Section 43B(h) disallows tax deductions for unpaid MSME dues. ZBB treats such payments as non-negotiable expenses.

Q5. Does ZBB support startup fundraising?

Ans. Yes. ZBB ensures fundraising proceeds are allocated not just to growth but also to mandatory filings under FEMA (e.g., FC-GPR within 30 days, annual FLA return) and valuation/legal fees, preventing compliance lapses.

Q6. How does GST compliance affect ZBB?

Ans. Startups must budget for vendor compliance, invoice reconciliation (GSTR-2B), and e-invoicing costs. Without this, ITC claims may be blocked, impacting working capital.

Q7. Is ZBB only about cutting costs?

Ans. No. ZBB is about strategic allocation. While it eliminates unnecessary expenses, it also ensures sufficient investment in critical areas like technology, product development, compliance, and data security.