Earlier this year, the Prime Minister’s announcement of three-year tax holiday for startups, available over a five-year window, in his Startup Action Plan — followed by ratification in the Budget — was a much-lauded initiative. However, many did raise concerns over the small period of three years announced in the Budget.
Finally, the startup industry has been able to make itself heard. The Ministry of Commerce and Industry has approached the Ministry of Finance with a proposal to expand the income tax exemption period from the current three years.
"I have been interacting with startups and a lot of them are in touch with us directly. The decision has to be taken by the Finance Ministry, who are favourably inclined to helping them out because this is a major initiative," Minister of State for Commerce & Industry Nirmala Sitharaman told ET.
Experts appreciate the move of Ministry of Commerce & Industry and says that if it the tax holiday period is further extended, it will benefit the startup industry, which is in dire need of every positive step.
“The profit-making process is a bit extended in startups. So, the majority of the startup has not been able to take advantage of this scheme as it expires in three years. The idea behind this move is to extend the benefit to more and more startups,” says Saurabh Srivastava, Co-founder, Indian Angel Network.
Neeraj Jain, CEO and Co-founder, Zopper says that he appreciates the move of the government. However, this extension of the tax holiday is not going to make a huge difference to companies in e-commerce, retail, and other online service companies. Whether it is three years or five years, we are yet to witness the emergence of a profit-making venture in this category.
He, however, adds that the proposition is not same for all. B2B category startups have a good track record in building a profit-making business; and they might yield the largest benefit of this extension.
Dheeraj Jain, Partner, Redcliffe Capital reiterates the sentiments and says that he appreciates the gesture of the Ministry towards startups; however, this is not going to extend a larger benefit to the industry.
“I think the government can put a larger capital fund, start more incubators, make registration of companies faster and do some other peripheral areas. Nonetheless, the growth of the industry rests in the hands of industry players. The government can’t offer much help in building the ecosystem,” says Dheeraj.
Besides tax exemption to startups for three years, tax exemption on capital gains and tax exemption on investments above fair market value were the other two announcements made during the Startup Action Plan.
Investors may invest in a fund-of-funds, which will in turn invest in startups. If investors reinvest their capital gains in such an approved fund, they will be exempt from paying tax on those gains. However, the amount invested shouldn't exceed Rs 50 lakh. The investment will carry a three-year lock-in, and premature withdrawal will result in the tax benefits being reversed.
If a person reinvests the long term-capital gains earned from the sale of a residential property in an eligible start-up, then he will become eligible for exemption on those gains. However, the individual investor should hold more than a 50 percent share in the start-up. And, the startup should have utilised the amount to purchase new assets before the due date for filing tax return.
In its 'start-up India Action Plan', in order to promote the start-up ecosystem in the country, the government has envisaged establishing a Fund of Funds, which intends to raise Rs 2500 crore annually for four years to finance startups.
According to Ms Sitaraman, for 2016-17, the allocation of Rs 1,100 crore has already been made and 35 new incubators have been established.