It has been a year now since Prime Minister Narendra Modi launched the Startup India scheme on the 16th of January, 2016. However, the response to the scheme has been lukewarm. As per certain media reports, less than 1,500 startups have so far applied for registration under the scheme, around 500 were recognised as startups, and only about 100 became eligible for tax benefits.
We can be certain that these were not the numbers that the government had in mind for the provision of benefits, especially with a scheme of this scale, a pet project of the Prime Minister himself that was first coined in his Independence Day speech of 2015, heard across the country and even abroad.
A brief background
The entities registered as startups are primarily eligible for the following benefits:
- Income Tax benefits for three consecutive years in the first five years of the startup under section 80-IAC of the Income Tax Act, 1961
- Exemption from income tax on receipt of investment at a price higher than the Fair Market Value (FMV)
- Access to Rs 10,000 crore fund of funds
- Exemption from capital gains on sale of shares of a registered startup
- Self-certification under nine different labour laws
- Fast tracked and up to 80 percent rebate in patent filing
- Benefits under public procurement regarding prior experience and turnover
To avail of these benefits, the startup needs to have the following:
- The startup should be less than five years old, and for income tax benefits, it must be incorporated on or after 01st April, 2016
- It should be incorporated as a Private Limited Company, LLP or registered firm
- Turnover in any year should not exceed Rs 25 crore
- The entity should not be formed by the splitting or restructuring of an existing firm
- It should be working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property
- For tax benefits, the startup should obtain a certificate of eligible business from an inter-ministerial board after getting a recommendation from a recognised incubator/VC
As a result of so many ifs and buts, till date, only a handful of startups, approximately 100, have been able to get themselves recognised as eligible businesses to claim tax benefits under the Startup India scheme.
The root cause has been procedural bottlenecks. The startup selection and registration process is not automatic or system-driven. Rather, the approval process involves a lot of human intervention and discretionary powers, which again opens the way for red-tape and corruption.
Even the application for registration under the scheme is lukewarm and drying up because of the following reasons:
- Startups do not earn profits in the first few years of their operations. So income tax exemption in the first few years is not attracting a lot of startups in the development phase
- The fund created by the government is not helpful either, as the same can provide support only when other investors and VCs are investing in the company. Investment is market-driven, and hence, the usefulness of the fund created by the government is yet to be seen as the funds have not been withdrawn and used till date
- Minimum Alternate Tax (MAT) at the rate of approximately 18.5 percent shall anyway be imposed
In the given circumstances, a very promising scheme seems to be going nowhere and will benefit only a handful of startups that have clout with the VCs, incubators or Inter-Ministerial board.
Taxmantra’s take on the subject
The following were the objectives of the government for launching the Startup India scheme:
- Attracting more innovation and entrepreneurs
- Job creation
- Boost to Make in India initiative and foreign exchange earnings in the long run
- Simplification and hand-holding
- Funding support and incentive
In our opinion, to do all the above in the long run, the government should focus more on the simplification of tax laws rather than on further complicating them. It should look at lesser discretionary powers for the government machinery and system-driven online approvals registrations, thereby creating a more conducive environment for industry and commerce. A conducive business environment and ease of doing business shall automatically boost startups and industries in all sectors, which will fulfill all the above stated objectives of the government. Some of the steps that the government should, in our opinion, take in this budget are as follows:
- Lesser exemption and rather overall reduced corporate and individual tax rates, which would lead to a wider tax base and better compliance
- The startup registration process, if any, should be simple and process-driven, and not based on the discretionary powers of any entity, government or private
- The convergence of MAT and Income Tax, somewhere mid-way, which would simplify things to a great extent
Further, the other benefits coined in the scheme such as (1) Self certification, (2) Handholding and support, (3) Single window approvals, (4) Simplified and online processes, and (5) Rebate and fast tracked IP application, should be standard across the industry and different government departments. It should not be limited to a particular scheme or sector.
On funding support, we feel that we already have banks and financial institutions for debt financing. Equity financing should be left open to market forces, with the government only arranging for a conducive and enabling environment for businesses to grow on their own, and not by interfering in things in which it does not have any expertise. Remember, the objective of this government is ‘Maximum Governance’ and ‘Minimum Government’.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)