DPIIT raises concern on startup taxation issue with FinMin, top govt official says

The Department for Promotion of Industry and Internal Trade (DPIIT) has taken up the taxation issue of startups with the finance ministry, a top government official has said.

"Startup India does provide such policy advocacy, particularly on the taxation issue. We have been taking that particular issue that many startups are worried about funding from non-residents...and the initial valuation of the startup, how that tax is calculated. We have taken it up," DPIIT Secretary Rajesh Kumar Singh said here at an industry interaction.

Post the amendments proposed in the Finance Bill, concerns have been raised over the methodology of calculation of fair market value under the two different laws.

The Finance Act, 2023, has amended Section 56(2)(viib) of the I-T Act, thereby bringing overseas investment in unlisted closely held companies, except DPIIT-recognised startups, under the tax net.

The Income Tax department is expected to soon come out with certain draft rules to specify the class of investors and norms of valuation of foreign investment in unlisted companies.

The modification in valuation rules is needed as I-T Act and FEMA provide different methodologies for calculating the FMV of shares of unlisted companies.

The startup and venture capital industry has sought exemption for certain overseas investor classes.

However, no tax would be levied on investments in startups, which meet the prescribed norms and are recognised by the DPIIT.

Further, the secretary suggested the captains of the industry mentor startups in a structured manner.

On a question related to delay in getting manufacturing licenses to defence units, he said that the defence industry and some other strategic sectors are few segments where license permit raj remains.

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"And the fact that you still have to run around (to get a license) that way shows why the license permit raj has to be dismantled... In this sector, we have found significant delays...Even in my own department, I have seen cases taking several months for the issue of licenses," he said, adding one of the reasons is that it requires clearance from the home ministry which tends to take time, particularly, the security clearances.

State government responses are also often delayed and "our target is to issue DPIIT licenses in five months, but in general it takes more months," he added.

Further talking about PM Gatishakti initiative, Singh said it would become relevant for the private sector in the longer run.

"We intend it to offer to other countries as well but before that, we intend to offer to start providing some access to the private sector as well in the not-so-distant future. It already has about 1,400 layers of data of all kinds," he said.