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The Change
Two main sops, both relating to taxes, have been handed out to start-ups, in Budget 2017. One, a sweetening of the time limit of exemptions announced last year; two, a relaxation on holding conditions for loss carry forward.
Also, the proposal to reduce corporate tax rate — to 25 per cent for companies with a turn over of ₹50 crore — will likely benefit profitable start-ups, though the main beneficiary will be SMEs.
The Background
The Start-up India scheme, unveiled in January 2016, hoped to spur innovation and job creation by offering incentives to start-ups. The start-up ecosystem has been reeling under stress with a slow-down in funding in 2016. While many proposals — certification, tax breaks, funding for incubators, start-up funding through Fund of Funds — were announced last year, there has not been much traction at the ground level. For instance, only a handful of start-ups — just eight — have qualified for tax exemption.
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In this backdrop, start-ups were looking for big-bang announcements to provide a boost. For example, helping entrepreneurs with more innovative funding schemes, support for R&D through credits and sops such as lower capital gains tax rates to attract private investments.
There has, however, been no path-breaking schemes, just incremental updates that may not create much dent. Investors and start-ups were also hoping that the angel investment tax would be scrapped.
The tax was removed last year, but only for ‘eligible’ start-ups as approved by the Department of Industrial Policy and Promotion. With only 500-odd start-ups in that bucket, the tax removal announced last year was not very helpful. Widening the benefits would have cheered early-stage investors who bet on risky and innovative ideas.
The Verdict
The concessions have been a damp squib for the entrepreneurial ecosystem in the country. The tax rebate period of five years given last year was quite unreasonable, as not many start-ups may see three years of profit in five years of existence. So extending it to a more reasonable period of seven years may only be fixing what was broken.
That said, the push for digital payments, technology in education, skill development, export infrastructure and rural development will indirectly help the start-ups working in these segments. Also, the lower corporate tax rate will benefit profitable enterprises.
What has changed
Better profit linked tax deduction available to start-ups — increased from exemption for 5 years (of which 3 years exempted) to 7 years
Easing of the requirement of continuous holding of 51% to avail tax loss carry forward, subject to certain promoter holding conditions
Lower corporate tax rate — 25% tax rate charged for companies with annual turn-over of less than ₹50 crore
Increase in carry forward of Minimum Alternate Tax to 15 years from up to a maximum of 10 years currently
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