With its proposal of a tax holiday for start-ups in their first three years drawing criticism, the government plans to fine-tune it by expanding the scope of the tax holiday from the first three years to three from a block of maximum 10 years.
In its package for start-ups unveiled on January 16, the government had announced an array of initiatives for start-ups, including a Rs 10,000-crore fund of funds, ease of closing companies, patents and exemption from income tax on their profits for the first three years. More benefits are expected in the Budget announcements for 2016-17.
And one important proposal is to expand the scope of the three-year holiday because there is broad consensus that start-ups usually do not make profits in the first three to five years — something which C A Gupta, partner with Deloitte Haskins & Sells, underlines.
Proposals warranting changes in the current legislative framework for building on the January 16 package is likely to figure in the amendments to the Finance Bill to be moved as part of the Budget, sources said.
“The proposal is on the anvil. In the Budget, the government may allow start-ups to claim the three-year tax holiday from a block of years,” a source involved in the exercise said, adding that the intervention is being planned to make this proposal more meaningful for start-ups.
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From the point of view of boosting start-ups in India, the Budget is going to be very critical, including exemptions that are in place in countries such as Singapore, Germany and others which provide similar benefits for a better start-up ecosystem.
There is also a clamour for widening the avenue of fund of fund schemes where capital gains made by start-ups can be deployed to avail tax benefit. The government had announced that if capital gains made by start-ups are deployed into the fund of funds, then the start-up will not be required to pay capital gains tax. Experts say this is a little restrictive and does not offer much flexibility to a start-up.
“When we talk of start-up ecosystem, it is about large sums of money and we would like the government to make the ecosystem larger, more friendly. The rollover benefit should not only be limited to the fund of funds set up by the government but they should also be allowed to put the money into other funds or alternative investment funds that are putting money in start-ups,” Amarjeet Singh, Partner-Tax at KPMG, said.
Another expectation of start-ups is a relaxation in the anti-avoidance rule under the tax laws in the Budget. As of now, the anti-avoidance rule says that if there is change in the shareholding of company in excess of 51 per cent, then the company will not be allowed to carry forward its losses.
“Start-ups go through multiple round of funding and also incur losses in the first few years. So, some enabling exemption should be carved out for start-ups to ensure that their tax losses don’t lapse even if there is a change in shareholding multiple times in the initial years,” Singh said.
Tax experts say the government should also look to widen the scope of benefit, especially those relating to ease of compliance for start-ups and the Budget should aim at providing some exemptions. They say that reduction in compliance requirement will help them focus on nurturing and developing their business.
“Simplification should be the key. Compliance burden should be reduced for start-ups that are anyways small companies and steps such as increasing the threshold of service tax should be taken for them. It will make them more competitive,” Gupta said.
Even Singh argues that service tax should not be applicable to them and subsidy should be given on excise duty for start-ups involved in manufacturing. “Exemption on indirect taxes will provide a better ecosystem to start ups and will help them make profit and deploy funds into their business rather than wait for funds to arrive from a third party,” Singh said.
Experts also say the government could look at exempting start-ups from withholding a tax provision such as TDS. There is a view that since start-ups are small companies, there is not much that the government will lose in terms of revenue but it can make their life simpler and help them focus on their core activity.