In a move that could benefit the ecosystem for entrepreneurs, the Union Budget for 2018-19 has not only extended tax exemption for start-ups by two years but also changed the definition to widen the ambit beyond technology-related venture. Startups that are incorporated on or after April 1st, 2016 but before April 1st, 2021 will be eligible for this benefit.
Earlier, start-ups eligible for the tax sops, were the ones with turnover less than Rs 25 crore between April 2016 and March 31, 2021. This has now been eased to allow start-ups with a turnover not exceeding Rs 25 crore to avail the exemption over seven years commencing from the date of incorporation between the years 2016 and 2021.
According to the explanatory memorandum of the Budget presented on Thursday, the definition of eligible business has also been expanded to extend the benefit to startups that are “engaged in improvement of products or processes or services” or “a scalable business model with a high potential of employment generation or wealth creation”.
Till April 1, 2018, only those start-ups will be allowed to claim tax benefits that are involved in innovation, development or commercialisation of new products, processes and services driven by technology or intellectual property.
Apart from the benefits on the taxation front, the finance ministry has also introduced certain measures that could help the upstarts with fundraising activities. While on one hand, the government has proposed allowing hybrid financing instruments, and to develop an alternative investment regime in the country by rolling out a taxation regime designed for venture capital funds and angel investors. However, the Budget did not detail the proposed taxation regime for venture capital funds and angel investors.
Software industry body Nasscom, in a statement, said that extending benefits under the Startup India scheme to March 2021 and “rationalising the condition of turnover will enable tens of thousands of start-ups to avail benefits”. “Evolving a distinct policy for hybrid instruments, which are suitable to attract foreign investments in several niche areas, will advantage start-ups and venture capital firms,” Nasscom added.
“Separate policy allowing venture capital firms to invest in hybrid instruments is a welcome move. Permitting issue of hybrid instruments such as redeemable shares, optionally convertible debentures, etc will enable startup founders have greater control over the company rather than diluting their stake through equity funding in initial stages,” said Ganesh Raju, partner and leader – startup, PwC.
However, as demanded by a number of early stage start-ups and angel investors, the Budget did not do away with the angel tax. As per Section 56 of the Income Tax Act, any investment that a company receives against issuance of shares in excess of its “fair value”, then such shares will be taxed as ‘income from other sources’ at a rate of 30 per cent. Analysts believe that since startups are valued in ways different from traditional companies, these ventures have been subjected to unjustified scrutiny from the income tax department. According to Nasscom, the 30 per cent tax rate has resulted in a 53 per cent reduction in angel funding during the first six months of 2017.