That only 88 startups of the 11,422 recognised under the government’s flagship Startup India scheme, over 30 months since its launch, have been certified for income tax exemption by the Department of Industrial Policy and Promotion (DIPP) points to the reason behind the Centre’s decision to partly ease the screening process for these ventures.
As per data updated till July 24, 2018, only 88 startups were certified for grant of income tax exemption by the DIPP out of the 2,197 applicants that came in till that date – a dismal 4 per cent strike rate. If the number of startups that had been recognised under the scheme – 11,422 till July 24, 2018 – is taken into account, the gap between the Startups recognized under the scheme – the starting point for these ventures to get tax breaks – and those that actually ended up receiving exemptions is far wider.
Under the Startup India scheme, tax exemption is available to startups for two aspects — income and investment raised. Income tax break is available to these companies and partnerships under Section 80IAC, where startups can avail income tax exemptions for three years in a block of seven years if they have been incorporated between April 1, 2016 and March 31, 2019. The second aspect of tax breaks under the scheme — startups and their angel investors are allowed exemption under the Income Tax Act as per which closely-held companies, when issuing shares, are charged 30 per cent tax on the difference between funds raised as per the actual valuation and the fair-market value of the company. This, within the start-up community, is known as the angel tax.
In order to avail both these tax exemptions, DIPP-recognised Startups had to undergo screening mechanism of Inter Ministerial Board (IMB), which has been cited as being rigorous and thereby contributed to the delays. As per changes moved by the DIPP on Wednesday, startups need not go through the IMB to claim breaks under of the Income Tax Act and, instead, new applications will be directly evaluated by the Central Board of Direct Taxes (CBDT). Firms will have to submit their applications through the DIPP website, after which it will be forwarded to CBDT, which has also been mandated to evaluate and respond within 45 days of receiving applications.
“Tax exemption is typically granted to unique and innovative startups. So the IMB scrutiny was justified. But given the rate of progress, this route is being eased now,” a government official involved in the exercise said. To access the three-year break on their income, the startups will still be processed by the IMB, which has evolved since it was conceived in 2016. In the first notification dated February 17, 2016 announcing the exemptions – the IMB comprised joint secretary, DIPP; along with representatives of Department of Science & Technology and Department of Biotechnology.
In a notification dated April 11, 2018, the government expanded the three-member IMB an eight-member board to include a DIPP additional secretary as its convenor, along with representatives from ministries of corporate affairs, electronics and IT, departments of science and technology, biotechnology, and from CBDT, RBI and Sebi. In order to provide tax exemption, the startups were scrutinised for innovativeness and potential for job creation but this “rigorous screening” has translated only into a minuscule proportion of total recognised startups being exempted for tax purpose by IMB.