With the 2017 Union Budget set to be tabled in Parliament on February 1, start-ups and investors are hoping that the government will usher in a more enabling tax regime to ensure that the Start-up Action Plan and Make in India initiatives are more impactful.
According to Ganesh Natarajan, chairman, Nasscom Foundation, start-ups are expecting four major announcements in the forthcoming Budget: Ease of starting and shutting down companies, ease of raising angel funds and venture capital; incentives to incubators/ accelerators and enabling agencies to enable the eco-system to develop; and special categories for government purchases where start-ups and small and medium sized enterprises (SMEs) will get preference.
Also, commerce and industry minister Nirmala Sitharaman recently stated that recommendations have gone to the finance ministry for extending the three-year tax holiday to seven years, for start-ups. FE spoke to a few start-ups to find out their expectations from Budget 2017.
Pawan Gupta, co-founder, Curofy says the biggest taxation issue that start-ups in India are facing are the rules governing indirect taxes. “The government needs to increase the service tax exemption limit to help start-ups be more competitive for a longer time,” he says. “The biggest pain point is the TDS rule. In today’s globalised world where most of the international payments happen through credit cards, the archaic TDS rules expose the start-ups to completely unwarranted risks, mostly due to ignorance. Ease of doing business is affected due to these rules.”
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Recalling last year’s Budget announcement where the government introduced two new sections in the Income Tax Act—54EE and 54GB—to encourage investments in start-ups, Raghavendra Pratap Singh, co-founder, i2ifunding, says, “The conditions imposed on investors, who avail the exemptions from capital gains, need to be relaxed further so that start-ups can raise more funds. The investment cap of R50 lakh under Section 54EE needs to be rationalised and the condition that the investor, to be able to avail the benefits under Section 54GB, needs to be the majority shareholder, should also be reconsidered.”
Shubham Patil, CEO and founder, BusinessWindo.com, shared an interesting insight on the current tax holiday. “Start-ups enjoy tax holiday for the first three years with a MAT (Minimum Alternative Tax) of 18.5% imposed on book profits. This overturns the impact of the exemption for start-ups as 18.5% MAT does not allow the full impact of the benefits to be realised,” he says. “In fact, if a startup is earning profits, MAT has to be paid regardless of any tax free scheme for the first three years. When any amount of tax is paid as MAT by an assessee, then credit in respect of tax so paid should be allowed to him in accordance with the provision of Section 115JAA.”
Vikram Kumar, founder, Letstrack, pointed out that some start-ups may try to shut shop and re-register as new ventures, to get the benefits of a three-year tax holiday period. Again, those start-ups who tend to incur losses for years would be scrutinised on the basis of their “book profits” under MAT, even when they may have incurred net losses.
Another shortcoming is the stringent requirement of ‘innovative’ business ideas for start-ups to enjoy the current tax holiday limit of three years. This means that not every start-up is eligible to reap the benefits of tax holiday, informs Sonia Sharma, founder and managing director, GoodWorkLabs. “It would be great if start-ups with real ‘business’ can benefit from the tax holiday scheme. We saw many start-ups with ‘innovative’ ideas shut down in 2016 because they didn’t have a business case. Again, there are start-ups which are self funded, generating employment and revenue but not getting benefits from the current scheme.”
Commenting on the Start-up India Action Plan which was launched last year, Vineet Chirania, director and CEO, Trainman, says the eligibility criteria for start-ups to reap these benefits is unrealistic. “Only companies incorporated on or after April 1, 2016 qualify. This is a big injustice to all existing start-ups. Second, the start-up needs to be a DIPP approved organisation. Only one company out of 728 that applied has actually got this status.”