The government is considering a proposal to raise the tax holiday for start-ups from the current three years, aimed at further boosting an eco-system for budding entrepreneurs and job seekers, which could be announced in the coming Budget. Although the Department of Industrial Policy and Promotion (DIPP) has recommended a seven-year tax holiday, the finance ministry may agree to give a tax breather for four-five years on profits made by the start-ups, an official source told FE. “The proposal to offer greater tax relief to start-ups is under consideration,” confirmed another source.
According to the Finance Act, 2016, start-ups are eligible to get income tax exemption for three years in a block of five years, if they are incorporated between April 1, 2016 and March 31, 2019. To get these benefits, a start-up needs to obtain a certificate of eligibility from the inter-ministerial board of the DIPP.
Given the fact that start-ups hardly make any profits in initial years and most of them even fail to survive, commerce and industry minister Nirmala Sitharaman has been pitching for greater tax support to start-ups, as they have the potential to not just create entrepreneurs but also generate massive jobs.
In their meetings with Sitharaman earlier this year, various start-ups had urged her to persuade the finance ministry to raise the period of the tax holiday.
Huge losses incurred by even the established e-commerce players — including Amazon, Flipkart, Paytm and Urban Ladder — in recent years has only reinforced the need to support start-ups for a longer period, founders of some of the start-ups had told FE earlier. According to the latest report by Kotak Institutional Equities, losses of 14 e-commerce companies — including e-retailers, furniture sellers, travel portals and food ordering and delivery players — jumped an annual 138% to Rs 10,670 crore in 2015-16, thanks to increased ad spend and employee costs.
Prime Minister Narendra Modi had on January 16 unveiled a package of incentives to boost start-ups, offering them a tax holiday and an inspector raj-free regime for three years, and capital gains tax exemption.
He also announced a ‘fund of funds’ of R10,000 crore, which is to be managed by SIDBI. The fund will invest in Sebi-registered Alternative Investment Funds which, in turn, will invest in start-ups. Thus, this fund is to act as an enabler in attracting private investment in the form of equity and quasi-equity for start-ups.
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The Prime Minister had also announced a liberalised regime to help start-up businesses register patents, for which the fees were to be slashed 80%, apart from an easy exit option that would be provided under the bankruptcy Act so that start-ups can exit within 90 days.
India is the world’s youngest start-up nation with 72% founders less than 35 years, and is home to an estimated 4,750 start-ups, the highest after the US and the UK. As many as 1,00,000 people will have been employed in the country by the end of this year, according to a report by IT industry body Nasscom.