The Indian startup ecosystem mostly welcomed the multiple tax breaks and respites introduced in Budget 2023, especially on the relaxation of carrying forward of losses. However, some investors and founders said the Budget did not accommodate tax benefits or relaxations for the private equity and venture capital industry, especially with the government now including NRI investors under the ambit of the angel tax provision.
The Budget extends the date of incorporation for income tax benefits to startups from March 31, 2023, to March 31, 2024.
The Budget also proposed to extend the benefit of carrying forward of losses on change of shareholding of startups from the existing seven years of incorporation to 10 years.
Maneet Pal Singh, partner, IP Pasricha & Co, said Section 79 of the I-T Act typically restricts carrying forward and setting off of losses in cases of private companies. The Act also prohibits setting off carried-forward losses if there is a change in shareholding. “The carried forward loss is set off only if at least 51% shareholding remains the same on the last date of the previous year to which the loss belongs,” said Singh.
However, some relaxation has now been provided for government-recognised registered startups. The 51% shareholding condition is not applicable to eligible startups if all shareholders, as on the last day of the year, continue to hold those shares on the last day of the previous year in which the loss is set off, and if the loss has been incurred during the seven years since incorporation, Singh said.
Ankur Bansal, co-founder of BlackSoil Capital, said equity investors and founders will now have a better return on equity with the three-year extension. However, for debt investors, there would be no impact. “The startups could also benefit with surplus funds being utilised towards working capital requirements or towards growth requirements,” Bansal told FE. But a key condition for carrying forward losses is being profitable.
In addition, as per the fine print of the Finance Bill, 2023, NRI investors in private companies will pay tax on any or all shares issued on premium pricing. Pankaj Makkar, MD, Bertelsmann India Investments, said while the intent to include foreign investors under the angel tax regime may be appreciated, the rules could unintentionally impact genuine cases such as convertible rounds. “On wish lists including easing ESOP taxation, rationalising capital gains tax rates for unlisted shares etc., there remains optimism that these areas will be dealt with in due course…,” Makkar said.
Manu Rikhye, partner, Merak Ventures, said the deferment of the time of payment of tax on ESOP plans needed to be looked at. “It would have also been encouraging if the Budget accommodated for an advisory on the PE/VC ecosystem.”