By Annu Gupta
The Finance Minister, through Union Budget 2022–23, has continued with the underlying theme of providing a stable and predictable tax regime, promoting voluntary compliance, and reducing litigation. The extension of time limits for setting-up new manufacturing facilities will boost the aspirations of many start-ups who are now looking to enhance their platform with their own indigenous manufactured goods.
As per the Economic Survey 2021–22, India has over 61,400 recognised start-ups and become the third-largest start-up ecosystem in the world with 83 unicorns, after the US and China.
Budget proposals promoting start-ups showcase the commitment of the Government towards the start-up and investor community. In this direction, the Government’s proposal to set up an expert committee to examine the frictions and suggest appropriate measures to scale up venture capital and private equity investments has created a strong positive vibe amongst the investor community.
Further, thematic funds will be promoted by the Government with equity participation of up to 20% to encourage important sunrise sectors such as climate action, deep tech, digital economy, pharma, electric vehicles and AgriTech. The Government’s intent to have private fund managers manage such sectors will bring in necessary agility and better IRRs, resulting in a win-win situation for both the Government and the start-up ecosystem.
To mitigate the adverse impact of the pandemic on sectors which are yet to regain their pre-pandemic business levels, the one-year extension of the Emergency Credit Line Guarantee Scheme (ECGLS) and proposals to finance AgriTech start-ups and rural enterprises through a co-investment model are welcome moves.
Extending the one-year period of incorporation of eligible start-ups for claiming existing profit-linked deductions by three years will also incentivise some more people to join the bandwagon. However, it was disappointing that the threshold limit of INR 100 crore turnover was not enhanced. For any meaningful tech-based start-up, it becomes difficult to claim this tax holiday as there is no profit till INR 100 crore.
Turnovers due to major research and development (R&D) spends in the initial years leads to no meaningful benefit to start-ups.
To boost investor sentiments and promote more investments in start-ups, gains arising on transfer of long-term capital assets in the hands of individuals will now be reduced by 4.58% due to the reduction in surcharge. This shall also cover transactions in privately funded start-ups, including some delta benefit to employees on sale of ESOP shares, post the payment of salary tax.
However, the industry was disappointed as far as taxability of ESOP in the hands of start-up employees is concerned as they are required to pay notional tax on exercise of ESOP. Although, in cases of recognised start-ups with turnovers of up to INR 100 crore, tax liability was deferred last year and linked to ultimate sale of shares. However, a majority of start-up employees are unable to take the aforesaid tax deferral benefit, as by the time they become eligible to exercise the shares, the start-up itself does not remain eligible due to breaching the INR 100 crore mark. This fails the intent of linking the taxation of ESOPs with the ultimate sale of shares.
The provisions for taxation of cryptocurrencies provide much-needed tax certainty which the industry was seeking. Virtual digital assets (VDAs) have been defined to include cryptocurrencies, non-fungible tokens (NFTs) and any other asset as may be notified. Income from transfer of VDA has been made taxable at 30%, irrespective of the period of holding, with effect from 1 April 2022. No deduction, except the cost of acquisition, is allowed while computing the income from transfer of VDAs. Even gifting of VDAs will attract taxation for the recipient. Tax deductible at source (TDS) has been made applicable (w.e.f. 01-July-2022) at the rate of 1% on transfer of VDAs even where the consideration is wholly or partly in kind, subject to the prescribed threshold limit.
Loss on sale of VDAs is not to be set-off with any other income. Set-off and carry forward of loss on transfer of VDAs are not to be allowed. Clarity needs to emerge on taxability as well as transition provisions for transactions undertaken prior to 01-April-2022. These provisions, while welcomed, are onerous and not in lines with general taxation principles which provides for deduction of all expenses including carry forward of losses and should be rationalised.
Dividend received by Indian start-ups from foreign subsidiaries was taxable at a concessional rate of 15%. Withdrawal of this benefit will discourage and make repatriation of funds from overseas subsidiaries costlier.
Another important relief which start-ups were expecting was the rationalisation of provisions of carry forward and set-off of losses wherein multiple shareholders enter and exit. Further, most investors are looking to invest only for a limited time period of three–five years. The current provisions require that the start-up shareholders should continue to hold the same shares in the set-off year which they held in the year of loss, which seems to be more onerous than the basic condition of continuity of shareholders carrying 51% voting power is not met. The provisions relating to carry forward and set-off of losses need to be rationalised to cover the practical realities of the start-up ecosystem.
The focus of the budget for an all-inclusive growth with specific enablement to start-ups through public-private partnership seems well placed. However, the industry is still looking for some more relief on the issues highlighted above. I wish these changes would be considered by the Finance Ministry before the bill becomes an act. This would greatly augment the growth of start-ups, which shall, in turn, help the Government in digitising the economy, spurring innovation and creating new jobs and industries.
The writer is Partner – Price Waterhouse Co LLP. Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.