Department-related standing parliamentary committee for commerce has recommended relaxation in the criteria for startups to claim benefits under the income tax law. The panel, expressed concern over the low utilisation of Section 80-IAC of the Income Tax Act, 1961, which was implemented in 2017.
The section allows startups to claim a deduction of up to Rs 100 crore in profits for three consecutive years. However, only 10.4% of the 98,119 recognised startups in India have applied for the exemption, the committee noted in its report. Meanwhile, Certificate of Eligibility has been granted to only 1,173 applicants as on March 31, 2023, it added.
“This means that even after six years of the implementation of Section 80-IAC of the Income Tax Act, 1961, only 1% of recognised startups have received the Certificate of Eligibility,” the committee said in its report.
The committee also noted that 75% of applications for Certificate of Eligibility were being sent for resubmission due to a lack of clarity in the process.
“The committee is of the view that the government should work towards making the application processes more transparent and user-friendly,” the report noted, while adding that “the eligibility criteria for issuing a Certificate of Eligibility by the inter-ministerial board for claiming income tax exemptions may be relaxed in consultation with the stakeholders so that more startups could avail the tax benefits under Section 80-IAC of the Income Tax Act”.
The committee also recommended that the requirement for startups to be profit-making for three consecutive years be waived.
Aditonally, the committee also suggested making “necessary amendments to the Income Tax Act” that would allow start-ups to use ESOPs (Employee Stock Option Plans) as an attractive compensation model for employees, especially ones on low salaries. In this regard, the committee recommended considering taxing ESOPs “only at the time of sale of shares and not on notional gains.”
Other recommendations from the standing committee included creation of a comprehensive database of all startups in the country, and a relaxation of regulatory framework for unlisted domestic companies to directly list on foreign stock exchanges.