Indian start-ups have fueled optimism at a time of waning growth in the manufacturing sector and the rupee consistently falling against the US dollar. The Government is also seeking to encourage this enthusiasm, which has resulted in the Start-up India initiative.
The government can give a further push to start-ups by considering certain steps, including tax measures. Since the Start-up India Action Plan also contains tax aspects to be enforced through legislation, high expectations have been pinned on the upcoming Budget by the start-up community. The Action Plan basically contains the following tax incentives:
Roll-over tax exemption on capital gains, if gains are re-invested in a recognised fund
No tax on share premium received above fair market value, from an incubator; and
Three-year tax holiday.
The nuances and ambiguities within these incentives can be left for future discussion, as what has currently been announced is merely a roadmap, and suitable clarifications may be provided for in the Budget, when these incentives are tabled as part of the Finance Bill.
Outside of the Action Plan, it is also expected that the large promotional spend by start-ups (AMP expenses), in particular by e-commerce companies, may be allowed to be capitalised as an intangible asset, depreciable over several years.
Since start-ups have recently become an industry sub-sector in itself, they too have a laundry list of tax expectations – ranging from exemption from service tax to issues like clarity on CST applicability on cash-on-delivery transactions. However, the Government is likely to tread a careful line on sops, aligned with the emerging principle of not creating too many differential tax policies that result in lobbies and distortions. In any case, given the early stages at which most start-ups are, tax may be a somewhat narrow lens to view their facilitation from.
Other aspects which would be crucial in the Budget are:
Earmarking and mobilisation of funds for Government investment in venture funds;
Earmarking corpus for the credit guarantee mechanism for start-ups; and
Roll-out plan for incentivizing and setting up new incubators.
Concluding words
What is heartening is that the right signals are coming from other bodies – TRAI ruled in favour of net neutrality, RBI announced a slew of proposals aligned to the Start-up India initiative for easier access to foreign funds and SEBI released the report of the Alternative Investment Policy Advisory Committee for public comments. All these bode very positively for the start-up ecosystem that is being envisaged.
How swiftly and effectively these changes are collectively brought about and how they interact with Budget proposals will determine the direction in which the Indian start-up movement progresses. And revisiting how we choose to define a start-up would be the best starting point.
Amish Behl, Senior Tax Professional, EY India