Making it tax worthy for start-ups

By: |
February 29, 2016 12:16 AM

To thrive, start-ups need a five-year income-tax holiday, reduction in corporate tax, and input credit benefit

Start-ups have become a buzzword in India. Rightly so, with one such venture joining the club every day. Today, India is just behind the US and the UK in terms of number of start-ups. By end-2015, we had over 4,200 start-ups, growing at rate of 40%, according to Nasscom.

In January, the Start-up India initiative saw thousands of companies transcending on the national capital. Prime Minister Narendra Modi made significant announcements, including single-point contact, patent protection, creation of funds of funds, and tax incentives.

The challenge, however, is to demarcate clearly who the actual beneficiary is, given the fact that there are thousands of start-ups in India. A prominent step that the government has taken is putting riders for any start-up to benefit from the measures. Start-ups need to fall in the definition laid down by the government and fulfil some criteria; for instance, a company should be solving a real problem, filling a gap in the society, and should not be more than five-year-old, among others, to be eligible as a beneficiary.

The announcements made, then, are worth the appreciation, but there are certain measures related to the tax structure that need to be revisited to aid entrepreneurial ventures.

Income-tax holiday

The government announced that start-ups would not be liable for tax for the first three years of inception. This is commendable, but the question is, how many start-ups will benefit from it? Hardly any, as it is increasingly difficult for them to become profitable in the first three years. The government must give a relook to the announcement and increase the time frame to at least five years. This would leave start-ups with more cash in hand to reinvest in their businesses.

Reduction in corporate tax

There are certain measures the government must implement with regard to corporate tax. The two immediate steps would be to consider differential tax for start-ups for a certain time-period, say five years. When a start-up begins to make profit, it should be charged lesser corporate tax as opposed to corporates. They can be charged 20% tax as opposed to normal 30%. Secondly, the carry-forward of losses for set-off should be allowed for more than eight years for a start-up. These two steps will also leave start-ups—those which are in their early stages and are reaching profitability—with more cash. They have to continuously invest on technology upgrade and R&D. Also, start-ups are taking more risk, profit-making is increasingly difficult for them and, above all, a lot of them, in big or small measure, are solving some genuine problems of the society.

No tax on capital gains

On capital gains, profit is tax-free if an investor remains invested in a listed company for a year. This should be allowed in start-ups too, which are unlisted, with a rider for the investors to be stay invested for minimum 3-5 years, making them stay with the company for more time, stay committed and be able to take more risk. Also, the dividend distribution tax should be cut from the current 15% to 10%.

Input credit benefit

The expense that start-ups bear as service tax is not easy to be set off in one year, as the profit for any start-up is either negligible or low. So, the benefit of service tax, i.e. input credit, should be allowed for more than two years, which is currently restricted to one year. Else, it becomes cost after one year of input credit, which is additional indirect tax burden. Increasing the time period will provide an opportunity to adjust the input credit without quick lapse.

Increase in tax rebate on healthcare spend

The benefit of tax rebate on healthcare expense should be allowed to encompass the entire taxpayer class and not be restricted to only salaried class. This very rebate should be increased to R5,000 a month, which is currently bracketed to R1,250, and this should be allowed on online healthcare services as well. This would make more people spend on healthcare, give an impetus to the health-tech start-up sector and result in more cash revenue generation for the government. The government can discuss the nuances with the players in the sector to conclude a framework.

The government is doing its bit to make the environment conducive and friendly for the start-up community. Going ahead, these measures, if implemented, will give an impetus to the already-thriving start-up sector.

The author is founder & CEO, Lybrate

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