Small startups may not get promised tax holiday
- Startups broadly enjoy two benefits under the Income Tax Act.
- The exemptions are subject to the startup meeting conditions specified by the DPIIT in its February 19 notification.
- The government views startups as a key source of wealth creation and employment generation.
- It has been trying to incentivise entrepreneurship through initiatives such as Startup India.
Startups want the DPIIT and Central Board of Direct Taxes (CBDT) to remove the ambiguity, said people familiar with the matter.
“Clarity is needed urgently as the September 1 deadline to file returns is nearing,” said the chief financial officer of a tech startup.
Startups exceeding the turnover threshold of Rs 25 crore stand to lose out on the tax holiday and may have to cough up tax with interest.
“The different turnover thresholds specified for qualifying as an eligible startup in the DPIIT circular vis-a-vis under income tax law is a mismatch and should be addressed at the earliest,” said Vikas Vasal, national leader (tax), Grant Thornton India.
Startups broadly enjoy two benefits under the Income Tax Act. Section 80 IAC allows 100% deduction in respect of profits and gains for any three out of seven consecutive years beginning from the year in which a startup is incorporated. However, only an ‘eligible’ startup can avail of the benefit subject to certain conditions.
‘Discrepancy not Deliberate’
The conditions say total turnover should not exceed Rs 25 crore and the Inter-Ministerial Board of Certification should endorse that the company is a startup. Section 56(2)(vii)
(b) allows exemption from tax being levied on the share premium received in excess of the fair market value, which stemmed from protests over the socalled angel tax.
The exemptions are subject to the startup meeting conditions specified by the DPIIT in its February 19 notification, which had amended the definition of startups. An entity would be considered a startup if turnover in any of the financial years since incorporation or registration had not exceeded Rs 100 crore. However, the income tax provisions haven’t been changed in accordance with this threshold. The DPIIT measures were aimed at ensuring a more helpful ecosystem for startups, which had been complaining about the angel tax and other matters.
It’s likely that the discrepancy wasn’t deliberate, said a person familiar with the matter. “The government should clear this ambiguity,” said the person. “They have taken many steps for startups.”
Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP, concurred with this view. “This doesn’t seem to be the intention of the government,” he said. “A clarification on this would help startups.”
Vasal said the government has rolled out many laudable measures to ease the burden for startups and added that more concrete steps need to be taken to avoid tax and regulatory disputes that keep arising regularly and lead to negative perception about the business environment in India.
The government views startups as a key source of wealth creation and employment generation, and has been trying to incentivise entrepreneurship through initiatives such as Startup India.