Tax benefits for startups? Govt reviewing policy to encourage entrepreneurship

It’s been two years since Prime Minister Narendra Modi launched his flagship scheme Start Up India. Industry feedback shows that a lot of issues need to be urgently addressed in order to continue fostering the startup culture in the country. For example, while the initiative has helped make India the third largest startup ecosystem in the world, complicated tax rules continue to plague entrepreneurs.

And the government is not only paying heed to the feedback, but is also taking steps to proactively refine the policy. According to media reports, the government is reviewing the regime for startups, especially on the taxation side of things, in an attempt to make it more attractive for entrepreneurs. This news comes just ahead of the Global Entrepreneurship Summit in Hyderabad, starting tomorrow, where Modi is scheduled to meet several startups and their CEOs. The Times of India has quoted sources claiming that discussions have already been initiated across ministries over the last few days.

A growing concern, flagged off by Nasscom Chairman Raman Roy, is the taxation problem faced by Angel investors. “As an angel investor, I have 60-plus investment in the world. (In) Some of my investee companies, the tax guys coming back and saying that this is not an investment and this has to be taxed as your income in your (account) head,” he said to PTI during the launch of the 2017 edition of the ‘Indian Startup Ecosystem-Traversing the maturity cycle’ report earlier this month. Roy claims that this explains why angel stage funding has dipped by 53% while early stage funding is up by 83%.  Sources have also told The Times of India that there are concerns over the rules for taxation of employee stock options.

“The issue of startups being taxed on the investments received is far from over. While an exemption is provided to investors registered with Sebi and to foreign investors, domestic investors in general have to still defend the valuation. In fact, it continues to be common for companies to receive notices asking for a justification of the premium received,” Abhishek Goenka, India leader, corporate and international tax at PwC told the daily.

The government may be all ears for such issues, but any tax changes are unlikely before the next budget, scheduled for February 1, 2018. However, media reports point out that some of the procedural issues can be fixed earlier if they only require a change in rules through notifications. If that comes through, India’s ongoing startup boom–1,000 ventures have reportedly launched operations this year-will only accelerate.

In the meantime, entrepreneurs can just wait and avail of the many benefits already extended to them, like the three-year income tax holiday in the first seven years of business for startups incorporated after March 31, 2016. The International Business Times reported that the Department of Industrial Policy and Promotion (DIPP) has considered 671 startups for income tax exemption so far.