There are several expectations of finance leaders from the upcoming Budget on 1st February 2023 in order to propel the growth of startups. The expectations from the Budget are to simplify the regulations and overall tax regime by introducing tax incentive schemes to augment the development and growth of more start-ups. These tax incentives and reductions in corporate tax rates would not only help in increasing earnings but also plays a pertinent role in encouraging investments.
Tax incentives
An important area is deduction u/s 80IAC of the Income-tax Act, wherein the start-ups that are incorporated on or after 1st April 2016 but before 1st April 2023 are eligible to avail deduction under section 80 IAC to the tune of 100% of the profits for three consecutive years out of ten years since the incorporation of the start-up. It is expected that the government may extend the incorporation period of start-ups from 1st April 2023 to 1st April 2026, so that the newly incorporated start-ups would also be able to get the benefit of this deduction. Apart from extending the incorporation period, the period for claiming deduction should also be extended to 5 years from 3 years to encourage start-ups.
Additionally, Section 79, which poses restriction on carry forward of losses in case of substantial change in shareholding of an Indian start - up requires a relook. As per the current provisions, shareholders of the start- up must continue to own at least 51% of the shares at the end of the financial year in which the loss was incurred to carry forward the loss, which is to be set off; otherwise, the start -up cannot carry forward such loss. In an endeavour to support start-ups, this condition of continuous holding of the shareholders or investors (being persons holding shares in the year of loss) should be relaxed.
Start-up India Action Plan
Furthermore, to promote the start -up ecosystem in the country, it was envisaged in 'Start -up India Action Plan' to establish a Fund of Funds (FOF).With a view to provide tax incentives for investment in Fund of Funds, section 54EE was inserted in the Income-tax Act so as to provide exemption from capital gains, if the long term capital proceeds are invested by the start-ups in units of notified fund subject with a condition that the amount remains invested for a period of three years failing which the exemption shall be withdrawn. The investment in the units of the notified funds is allowed up to Rs. 50 lakhs. However, no such funds have been notified till now. The said fund should be notified.
It is a common scenario that Indian start - ups issue convertible notes to the resident investors. Also, the Reserve Bank of India has permitted a person resident outside India to purchase convertible notes issued by an Indian startup company for IN 25 lakhs or more in a single tranche. In order to bring parity, exemption on conversion of convertible notes into equity should be provided.
The tax on ESOPs has been deferred for the employees of eligible start-ups, which casts uncertainty on the employee's liability since the notice of demands can be enforced at a future date. Hence, there should be proper clarification on the aspect that the income may be quantified in the year of conversion of such options to shares but the taxation is deferred till the year of sale of such shares.
MAT rate
Another expectation from the upcoming budget is the sizable reduction in the Minimum Alternative Tax (MAT) rate for start -ups from 15% to 10% to ensure their growth and meet their daily working capital requirements.
By taking inflation into consideration, the government should also rationalize the limit of emoluments of additional employees in order to claim deduction under Section 80JJAA of the act. Currently, the section permits a deduction of 30% of the additional employee cost incurred in the course of business of the previous year. Moreover, the emoluments of the additional employee shall not be more than IN 25,000. So, by taking inflation into consideration, the limit of emoluments should be increased from IN 25,000 to IN 50,000.
Start -ups are also required to get registered with multiple authorities to claim tax benefits. There should be a single window clearance so that the process becomes smoother for them.
About the Author: Amit Maheshwari is Tax Partner, AKM Global, a tax and consulting firm. Yeeshu Sehgal, Head of Tax Market, AKM Global also contributed to the article.
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