India is home to a thriving startup ecosystem, with a large number of entrepreneurs and innovative companies emerging in recent years. Some of the most successful startups in India include Flipkart, Paytm, Ola, and Snapdeal, among others. These companies have disrupted traditional industries and created new opportunities for growth and innovation.
In recent years, the Indian government has also been supportive of the startup ecosystem, launching initiatives such as Startup India and Digital India to encourage entrepreneurship and promote the use of technology. Additionally, the availability of funding has increased, with both domestic and international investors investing in Indian startups.
There are also numerous incubators and accelerators in India that provide support and resources to startups, helping them to grow and succeed. Some of the most well-known incubators and accelerators in India include Zone Startups India, Nasscom 10,000 Startups, and Axilor Ventures.
The government of India has been continuously supporting Startups by helping them in getting funds, tax incentives, removing angel tax, technology support, and other supports. Recently union budget 2023 was announced by the Hon’ble finance minister, which further offers support to startups by extending the period of tax benefits. Let’s discuss the benefits to startups given in the union budget 2023.
Relief to start-ups in carrying forward and setting off of losses
Section 79 of the Act restricts the ability of companies, except those in which the public holds a substantial interest, to carry forward and set off their losses. This restriction prohibits the setting off of carried forward losses if there has been a change in shareholding, unless at least 51% of the shareholding (as of the last day of the previous year) remains unchanged with the company.
However, eligible startups as defined in section 80-IAC of the Act are given some relief. The requirement for continuity of at least 51% shareholding does not apply to eligible startups if all shareholders, as of the last day of the year the loss was incurred, continue to hold their shares on the last day of the previous year in which the loss is set off. The only condition is that the loss must have been incurred during the seven-year period beginning from the year of incorporation.
To align with the ten-year period outlined in sub-section (2) of section 80-IAC of the Act, the period for eligible startups to use this relaxation is proposed to be increased from seven years to ten years from the date of incorporation. To achieve this, the proviso to sub-section (1) of section 79 of the Act will be amended so that eligible startups can set off their carried forward losses, provided the loss was incurred during the ten-year period starting from the year of incorporation.
This amendment will take effect on April 1st, 2023 and will apply to the assessment year 2023-2024 and subsequent years.
Tax Holiday Scheme: Extension of date of incorporation for eligible start-up for exemption
The current provisions of section 80-IAC of the Act allow eligible startups to deduct 100% of their profits and gains from an eligible business for three consecutive assessment years out of ten years, starting from the year of incorporation, at their discretion. This is subject to the following conditions:
- The total turnover of the business does not exceed one hundred crore rupees.
- The startup holds a certificate of eligible business from the Inter-Ministerial Board of Certification.
- The startup was incorporated on or after April 1st, 2016 and before April 1st, 2023.
In order to further support the growth of startups in India and provide them with a competitive environment, it is proposed to amend the provisions of section 80-IAC of the Act by extending the incorporation period for eligible startups to April 1st, 2024.
This amendment will come into effect on April 1st, 2023 and will apply to the assessment year 2023-2024 and subsequent assessment years.
Angel Tax: Bringing the non-resident investors
The provisions of Section 56(2)(viib) of the Act state that if a company that is not widely held by the public receives an amount for issuing shares that is higher than the face value of the shares, the excess amount over the fair market value of the shares must be taxed under the “Income from other sources” category. The computation of the fair market value of unquoted equity shares for the purpose of Section 56(2)(viib) is specified in Rule 11UA of the Income-tax Rules.
Clause (viib) of sub-section (2) of section 56 of the Act was introduced through the Finance Act, 2012 to counteract the circulation of undeclared money via share premium received from local investors that exceeds the fair market value. However, this provision does not apply to share premium received from non-resident investors.
It is now proposed to remove the phrase “being a resident” from Clause (viib) to make it applicable to any individual, regardless of residency status, who provides consideration for the issuance of shares. This amendment will make the provision applicable to the receipt of consideration for the issue of shares from any person.
These amendments will take effect from April 1st, 2024 and will apply to the assessment year 2024-2025 and subsequent assessment years.