Govt. To Provide Greater Tax Relief To Startups

Modi government has been a huge supporter and promoter of the Indian Startup industry ever since it came to power at the centre in the year 2014. Keeping in tandem with its this ideology, the government is currently considering a proposal to raise the tax holiday for startups from the current three years period.

According to reports, with this, the government aims to boost an eco-system for budding entrepreneurs and job seekers in the country. A confirmed announcement about the same can be expected to be made during the budget session next year.

While the Department of Industrial Policy and Promotion (DIPP) has recommended to increase the three years tax holiday to a seven-year tax holiday, the finance ministry may agree upon providing a breather of four-five years on profits made by the startups in the country.

Finance Act, 2016 dictates that startups in India are eligible for an income tax exemption for a period of three years in a block of five years, if they get incorporated between April 1, 2016 and March 31, 2019. In order to avail the benefits, startups are required to obtain a eligibility certificate from the inter-ministerial board of the DIPP.

Since a majority of startups hardly make any profits in their initial years, with a certain percentage even failing to survive, Nirmala Sitharaman, India's commerce and industry minister has been pitching for a greater tax support to startups for a long time now. She believes that the Indian Startup industry not only has a potential to just create entrepreneurs but also generate massive jobs, something which the country desperately needs right now.

Several startups had also pleaded her to persuade the finance ministry to increase the tax holiday period earlier this year in a meeting.

Recent trends have shown that even e-commerce biggies like Amazon, Flipkart, Urban Ladder and Paytm have faced huge losses. This further underlines the need to support startups for a longer period than the current three years period.

A latest report by Kotak Institutional Equities highlights that the losses of 14 e-commerce companies — including travel portals, e-retailers, furniture sellers, food ordering and delivery players — jumped an annual 138% to Rs 10,670 crore in the financial year 2015-16, courtesy increased employee costs and advertising spending.

India is considered as the youngest startup nation in the world with 72% of the startup founders less than 35 years of age. The country houses approximately 4,750 startups, the highest after the US and the UK.

The starting of the year saw PM Modi unveiling a package of incentives to boost startups in the country by offering them a tax holiday and an inspector raj-free regime for three years, and capital gains tax exemption. He also announced SIDBI managed 'fund of funds’ of Rs. 10,000 crore. The fund will invest in Sebi-registered Alternative Investment Funds which, in turn, will be investing in startups.

After More Than 2 Yrs of Announcement Centre Finally Okays Rs 10K Cr Fund for Startups

In the 2014 Union Budget of India, finance minister Arun Jaitley announced Rs 10,000 crore startup fund for new businesses and startups in India however since then whole of the startup industry was puzzled that where exactly does this money go and how can Indian entrepreneurs benefit from it?, and after more than two years of the announcement nobody even know where and how this fund has been utilized so far.

Surprisingly, Modi government on Wednesday filled the Indian startup industry with cheer as it sanctioned the much awaited Rs 10,000 crore 'Fund of Funds for Startups'. The fund is one of the steps taken by the Central government towards boosting self-employment in the country — a move that is part of a larger initiative, Prime Minister Narendra Modi’s pet project ‘Startup India Action Plan’, which he unveiled himself in the month of January this year.

Still a riddle, question arise as how come a fund announced in 2014 took more than two years of time to get sanctioned and now as a next step how much time would it take to get implemented on grass root level as its sanctioning itself took more than a couple of years.

According to an official statement issued by the government, the fund sanctioned is expected to generate employment opportunities for 18 lakh Indians and that too on full deployment. Further, the government is quite hopeful that this dedicated corpus of Rs 10,000 crore could potentially be the nucleus for catalysing Rs 60,000 crore of equity investment and twice as much debt investment.

The fund was given a green flag after a decision was made for the same in a recent Union Cabinet meeting which was chaired by Prime Minister Narendra Modi himself.

"The Cabinet has approved the establishment of 'Fund of Funds for Startups' (FFS) at Small Industries Development Bank of India (SIDBI) for contribution to various Alternative Investment Funds (AIF), registered with SEBI which would extend funding support to startups," said the official statement.

The statement issued also mentioned that the Fund has been built up over the 14th and 15th cycles of the Finance Commission. This has been done in order to provide startup enterprises with a funding source that is much for stable, reliable and predictable.

According to information available with us, the Modi government is committed to its this mission and has already approved and sanctioned a sum of Rs 500 crore for the project in the financial year 2015-16 and earmarked Rs 600 crore for the current financial year i.e. 2016-17.

In order to keep a check on the project's progress, the government is also making provisions to grant assistance through gross budgetary Support by Department of Industrial Policy and Promotion (DIPP), which will then review and monitor the project's performance in alignment with the central government's 'Start up India Action Plan'.

According to initial reactions of industry experts, this move by the central government can be of much help to Indian startups which have to face several hardships such as limitations of the conventional bank finance, information asymmetry, lack of hand holding support from agencies that are credible and limited availability of domestic risk capital.

Indian government scraps angel tax for investors funding startups

Investors investing in startups in India will no longer be required to pay an angel tax to the government. Under a recent move made by the government of India to boost the country's entrepreneurship sector and job creation market, it has decided to let go of the so-called 'angel tax' for investors.

Fundings to startups, notified under the PM  Modi announced government-approved plan in January this year, will not have to give tax even if it ends up exceeding the face value.

The existing rules state that any money raised by an unlisted company in India by the means of equity issuance has to be covered under this tax up to the extent that the amount is in excess of the fair market value. This extra money is taxable as "income from other sources" under the Section 56(2) of the Income-Tax Act India and charged the corporate tax rate, adding up to an effective tax of over 30 percent.

The venture capital community has been contesting for the removal of the angel tax for a long time now. According to them, the tax acts as a bug hurdle to their investment activities.

In majority of the cases, the valuation of the startups are way more than the market value as it is calculated on the potential of the idea rather than the startup's immediate worth. In such cases, the startups end up losing out a majority of the money inflow in angel taxes. But, now under the new notification issued by the Central Board of Direct Taxes, the startups would be now exempted from raising fundings from the rigours of Section 56(2)(viib).

Talking about the government's action to do away with the angel tax to a national business newspaper, Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP said, "This has been long awaited and is a very welcome step. The abolition of this so-called 'angel tax' has been a long-standing demand of the industry." However, he wasn't happy with the fact that the Indian tax officers could still question the earlier investments as being overvalued in the view of declining valuations on a global level and in the Indian sub-continent.