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Siddharth Tandon |
Smita Roy, Partner & Leader (North)
Indirect Tax

16 January 2023

Start-ups are a significant chapter in India’s growth story. However, with increasing inflation and a rise in interest rates globally, funds are declining and it is leading to severe cash-flow management issues for start-ups. Budget 2022-2023 with an effective policy can support new-age start-ups. The start-up ecosystem wishes for a few key policy changes which could help them survive and grow.

Budget 2020 had deferred the income tax on Employee Stock Options Plan (ESOPs) from the time of exercise of ESOPs.
This was a welcome amendment; however, it was only extended to start-ups recognised by an Inter-Ministerial Board Certificate (IMB). The start-up ecosystem also wishes for the benefits to be extended to DPIIT-recognised start-ups. 

The IMB certifications are difficult to get and 99% of the start-ups are not recognised by IMB, and thereby could not get the benefit of deferred income-tax on ESOPS.   Also, the start-ups wish that the benefit of Section 80-IAC is extended to DPIIT - recognised start-ups which are currently provided only to IMB-certified start-ups. which are currently provided only to IMB-certified start-ups.

Further, the tax deduction under 80-IAC is valid for start-ups incorporated before 1 April 2023. It is also recommended by NASSCOM that the sunset clause of 80-IAC be extended by another 5 years. Currently, long-term capital gains on unlisted shares held by non-resident investors in a company where the public is not substantially interested are taxed at 10% for non-resident investors. The same benefit may also be extended to domestic investors for the sale of unlisted shares of the company recognised as a start-up by the DPIIT. NASSCOM has also recommended reducing the Minimum Alternate Tax (MAT) for eligible start-ups under 80-IAC of IT Act, from 15% to 9%.  

Currently as per Section 68 of the IT Act any company in which the public is not substantially interested are required to explain the source of income of the investor to the satisfaction of the tax officer. This disincentivises friends/family and other investors to invest in start-ups without the additional layer of scrutiny.

Rationalisation of Section 68 would help facilitate additional investment in the start-up ecosystem.

Exemption from the filing of an Accountant Report as per section 92E of the IT Act by foreign company investors on similar lines as section 115A. Section 115A exempts foreign companies from filing an income tax return in India if their income from India comprises interest, dividend and royalty. Similar relief from filing the 92E report will reduce compliance by foreign investors in Indian start-ups.

Similar relief from filing the 92E report will reduce compliance by foreign investors in Indian start-ups. 

Special tax incentives or lower rates of tax to start-ups serving important priority sectors of the country would also boost the performance,especially in sectors like ed-tech, agri-tech, health-tech and fin-tech. 

Till date, the government’s policies have always promoted start-ups and the start-ups wish to receive this continued support for increased performance.

With many economists, warning of the looming recession, it is important that start-ups must be adequately supported to survive and thrive.

Source: The Economic Times