New Delhi, Feb 1: Finance Minister Arun Jaitley has proposed extending the window for startups to avail tax benefits to first seven years of existence, a move that will allow new ventures to extract full benefit of the permitted deductions.
Earlier, startups were allowed to claim profit-linked deduction for three years out of the first five years of existence. "...the profit linked deduction available to the start-ups for three years out of five years is being changed to three years out of seven years," Jaitley said in his Budget Speech.
Nasscom President R Chandrashekhar said startups could not avail full benefits of the three-year clause as they typically tend to begin making profits only after a few years of operation. "By then, the window of benefit would end. Now even if the startup reports profits in the fifth year, they can still enjoy the exemption for an extended period," he told PTI.
This extended time period will allow companies to partly offset the impact of losses incurred in the first few years, he said adding that the benefit will become much more useful. On the issue of removal of Minimum Alternate Tax (MAT), the Finance Minister said, "It is not practical to remove or reduce MAT at present".
"However, in order to allow companies to use MAT credit in future years, I propose to allow carry forward of MAT up to a period of 15 years instead of 10 years at present," he added. Saurabh Srivastava, co-founder of Indian Angel Network (IAN) said, "Profit-linked deduction for startups extended to three of seven years is a good move. We were hoping for MAT to go away but its extension up to 15 years is still satisfactory."
Scale Ventures co-founder Rahul Narvekar said startups are always striving hard to break-even and the exemption provided will surely help the young entrepreneurs to allocate funds accurately. For the purpose of carry forward of losses in start-ups, the condition of continuous holding of 51 per cent of voting rights has also been relaxed. However, this is subject to the condition that the holding of the original promoter/promoters continues.
"Previously, the carry forward of losses was not permitted in case of change of ownership, and we had been saying that the benefits should be allowed if the change in ownership comes by way of infusion of fresh capital. The Budget announcement will ensure that people who are investing in a start up, will see more value," Narvekar said.
Besides, Jaitley has proposed to reduce the income tax for smaller companies with annual turnover up to Rs 50 crore to 25 per cent, in order to make micro, small and medium enterprises (MSMEs) more viable and also to encourage firms to migrate to company format. Industry stakeholders welcomed the tax holiday terming them as "startup friendly".
"This will lead to a robust ecosystem for entrepreneurs and startups. Further, foreign Investment Promotion Board removal and further liberalisation of FDI policies will help attract foreign investors and technology to be brought in by them will help Indian startups," GrabGuru co-founder Raj Bhatia said. Falguni Nayar, CEO and founder of Nykaa.com, said the tax exemption for companies with turnover below Rs 50 crore will help around 96 per cent of MSMEs and startups in the country.