Parliamentary Panel Recommends Easing Criteria for Startups to Avail Tax Benefits 2023

Parliamentary Panel Recommends Easing Criteria for Startups to Avail Tax Benefits 2023

According to the clause, entrepreneurs may deduct up to Rs 100 crore in income over three years.

A recommendation for loosening the requirements for startups to qualify for advantages under the income tax legislation came from the department-related standing parliamentary committee for business. The panel voiced concern regarding the Income Tax Act of 1961 Section 80-IAC’s minimal usage since its implementation in 2017.

According to the clause, entrepreneurs may deduct up to Rs 100 crore in income over three years. The committee reported that just 10.4% of India’s 98,119 officially certified startups had requested the exemption. Only 1,173 applications have received a Certificate of Eligibility as of March 31, 2023, it was said.

According to the committee’s findings, just 1% of certified startups got the Certificate of Eligibility six years after Section 80-IAC of the Income Tax Act of 1961 was implemented. The committee also observed that 75% of Certificate of Eligibility applications were being resubmitted since the procedure wasn’t clear enough.

The report states, “The committee believes that the government should work towards making the application processes more transparent and user-friendly.” It suggested that “the eligibility criteria for issuing a Certificate of Eligibility by the inter-ministerial board for claiming income tax exemptions may be relaxed in consultation with the stakeholders so that more startups could avail themselves of the tax benefits under Section 80-IAC of the Income Tax Act.”

The committee also suggested that the requirement that new businesses turn a profit for three straight years be eliminated.

Furthermore, the committee recommended adopting “necessary amendments to the Income Tax Act” to enable startups to use ESOPs (Employee Stock Option Plans) as a desirable remuneration model for employees, particularly those on modest incomes. The committee suggested taxing ESOPs “only at the time of sale of shares and not on notional gains.”

The standing committee also recommended loosening restrictions to allow unlisted domestic firms to list on global stock markets immediately and creating a comprehensive database of all startups nationwide.

In 2023, a significant move by the Indian parliamentary panel suggested easing the criteria for startups to avail of tax benefits. This move comes as a part of the government’s continuous effort to promote and foster the growth of startups in India, considering their immense potential to boost economic growth, job creation, and innovation.

Since launching the ‘Startup India campaign in 2016, the government has pushed various schemes and benefits for the startup ecosystem.

 Tax benefits are among the most sought-after advantages, as they directly impact the finances of startups, which often operate on tight budgets during their initial years.

However, the existing criteria for availing of these benefits have been deemed too stringent by many in the startup community.

Previously, startups with an annual turnover of up to INR 25 crores were eligible for certain tax deductions. The panel has recommended increasing this limit, bringing more startups under the tax benefits umbrella.

Startups are allowed a tax holiday of three consecutive years out of their first seven years. The panel suggests extending this to five consecutive years out of the initial ten years because most startups take time to become profitable.

A startup must be certified by the Inter-Ministerial Board (IMB) to avail of tax benefits. The panel recommends simplifying this process and suggests that startups only backed by government-recognized venture capital funds or angel networks be considered, thereby removing bureaucratic hurdles.

Stock options are a standard tool startups use to attract and retain talent. The panel recommends revising the taxation criteria for Employee Stock Option Plans (ESOPs) to make them more favourable for employees.

The panel has advised that the carry forward of losses should not be restricted if there’s a change in the shareholding pattern of the startup as long as the original promoters continue to hold a significant stake.

More straightforward criteria will ensure more startups can avail of tax benefits, leading to better financial stability and contributing positively to the nation’s economic growth. Financially stable startups are more likely to hire more, leading to increased job opportunities.

A friendlier tax regime is likely to attract more domestic and international investors, as the potential for returns on investment will be perceived as higher. With more financial leeway, startups can invest further in research and development, promoting innovation and technological advancements.

The recommendations by the parliamentary panel, if accepted and implemented by the government, can mark a significant milestone in India’s startup journey.

The proposed ease in tax norms will strengthen the startup ecosystem and reaffirm the country’s commitment to becoming a global startup hub.

 While the immediate financial implications for the exchequer remain to be fully assessed, the long-term benefits of economic vitality, job creation, and technological progress make a compelling case for adopting these recommendations.