Budget extends window for startups to avail tax benefits

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.
Pranay Bhatia, Partner - Direct Tax, BDO India also
agreed that the ability to carry forward losses if the founder remains involved was positive, and said it was in line with the industry expectations.
"Increase in MAT credit entitlement to 15 years will also incentivise credit availability to startups," he added.

Snapdeal CEO Kunal Bahl said, "We commend the focus on growing the digital footprint in the country; enhancing digital infrastructure, capping cash transactions, reducing cash donations, using Adhaar Pay to enable more digital payments are significant measures."
He also welcomed the emphasis on skill development and technical education, saying it would enable India to successfully harness the demographic dividend.
Bipin Preet Singh, the co-founder of payments platform MobiKwik applauded the government's move to reduce corporate tax for MSMEs, as well as the digital push in the budget which "invests heavily in technology and digitisation."
"Reduction in the corporate tax for MSMEs to 25 per cent will also go a long way in attracting more investment in the country. It will surely give the domestic sector a massive push and indirectly help the country in restoring its healthy GDP growth forecast," he said.

Entrepreneurship network TiE's president Anand Desai welcomed the move to allow MAT credit to be carried forward for 15 years, and relaxing the tax exemption period for startups. He also pointed out that FIPB being abolished, and easier FDI would be positive for startups.
However, the demand to carve out section 56 of Income Tax Act which taxes angel investments, for startups, was not addressed, and Saurabh Srivastava of IAN pointed out that it could impede the growth of innovative startups and job creation.