DPIIT proposes relaxation in income tax law to help start-ups raise funds

As part of easing regulatory requirements for start-ups, the DPIIT has recommended amendments in Section 54GB and and Section 79 of the Income Tax Act

With a view to facilitate fundraising by start-ups, the Department for Promotion of Industry and Internal Trade (DPIIT) has proposed relaxation in the income tax laws pertaining to sale of residential properties and carrying forward of losses, sources said.

These suggestions are part of 'Startup India Vision 2024', prepared by the DPIIT for the new government to promote growth of budding entrepreneurs, who face difficulty in raising finances.

As part of easing regulatory requirements for start-ups, the DPIIT has recommended amendments in Section 54GB (capital gain on transfer of residential property not to be charged in certain cases) and Section 79 (carry forward and set off of losses in case of certain companies) of the Income Tax Act.

It has suggested changes in Section 54GB of Income Tax Act to exempt proceeds on sale of residential properties from capital gains tax if it is used to fund a start-up.

"Budding entrepreneurs often sell their residential properties to support their business activities," one of the sources said.

As part of the amendment of this section, it has also proposed to reduce founders' shareholding requirements from 50 per cent to 20 per cent and mandatory holding period from 5 years to 3 years as it would enhance flexibility of founders to raise capital by selling the properties.

Regarding Section 79, it suggested relaxation in shareholding requirements to carry forward the losses.

"Start-up promoters presently need to hold 100 per cent shares for carrying forward of losses. The requirement needs to be reduced to 26 per cent, as it will encourage new investors to invest in start-ups," they said.

DPIIT, under the commerce and industry ministry, has also proposed other measures such as tax incentives to promote budding entrepreneurs as part of the vision document.

The document aims at facilitating setting up of 50,000 new start-ups in the country by 2024 and creating 20 lakh direct and indirect employment opportunities.

The other proposals include setting up of 500 new incubators and accelerators by 2024, 100 innovation zones in urban local bodies, deployment of entire corpus of Rs 10,000 crore Fund of Funds, and expanding CSR funding to incubators.

Startup India, the flagship initiative of the government, was launched in January 2016 and intends to build a strong ecosystem for the growth of start-up businesses to drive sustainable economic growth and generate employment opportunities. The Startup India action plan provides tax and other incentives.

So far, as many as 18,151 start-ups have been recognised by the department.