Tax holiday: Start-ups to not get extra relief

The finance ministry is learnt to have turned down a proposal of the department for the promotion of industry and internal trade (DPIIT) to extend the cutoff date for the incorporation of start-ups to be eligible for the income tax holiday by five years from April 2021. This has dashed hopes of industry executives who were eyeing extended tax relief to help proliferation of start-ups. Currently, start-ups that are incorporated between April 1, 2016, and March 31, 2021, are allowed to apply for the I-T relief and the eligible ones get it for a block of three out of the first 10 years.

The revenue department believes that in sync with the government’s policy objectives in recent years, the myriad exemptions need to be phased out and tax rates rationalised so that a much simpler and more efficient tax regime can be ushered in. Already, the cutoff date was once extended by two years through March 2021. In its proposal for the FY22 Budget, the DPIIT, however, wanted the relaxation to continue for another five years to enable a wider pool of start-ups to get the benefits, especially in the light of the Covid-19 pandemic.

Meanwhile, industry executives complain that only about a very tiny section of the start-ups has so far got the tax benefit, thanks to a “rigid” approval process. Usually, an inter-ministerial board (IMB) headed by a senior DPIIT official vets the applications and issues the eligibility certificates. Upon its clearance, start-ups get the benefits under Section 80-IAC of the I-T Act.

Siddarth Pai, founding partner at 3one4 Capital, said: “Recognising the damaging impact of the Covid-19 on fresh investments, the DPIIT had recommended an extension of the cutoff date. The income tax holiday of 80IAC, due to the nature of approvals, has seen limited coverage of India’s startups, with around 2-2.5% of India’s 60,000+ start-ups being granted the IMB certification.”

Pai argued that the government should consider granting the relief to all the start-ups incorporated during the specified period, instead of only those that are certified by the inter-ministerial board on the basis of innovation & such criteria, which is, in any case, a subjective matter.

As for the relief, the I-T Act provides for a deduction of an amount equal to 100% of the profits and gains derived from an eligible business by an eligible start-up. The turnover of the start-ups must not exceed Rs 100 crore in the previous year relevant to the assessment year for which deduction under this section is claimed.

“We await the Budget for FY22 and just hope that the rejection of the DPIIT proposal is not going to signal an unwinding of the start-up India program, for which the Indian Prime Minister is the biggest ambassador,” Pai added.
Sachin Taparia, founder and chairman of LocalCircles, said the government should also consider extending the I-T relief to those incorporated before 2016 if indeed it wants the country to have a robust start-up ecosystem.
Given the fact that start-ups hardly make any profits in initial years and most of them even fail to survive, they have been pitching for a more liberalised taxation regime.