Leading Corporate Lawyer Dr Kislay Panday recommends implementing tax rebate programs for startups

Entrepreneurial ventures have the potential to create wealth for both the founders and the nation. As businesses grow and succeed, they generate profits, taxes, and other economic benefits that contribute to the nation's prosperity. India has recently surpassed China to become the country with the largest population. While population can be considered a valuable asset, its true value lies in its productivity. Encouraging entrepreneurship in India can effectively channel skilled labour into productive ventures, ensuring that the population contributes meaningfully to the economy. Despite encountering numerous challenges, such as funding issues, Indian startups experienced remarkable growth in the past financial year.

As a result, India currently ranks third in the global startup ecosystem. The government's proactive measures to promote entrepreneurship, like by initiatives like the Startup India scheme, have been instrumental in fostering this success. Recognising the significant growth and contributions of the startup community to the Indian economy, Prime Minister Narendra Modi declared January 16 as 'National Startup Day'. 

In spite of the focus on promoting entrepreneurship culture, Startups in India today still face multiple challenges. As per Dr Kislay Pandey, “Our current situation concerning the establishment and funding of startup incubators and accelerators, which offer mentorship, infrastructure, and networking opportunities, is not optimal.”

Dr Kislay Pandey further states that” The government should take a proactive role in spearheading the creation of innovation clusters and technology parks that serve as hubs for startups, investors, and industry experts. Until these foundational elements are in position, it is crucial to provide substantial financial incentives to startups. A tax rebate should be considered the minimum measure in this regard.”

Dr. Kislay Pandey is a corporate lawyer practising in the Supreme Court of India, and he serves as a legal consultant for both Corporates and Startups. What he states is true. Increased compliance, focus on governance and robust risk mitigation strategies make day to day functioning of Startups challenging. Retaining talent is another challenge which comes with high costs. The government can take several steps to reduce multiple challenges of entrepreneurs so that they can focus more on strategic aspects of business.

The costs are skyrocketing, and markets are becoming more competitive. As per 2022 data, Indian Startups got $42 billion in funding which was quite impressive considering data from previous years. But in the current year a few sectors have seen a decline in funding. Reduced tax burden and tax rebates may help to ameliorate some of the financial burden. Currently Startups receive tax exemptions as below:

-Tax holiday of 3 years

Startups established or officially formed from April 1, 2016, to March 31, 2022, qualify for this benefit. These startups are entitled to a full tax exemption on their profits for a three-year period within a span of seven years. Nevertheless, their total annual turnover must not surpass 25 crores. Insufficient funding poses a significant challenge for startup operations. A three-year tax break provides valuable support for startups to establish their ventures smoothly.

-Exemption on Long-Term Capital Gains through section 54EE 

This section is for eligible startups only and can be claimed if the gains are invested in a fund specified by the central government within 6 months from the transfer date.

-Exemption on Investments Above FMV

These investments include investments by angel investors, investments by incubators, and investments by funds and individuals not registered as venture capital (VC) funds.

-Tax Exemption Under Section 54GB

As per Section 54GB of the Income Tax Act, if any individual/HUF sells a residential property and uses the amount to invest in SMEs or purchases 50% or more shares of eligible startups, they will be exempt from paying long-term capital gains. However, the exemption will be available only if the shares are not sold for 5 years from the date of acquisition.

-Set-off of Carry Forward Losses Allowed

As per section 79 of the Income Tax Act, a company can carry forward its losses if - Shareholders who possessed voting power during the year in which the loss occurred must still hold their shares on March 31st of the subsequent year in which the loss is to be carried forward. This provision applies to losses incurred within the first seven years of the company's incorporation.

In conclusion, Dr. Kislay Pandey asserts that, "India acknowledges the significance of the startup ecosystem and, therefore, offers a tax rebate for the first three years within the initial decade of incorporation and other exemptions. However, this may prove insufficient given the current challenges faced by startups”. One positive aspect for the tax regime is that the government is proactive in its engagement and listens to the needs of startups and other stakeholders. They continuously refine their support measures as needed.