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3 Years Tax Exemption On Profit For Startups Too Less? Commerce Ministry Thinks Alike

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3 Years Tax Exemption On Profit For Startups Too Less? Commerce Ministry Thinks Alike
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As Narendra Modi government celebrates two term years, it’s time to look at some of the initiatives that did great and others which need reforms.

There’s no bigger hit than Narendra Modi’s ‘Startup India, Stand up India’ initiative in the country right now. Although it began with a lot of scepticism, the initiative was successful in creating a buzz around the word ‘startup’ and ‘entrepreneurship’, if not really helping the entrepreneurs. This buzz motivated hundreds to come ahead and be a part of the initiative.

A part of this initiative was a few policies that aim at making the whole startup journey a lot easier. It exempted startups of tax on profit they make in the first three years and reduced the time of registration and getting patents. We have to say that it was very thoughtful of the government but what they forgot here is that startups usually don’t make any profit in their first three years. 

But better late than never! In the past one year, the commerce ministry received many inputs and many recommendations that 'have gone to the Finance Ministry for extending the three-year tax holiday to seven years'. In response to this, the Commerce and Industry Minister Nirmala Sitharaman said on Monday that this issue will be taken up to Finance Minister and raising tax holiday for startups to seven years from the current three years should be considered.

The minister told reporters while briefing them on the initiatives taken by her ministry during the last two years, "We shall pursue it and there shall now be lots more interactions with them,” according to a report.  Putting it into action, she also plans to visit different co-work spaces of these new age companies to see the ground picture and infuse fresh energy.

This is a consequence of several startups pitched for increasing the tax holiday period from the current three years as it would provide certainty on taxation matter. Sitharaman said that the government has been getting inputs by interacting with startups and hence, have also announced the action plan keeping those in mind.

For 2016-17, the allocation of Rs 1,100 crore has already been made and 35 new incubators have been established, she said.

Growth in FDI

On foreign direct investment, she said between June 2014 and January 2016, FDI equity flow has recorded a growth of 53 per cent to USD 60.04 billion, from USD 39.19 billion during the preceding 20 months.

FDI inflows in the country increased to the highest ever of USD 51 billion in 2015-16, she added.

Further, talking about the 'twitter sewa' launched by the ministry, she said stakeholders are using this facility and their queries have been resolved on time. The queries are filtered and sent to the minister apt to solve the issue and has received very positive reviews. Within one month, 98 percent cases have been responded to, the minister said, adding that out of 750 queries raised, 735 have been cleared.

Where many startup founders see this as a good start, some thought that more is needed. Founder and CEO of Avagmah, Karthik K S said to entrepreneur, "When a company is formed it starts from scratch. Many of the setup cost is not classified under capex and thus has to be expensed. Moreover if the company is in a vertical where they have to build a product/service then it takes months or years before the revenue starts pouring in. 

The 3 years tax holiday offered is surely welcome. However, it is too short a time and 7 years is optimum. The available funds can then be used to be ploughed back into business to ensure that if profits are generated they are not withdrawn as dividend. As an entrepreneur I would recommend that the policy include no-dividends during the tax holiday period. I am sure this will help more investors to invest in startups thus helping building the ecosystem"

However, disappointed with the policy, CEO ofTravelKhana said, "We expect this timeline to be 10 years. It takes 7-8 years for any large business to turn profitable. Additionally we would recommend a service tax relief for 3 years. It is a challenging business environment. The job situation is at its bottom most in many years. The prime minister’s dream that startups and new ventures can provide jobs to millions of unemployed youth can be realized only when the startups are able to survive and prosper.  These measures will really help in realizing the dream and taking the GDP growth by a few points up."

Edition: December 2016

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