Indian startups are a fast-growing lot. The breed of entrepreneurs pushing these fast-track businesses is aggressive to deliver and hungry for success.
But with the huge risks they wind up taking, building a successful business and managing all the paperwork at every step of their way, somehow tends to be detrimental to their growth. After all, they are new to the league and pursuing licenses or allocations is not their forte yet.
With all such emblematic problems, they’re faced with in an Indian business setup, any help from the government is welcome and anticipated.
Intended to ease out the compliance burden of this race of risk-takers, a program in the beginning of this year was announced. Launched by Prime Minister Narendra Modi, the Startup India initiative came as a welcome respite offering incentives such as the three-year income tax holiday dependent on non-distribution of dividend, and capital gains tax exemption for investments in newly formed manufacturing micro, small and medium enterprises by individuals.
However, startups were to enjoy these perks only if the innovative nature of their business was validated and they were declared as eligible entities by the Inter-Ministerial Board of Certification.
Does this help Startups?
Tax exemption for the initial three years was aimed at minimizing compliance burden and cash outflows, helping ventures to focus their investments in product development and scaling up their businesses. The budget also granted an exclusion to capital gains as far as the investment was made in reserves that invest in the startup network and by persons in owned startups.
With cash limitations and inadequate avenues of finances, a tax holiday in the initial years of a startup launch made perfect sense. But it also provoked a question on the practical utility of this policy as the three-year period seemed to short.
Startups typically do not make money early on in their journey and hardly ever break even in as few as three years. Besides, the said policy had retained the minimum alternative tax (MAT), which meant a limited 10 per cent arbitrage, that too applicable only if a startup became profitable quickly. With such conditions on, the policy ended up negating much of the advantages it offered.
Expectations from Ministry of Finance
Only a few days back, the minister of State for Commerce & Industry, Nirmala Sitharaman approached the Ministry of Finance with an industry proposal to increase the exemption period of the income tax payment from three to seven years. This initiative certainly seems promising.
A hard truth about startups is that no company breaks even in three years. As such, a longer-duration tax concession is needed not only to encourage entrepreneurship but also empower companies to expand operations, create employment opportunities and recruit quality talent. While it hasn’t been pushed into the discussion yet, startups have also been expecting a service tax relief for three years.
Coming back to the tax holiday extension, even though the final decision rests with the Ministry of Finance, it is reassuring that the government is receptive to feedback. According to Ms. Sitaraman, for 2016-17, the allocation of Rs 1,100 crore has already been made and 35 new incubators have been established.