Jaitley extends tax sops to startups, but much left wanting

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In an effort to stimulate the entrepreneurial ecosystem, Finance Minister (FM) Arun Jaitley, in his Union Budget speech on Wednesday, extended the tax holiday available to startups to any three out of the first seven years of their establishment. Last year, the tax exemption was for any three out of five years.

The FM also relaxed a condition set out last year which stipulated that startups could not carry forward their losses if the promoter no longer held 51 percent of the company. Now, as long as the holding of the original promoter continues, a startup can carry forward and offset its losses against future profits. A provision to allow the minimum alternate tax (MAT) credit to be carried forward from 10 years to 15 years was also made.

“Aside from the tax-related announcements, what is important is that the government is committing a lot to digital infrastructure, whether it’s broadband, e-transactons, Aadhaar and the like. The more digitisation the government is able to bring, the more it is going to provide a massive boost to startups,” said an upbeat Vishal Gondal, founder and CEO of wearable technology company GOQii. 

Indian Angel Network’s Padmaja Ruparel, however, was more tempered in her reaction: “I’m not overly excited, but neither am I overly depressed.” She acknowledged the dropping of the 51 percent rule as an “extremely positive step”, but added that MAT should have been completely eliminated for startups. Currently under MAT, startups have to pay taxes on the profits they book, (as opposed to their net profit) which adversely affects their cash flow and dilutes the other tax incentives they receive. “The extension of MAT credit up to 15 years is okay, but I doubt how many startups it will help. How many will last 15 years if they don’t have cash when they need it the most?” she questioned.

Moreover, from an investor point of view, Ruparel pointed out that she would have liked to see capital gains for startups aligned with those of listed companies. While long term gains on listed equity are tax-free, that is not the case with unlisted equity via venture funds. “You have to pay 20 percent tax even if you sell much later. I believe this is a dampener,” concurred Anand Lunia, co-founder and partner of early stage fund IndiaQuotient. “People will choose to invest in listed equity over venture capital simply because of the tax benefit. It’s completely unfair.”

On the ‘angel tax’ front, the FM remained silent. In the months building up to the budget, the IT department sent notices to several startups, seeking to levy a 33 percent tax on the premium paid by investors in excess of their ‘fair value’. However, Lunia believes that this will be ironed out over a period of time.