In a move that will benefit startups across the nation,the Union Budget 2018-19 has extended the tax exemption for startups by two years and has expanded the definition so as to widen the scope beyond technology related venture. Startups that have been incorporated on or after April 1, 2016 and before April 1, 2021 will be eligible to avail this benefit.

Earlier, the startups which were eligible to avail tax sops, were those with a turnover not exceeding  Rs. 25 crore, between April 2016 and March 31, 2021 . This rule has now been eased to allow startups with turnovers not exceeding Rs 25 crore to avail the tax exemption over a period of seven years, commencing from the date of incorporation between April 2016 and March 2021.

As per the explanatory memorandum presented during the Budget on February 1, the definition of eligible business has been amended to extend the benefit to startups that are “engaged in improvement of products or processes or services” or “a scalable business model with a high potential of employment generation or wealth creation”.

However, till April 1, 2018, only those startups that are engaged in innovation, development or commercialism of new products, processes and services that are driven by technology or intellectual property will be eligible to avail the tax benefits.

In addition to the benefits being provided in the sphere of taxation, the Finance Ministry has also proposed certain measures aiming to help the startups in their fundraising activities. The government has proposed to allow hybrid financing instruments and the development of an alternative investment regime by introducing a taxation regime specifically designed for venture capital funds and angel investors. However the government did not elaborate on the details of the proposed tax regime.

Software industry body, NASSCOM, has stated that the extension of benefits under the Startup India scheme to March 2021 and “rationalising the condition of turnover will enable tens of thousands of start-ups to avail benefits”.  “Evolving a distinct policy for hybrid instruments, which are suitable to attract foreign investments in several niche areas, will advantage start-ups and venture capital firms,” it added.

“Separate policy allowing venture capital firms to invest in hybrid instruments is a welcome move. Permitting issue of hybrid instruments such as redeemable shares, optionally convertible debentures, etc. will enable startup founders have greater control over the company rather than diluting their stake through equity funding in initial stages,” said Ganesh Raju, Partner and Leader – Startups at PwC.

However, despite it being a major demand by a large number early stage startups and angel investors, the Budget did not abolish the angel tax. According to Section 56 of the Income Tax Act, any investment that a company receives against issuance of shares in excess of its “fair value”, then such shares will be taxed as ‘income from other sources’ at a rate of 30 per cent. The tax came into being in the 2012 Union Budget . Analysts however, are of the viewpoint that startups are valued through methods that are different for traditional companies, and such are being subjected to undue scrutiny from the income tax department. As per NASSCOM, the 30 per cent angel tax has resulted in a 53 per cent drop in the angel funding in the first half of 2017.

(Picture courtesy: dnaindia.com)