Start-ups incorporated between April 1, 2016, and April 1, 2021, are eligible for Full Deduction on Start-Up profits & gains provided under Sec 80-IAC of the Income Tax Act.
The DPIIT wanted the tax department to consider extending this Start-Up incorporation cut-off date by another 5 years to March 31, 2026, for 80-IAC tax benefits.
The tax department seems to be in no mood to give any new exemptions, be it to any industry, until and unless it is seriously warranted. According to sources, in a recent discussion between the Department for Promotion of Industry and Internal Trade (DPIIT) and the revenue department, North block has rejected the proposal to extend the incorporation cut-off date for Start-Ups for tax benefits.
Start-ups incorporated between April 1, 2016, and April 1, 2021, are eligible for Full Deduction on Start-Up profits & gains provided under Sec 80-IAC of the Income Tax Act. The DPIIT wanted the tax department to consider extending this Start-Up incorporation cut-off date by another 5 years to March 31, 2026, for 80-IAC tax benefits, as the current window is expiring from April next year.
“The proposal was to Revise the definition of Eligible Start-Ups for tax benefits under Sec 80-IAC of IT ACT but the Tax Dept clearly told DPIIT, that the government policy is to remove all income tax exemptions and reduce income tax rates,” sources told CNBCTV18.
Under section 80-IAC tax benefits given to Start-Ups incorporated within 5 year period via Finance Act, 2018 were already given.
The tax department, while rejecting the proposal said, “In this connection, it may kindly be noted that the stated policy of the Government is to remove all income-tax exemption and simultaneously reduce the tax rate. Accordingly, Finance Act, 2016 grandfathered income-tax exemptions. In furtherance to this policy, the Taxation Laws (Amendment) Act, 2019 provided a concessional tax regime of 22% for all existing domestic companies which do not claim exemptions.
As an exception to the stated policy of the Government, the start-ups incorporated during the period from 1st March 2016 to 31st March 2019 were only allowed exemption. This limited period was already extended on the request of DPIIT up to 31st March, 2021 vide Finance Act, 2018.
In view of the stated policy of the Government to remove all income tax exemptions and reduction in the income-tax rate, the proposal to further extend the exemption for a period of five years is not acceptable,” sources said quoting the tax department’s view.
Tax experts, however, have a mixed opinion of this decision.
Amit Maheshwari, Tax Partner, AKM Global, is of the opinion that there is no rationale for continuing with this exemption.
"We have a thriving startup ecosystem now and this benefit is not required. As rightly pointed out, India now has very low corporate tax rates and policy has been to reduce tax rates are get rid of exemptions and deductions. Moreover, for the initial few years, it’s not very common for startups to report profits,” Maheshwari said.
Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP said, "The current Government since its inception has aimed at eliminating various tax exemptions and providing a beneficial lower tax rate to all taxpayers. As an exception, a tax holiday was provided to startups incorporated between April 1, 2016 and March 31, 2021 to encourage entrepreneurship and ideation in India.
Currently, most other tax holidays have met their sunset clause and stand withdrawn with the corporate tax rate having been slashed to as low as 15 percent. Considering the unexpected and unprecedented contraction of the economy, extending the tax holiday to startups would perchance make headway to achieve the new Atmanirbhar Bharat Mission of the Government."
"The lower corporate tax rates may extend limited relief to taxpayers but a tax holiday also entices foreign funding. As income tax holiday provides an exemption from tax for 3 profitable years out of 10 years, it is generally beneficial to startups that usually incur losses in the nascent stage and become profitable later, in which case a lower tax regime is comparatively lesser advantageous," he added.
To watch out now is whether the tax department continues with this stand and makes it a standard with other industries also as budget discussion have just started and it is a routine in pre-budget discussions for several industries and sectors to seek income tax exemptions.
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