Less than 1% of startups recognised under the Startup India initiative by the Indian government have availed income tax benefits so far. The initiative, launched in January 2016, enables startups to avail tax exemptions on income earned and investment raised.
As of February 7, out of 15,798 government-registered startups, only 94 have been certified by the Department for Promotion of Industry and Internal Trade (DPIIT) for income tax exemption under Section 80-IAC of the Income Tax Act, said an Indian Express report citing government data.
The income tax break is available to these companies and partnerships for three years in a block of seven years under Section 80-IAC if they have been incorporated between April 1, 2016, and March 31, 2019.
Startups and their angel investors are also allowed an exemption on angel tax, that is section 56(2)(vii)(b), which has been a bone of contention among them since 2016.
A 30% tax is levied when startups receive angel funding at a valuation higher than its ‘fair market value’.
Previously, government-recognised startups were required to go through a screening mechanism (to prove innovativeness and potential for job creation) of Inter-Ministerial Board (IMB) to avail the tax exemption, a process that startups find long and rigorous. This explains the miniscule number of startups which were able to successfully claim tax exemptions.
In order to address the concern, earlier this week, the government broadened the definition of startups and simplified the process for them to seek exemptions.
“We have solved the problem substantially by increasing the exemption limit. They (startups recognised by the government) just have to give the declaration and they will be exempted by the department in the system,” DPIIT secretary Ramesh Abhishek told the Indian Express.