Centre eases tax rules for startups

NEW DELHI: Large listed companies and alternate investment funds can now invest any amount in start-ups without worrying about tax scrutiny on valuations, while angel investors can infuse Rs 25 crore, as the government stepped in to address concerns of nascent companies. It also decided to allow startups to claim three-year tax holiday during a 10-year period, instead of a seven-year block.

Further, the tax department sought to allay concerns on assessment notices that have been issued, asking its officers against pursuing them. It is also advising its appeals wing to expedite decisions in 100-odd cases where a demand notice has been issued. An entity with a turnover of up to Rs 100 crore, against Rs 25 crore earlier, will be considered a startup through a new system that requires less paperwork to register with the department for promotion of industry and internal trade.

Startups can now do it through a system of self-declaration, where they will have to certify that they will not undertake investment in real estate, shares or buying aircraft or yacht. The move is meant to ensure that shell companies do not benefit from the concession. “In case, we find misuse of the provision, the concession can be withdrawn from the company,” CBDT member Akhilesh Ranjan said. So far, there are over 16,000 recognised startups and the names of the new ones will be shared with the tax department, which will ensure that there is no scrutiny related to valuation of the registered entities.

“It is a great movement forward. Startups are innovators and job creators and we want to support them fully. Taxation issues cropped up. We took up the issues with line ministries,” commerce and industry minister Suresh Prabhu told reporters after the new rules were notified.

On February 9, TOI was the first to report + that the government was planning to offer more tax sops to startups, including allowing large listed companies to invest freely. There will be no cap on investments made by listed companies with net worth of Rs 100 crore or turnover is Rs 250 crore or more, industry secretary Ramesh Abhishek said. “The decision will be applicable to new startups and also those who are already in business and have received investment,” he said.

Startups heaved a sigh of relief. “It removes the cloud of doubt and suspicion on the entire early stage start-up investment climate. It is a positive step because innocent start-ups, founders, and investors were facing significant challenges due to angel tax. Finally, there is a clear path for tax litigation to end and for these issues to be resolved to the satisfaction of the startup community,” said Piyush Jain, co-founder and CEO, ImpactGuru.com that provides crowd funding solutions.

Tax experts suggested that it will ease the rules and help startups focus on their business. “This concession is finally a recognition that the traditional valuation mechanisms that were prescribed earlier can simply not be applied to startups. The turnover exemption will also provide relief to a significant proportion of the smaller startups that were being targeted previously by the notices issued. The specific tax avoidance that the provision sought to cover can still be targeted under the GAAR Hence this concession is a business friendly / ‘startup friendly’ resolution to a controversy that has created uncertainty in the minds of promoters and investors alike,” said Rohinton Sidhwa, Partner at Deloitte India.