By Sachin Agarwal
India has rapidly emerged as a global start-up hub, boasting of the third highest number of technology- driven product start-ups in the world. Indian start-ups have also managed to scale fast, with some joining the USD 1 billion valuation Unicorn club. While the progress thus far has been impressive, sustaining this momentum calls for some proactive, positive steps from the Government. The Government should take the 2016 Budget as an opportunity to ring these in.
India’s complex tax and regulatory system has always been a pain point for Indian businesses. This is more so for start-ups, which find it challenging to deploy their limited resources in navigating this often obtuse and cumbersome system. Given this, improving the ease of doing business in India should be the Government’s top priority.
The recently unveiled Start-up India: Action Plan, which proposes introduction of tax and regulatory relaxations for start-ups, is a step in the right direction. For instance, it is proposed to exempt start-ups from ‘share premium taxation’ provisions under which amounts received towards share capital in excess of the ‘fair value’ could be subject to tax in the hands of the company.
The Action Plan also proposes a three year Income Tax holiday for eligible start-ups, subject to certain conditions. Presently, it is proposed that these relaxations would be available only for start-ups which meet a narrow set of eligibility criteria, and also obtain approval from an Inter-Ministerial Body. The Government should consider broadening the eligibility criteria for start-ups while implementing these proposals.
Rationalization of the tax regime for Employee Stock Options (ESOPs), a staple of start-ups, is also required. Presently, tax is triggered on exercise of ESOPs by employees, rather than on actual sale of shares. This results in a tax liability to employees even before they have sufficient liquidity. The Government should consider addressing the issue in this Budget by shifting the tax trigger in the case of ESOPs to the event of sale of shares.
Presently, historical tax losses lapse when there is a change in shareholding of a company beyond 50 per cent. Since the shareholding pattern of a start-up changes with each round of funds raised, historical tax losses lapse many a time. Permitting start-ups to carry forward their historical tax losses even where there is a change in shareholding would be helpful.
The Government should also bring in measures to encourage start-ups to set up shop in India, rather than overseas. For instance, clarifying the tax treatment of GDRs issued by unlisted companies can help start-ups access global capital markets while remaining domiciled in India. An IP box regime under which income from locally developed Intellectual Property is entitled to a beneficial tax rate can also be explored.
The present indirect tax regime, where there is a dual levy of VAT and Service Tax on software purchases has particularly impacted start-ups which tend to be technology focussed. Given this, rationalizing the indirect tax treatment of software purchases is important.
It is possible that the government may take steps to further align the Service Tax rates with the expected tax rates under the GST regime. The Government should, however, keep in mind the adverse impact of any increase in the Service Tax rate on start-ups. Further, in this Budget, the Government should also lay down the clear road map for the introduction of GST in India.
India is fortunate to have a rapidly developed healthy start-up ecosystem. It is now important to build on this strength to take Indian start-ups to the next level. It is hoped that Budget 2016 will bring in measures towards building a more start-up friendly India.
(The author is Director, Tax & Regulatory Services, EY. With inputs from Shashanka R Buduguntae, senior tax professional, EY)
Updated Date: Feb 23, 2016 16:17 PM