Introduction
As India gears up for the Union Budget 2024, the spotlight intensifies on the burgeoning Indian start-up ecosystem, a beacon of innovation and entrepreneurship. Having flourished under the supportive umbrella of the ‘Startup India‘ scheme initiated by Prime Minister Narendra Modi in 2016, the ecosystem now includes over 1,39,000 start-ups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT). With the Union Budget 2024 on the horizon, there is immense potential to further catalyze this vibrant landscape. Stakeholders are filled with anticipation, eager to see how the new policies and incentives will continue to nurture and expand the horizons for start-ups in India.
The ‘Startup India’ scheme, announced by Prime Minister Narendra Modi on August 15, 2015, and formally launched on January 16, 2016, has significantly strengthened the start-up ecosystem in India. This scheme is designed to promote and support start-ups in India through financing and other benefits. To celebrate this, January 16 is commemorated as National Start-up Day. It is observed annually on January 16 to appreciate and promote the Indian Start-up Ecosystem.
The Startup India scheme, a game-changer for the Indian start-up ecosystem, has provided numerous benefits to start-ups through various initiatives. Today, more than 1,39,000 start-ups are recognised in India by the Department for Promotion of Industry and Internal Trade (DPIIT). Out of these, 2,976 start-ups have received recognition for income tax benefits.
Key Expectations from the Union Budget 2024
The upcoming Union Budget is not just a routine event but a significant milestone that will continue shaping the landscape for start-ups. It is expected to introduce new policies and incentives, further supporting and encouraging innovation and entrepreneurship in India.
1. Liberalised Approach to Income-Tax Benefits
Currently, various benefits are provided to start-ups under the Income Tax Act, such as a tax exemption for 3 out of 10 years, relaxation in the carry forward and set-off of losses, and deferment of tax liability on ESOPs. However, these benefits are only available to start-ups approved by the Inter-Ministerial Board (IMB). The IMB is set up by DPIIT to validate start-ups for granting tax-related benefits.
Only 2,976 start-ups out of more than 1,39,000 recognised by DPIIT have received tax benefits approval from the IMB. One key issue is the IMB’s infrequent meetings, which delay the approval process. It is suggested that the IMB should meet more regularly and adopt a more liberalised approach to passing on income tax benefits to start-ups.
By addressing these issues, the Union Budget can play a crucial role in fostering a more conducive environment for start-ups in India, ensuring that more start-ups can benefit from these incentives and thrive in the competitive market.
2. Shifting of Foreign Domiciled Start-ups to India
According to various media reports, the government may implement a policy allowing companies domiciled in GIFT City to list on Indian stock exchanges such as the BSE and NSE. The upcoming Union Budget could allow foreign-domiciled Indian startups to relocate their corporate headquarters back to India via the special economic zone of GIFT City with minimal tax implications.
To position Gujarat International Finance Tec-City (GIFT City) as a competitor to global financial hubs like Dubai and Singapore, the Indian government has offered tax breaks and other incentives to attract companies. Industry insiders suggest that the scheme could make it tax-neutral for foreign-domiciled startups to shift to GIFT IFSC. Similar to the Budget 2021 provision that allowed foreign funds to redomicile to GIFT IFSC in a tax-free manner, a comparable provision could be introduced to enable startups to relocate to India.
3. Relaxation in carry forward of losses
In the initial years of operations, startups often test their business viability and may offer deep discounts to generate revenues. Although they might generate revenue, profitability remains elusive, leading to significant losses.
Business losses can be carried forward for 8 assessment years following the year the loss was first computed. Defining a standard time frame for startups to achieve profitability is challenging, as it varies across different industries and business models.
The issue with the current policy is that most start-ups incur huge expenses in the initial years of operations and may not generate profits for several years to offset these losses. Therefore, the 8-year limit should be eliminated for startups. Eligible startups should be allowed to carry forward losses indefinitely or extend the carry-forward period based on the specific industry’s gestation period. This change would ensure that operating losses can be fully set off against future profits, providing a more supportive environment for startups to achieve long-term success.
4. Extend ESOP benefits to all DPIIT-recognised start-ups
Employee Stock Option Plans (ESOPs) are a common practice among startups, which allow companies to offer employees ownership stakes in the company through stocks instead of high salaries. This approach helps startups conserve cash, which is often limited during the initial phases of business.
The Finance Act 2020 introduced provisions to defer tax on the perquisite value of ESOPs. However, this benefit is currently available only to eligible startups as defined under Section 80-IAC and their employees. Consequently, only a limited number of startups can take advantage of this deferment in TDS and tax payment on ESOP-related perquisites.
To build a more robust startup ecosystem in India, the finance minister should consider extending these provisions to all DPIIT-recognized startups, not just those eligible under Section 80-IAC. Expanding the scope of these benefits would provide broader support to startups, encouraging more innovative businesses to thrive.
Conclusion
As the Union Budget 2024 looms on the horizon, its potential to shape the future of India’s start-ups is both significant and transformative. With proposed enhancements like more liberalized income tax benefits, policies facilitating the relocation of foreign-domiciled start-ups, and expanded ESOP benefits, the government stands at a pivotal point to redefine the entrepreneurial ecosystem. For stakeholders seeking comprehensive updates and expert analyses on how these changes could affect the start-up landscape, Taxmann stands out as a premier source.