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Govt begins review of tax, other norms for startups
November, 28th 2017

The government is reviewing the regime for startups in a bid to make it more attractive for entrepreneurs, especially on the tax front.

Sources told TOI that discussions have been initiated across ministries over the last few days, ahead of Prime Minister Narendra Modi’s meeting with several startups and their CEOs during the Global Entrepreneurship Summit in Hyderabad this week. While PM had announced a policy almost two years ago, several elements of the package need to be recalibrated due to feedback received from industry. Startups are a major thrust area for the Modi administration as they are not just seen to create jobs but also encourage entrepreneurship.

Sources said that a large part of the agenda for the government includes tweaks in the taxation policy. For instance, the government had announced a tax benefit on profits earned in three years during a company’s first five years of operations. But based on industry feedback, the government allowed the tax benefit to be taken during the first seven years, as most startups do not make profits in the initial years of their operations.

There are concerns related to the taxation policy for a large number of angel investors, which face a levy on the capital gains. Nasscom recently attributed the 53% decline in angel funding during the first half of 2017 to the complicated tax rules. "For the last two years, the government has agreed that it needs to be done... There have been some concerns about misuse (of the provisions). But the fear of misuse is there for any law," Nasscom president R Chandrashekhar told TOI during a recent interaction.

Sources said there are concerns over the rules for taxation of employee stock options, which have been flagged and the government is looking into it. "The idea is to make the regime as attractive as possible and the the concerns are sought to be addressed at the earliest," said an official, adding that the PMO is monitoring the issue closely.

"The issue of startups being taxed on the investments received is far from over. While an exemption is provided to investors registered with Sebi and to foreign investors, domestic investors in general have to still defend the valuation. In fact, it continues to be common for companies to receive notices asking for a justification of the premium received," said Abhishek Goenka, India leader — corporate and international tax at consulting firm PwC.

While the tax changes are unlikely before the budget, scheduled for February 1, some of the procedural issues can be fixed earlier if they only require change in rules through notifications.

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