With a field of vision to facilitate fund raising by start-ups, the Department for Promotion of Industry and Internal Trade (“DPIIT” or the “department”) proposed relaxation in the income tax laws proposing a customized incentive package to attract foreign investments in sectors such as electronics, chemicals and food processing. This proposal is a part of a 100 day action plan prepared by DPIIT focusing “Startup India Vision 2024” to promote growth of bussing entrepreneurs facing difficulty in raising finances. At present, startups comply with a plethora of requirements such as GST filings, tax returns and other local laws every month. As part of easing regulatory requirements for start-ups, the DPIIT has recommended various below amendments:
- Change in section 54GB and section 79
Section 54GB (capital gain on transfer of residential property not to be charged in certain cases): It is proposed to exempt proceeds on sale of residential properties from capital gains tax if it is used to fund a start-up. It has also proposed to reduce founders’ shareholding requirements from 50% to 20% and mandatory holding period from 5 years to 3 years to enhance flexibility of founders to raise capital by selling the properties.Section 79 (carry forward and set off of losses in case of certain companies): It suggested relaxation in shareholding requirements to carry forward the losses. Start-up promoters presently need to hold 100% shares for carrying forward of losses. The requirement needs to be reduced to 26% to encourage new investors to invest in start-ups.
- Startup India Vision 2024
Several measures such as tax incentives to facilitate setting up 50,000 new start-ups in the country by 2024 in a hope of creating 20 lakh direct and indirect employment opportunities. Other proposals includes setting up 500 new incubators and accelerators by 2024, 100 innovation zones in urban local bodies, deployment of entire corpus of INR 10,000 crore, and expanding CSR (Company social responsibility) funding to incubators.
- Monthly compliances
DPIIT has proposed to reduce monthly compliances for startups to just 1 hour each month giving startups enough time to focus on their core activity. It will also create a stronger startup support ecosystem in the country.
- Proposed taxation on ESOPs (Employee stock ownership plan)
Startups are suggested to use ESOPs as an alternative provision instead of cash salary to attract talented employees from larger cooperations. A specialist team within banks or a separate private agency to assess startup loan applications is required to improve debt financing ecosystem for them.
- Foreign Direct Investment (FDI) prospective
India can attract USD 100 billion of FDI annually matching up to the financial incentives of competing countries like Vietnam. The Southeast Asian nation provides a host of incentives to foreign investors such a low rate of corporate income tax and tax exemptions up to four years. Major investments in the field of electronics, manufacturing, chemicals, food processing and others can come through such incentives. Customized incentive packages will be provided to large investors in priority sectors/areas
- Ten point action plan
It proposed a favorable tax regime, formulation of employment generation strategy through legal changes, proper allocation of natural resources, support for small businesses, steps to promote budding entrepreneurs, release of new industrial policy. The department has suggested inclusion of petroleum products, natural gas and electricity within the ambit of the Goods and Services Tax (GST) to help improve competitiveness of businesses by removing the cascading effect of taxes and enabling input tax credit.
Besides all the above changes, department also focused that revenue sharing models where the upfront payments from businesses are reasonable and do not affect viability of the business should be pursued. Further, the action plan has suggested formulating national retail policy helping 65 million small traders. All these changes intend to create a strong ecosystem for the growth of startups generating growth and more employment opportunities. As many as 18,151 start-ups have been recognized by the department uptil now. These actionable strategies and interventions will address challenges and layout the priorities for industrial development in future.
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