Riding the wave of entrepreneurship and the ‘Start-up India’ initiative by the Government, India has the 3rd largest start-up ecosystem in the world and is expected to witness a consistent annual growth of 12-15% every year. Private equity deal volume in India rose for the second straight year, and while the average deal size declined slightly from the prior year, the total value of USD 26.3 billion in 2018 was the second-highest of the last decade. The number of deals greater than USD 50 million increased from the previous year.
Considering the numbers and interest of the entrepreneurs for the start-up eco-system, the Government is pushing all its might in promoting the start-up sector and have given various tax incentives over the years. In line with the previous budget, this year’s budget also provides key incentives to promote domestic start-up by providing various benefits discussed as under;
1. The date of incorporation for eligible start-ups to avail tax holidays to be extended until 31st March 2024 from currently being 31st March 2023. This was an expected move as the Government wants to keep the ‘entrepreneurship’ attractive.
2. Additional Three years for set-off and carry forward of losses
At present, when there is a change of more than 51% in shareholding of a closely held company, the brought forward losses of the company lapse and the same cannot be carried forward unless the Company is an ‘eligible start-up’. In case of an eligible start-up, losses can be set-off and carry forwarded till 7 years as long as all shareholders remain to be the shareholders of the Company in the year of set-off irrespective of the fact that 51% shareholding has changed. It is now proposed to extend the period of carry forward of losses for eligible start-ups from seven years to ten years.
3. BOOST FOR AGRITECH
An agriculture accelerator fund is proposed to be set up to encourage agritech start-ups. Digital Public Infrastructure for agriculture to be built as an open-source, open standard, and inter-operable public good which will enable inclusive farmer-centric solutions and provide better access to farm inputs, market intel, support for agri-industry start-ups.
All of the aforesaid measures will further enhance and strengthen the start-up ecosystem in the Country.
It is also important to note that the Government wants to promote Indian Investment and Indian holding in the start-ups. In this regard, the government has taken following measures:
4. Issue of shares to non-resident investors and ‘Angel Tax’ applicability
As per provisions of the Income tax Act, when a closely held company issues shares to a resident investor above the fair market value (FMV) (computed as per income tax rules), such excess amount received over and above FMV is considered as income of the Company, popularly known as ‘Angel Tax’. However, as per specific a notification, eligible start-ups are exempted from such ‘Angel Tax’ provisions and moneys received from resident investors over and above FMV is not considered as income.
Budget 2023 proposes that shares being issued to non-resident investors over and above FMV will be covered by the aforesaid provision of taxability. Moreover, benefit of exemption from ‘Angel Tax’ provided to domestic investors of eligible start-ups has not been extended to non-resident investors as yet. This means, as on the day the law stands, an eligible start-up raising funds from foreign investor has to issue shares at or below FMV rules under The Income tax act.
It will be interesting to see how this plays out as the FEMA rules mandate a minimum floor valuation for bringing in FDI. Therefore, now we have two regulations – FEMA for determining minimum share issue price and Income Tax for determining maximum share issue price.
Other changes relevant for non-resident investors
- Gifts received by R-NOR persons now taxable under provisions of Income Tax Laws subject to certain specific exceptions.
- Mutual funds are now permitted to grant relief as per the Double Taxation Avoidance Agreement (DTAA) to non-resident unit holders while withholding tax on income distributed to the unit holders.
Our Comments:
Most of the governance changes are on a positive side for the entire start-up eco-system of the Country. However, we feel that the provision in relation to ‘Angel Tax’ for non-resident investors has created nervousness among privately held companies, especially start-ups. The government could come out and clarify its stand on the funding received from non-resident investors and issue an updated notification in case it also intends to extend the exemption to non-resident shareholders.
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Disclaimer: The above information is intended for academic guidance and is to be used for informative purpose only. The said information is not be considered as an opinion or advice. The views expressed are strictly personal.
About the Authors:
Shravan Suratwala is a Partner at S.M. Suratwala & Co., Chartered Accountants. Shravan has 8+ years of post-qualification professional experience in advisory, litigation and compliance areas of Corporate and International taxation. He has also worked three plus years in the field of Internal and Process Audit while pursuing chartered accountancy course.
Aditi Shelke is currently pursuing her Chartered Accountancy course and is currently completing her internship with S.M. Suratwala & Co., Chartered Accountants, Pune.
(The Author can be reached at contact@smsuratwala.com or shravan.suratwala@outlook.com)
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