Startups have become a buzzword in India, with one such new venture joining the club every day. Today, India is just behind the US and the UK in terms of number of startups. By the end of 2015, India had more than 4,200 startups, growing at a rate of 40 per cent, suggests industry body Nasscom in its report "Start-up India - Momentous Rise of the Indian Start-up Ecosystem".
The government has been quick to take note of the immense potential of startups and how they can be the powerhouse of solutions to some genuine problems facing the country. Their contribution to economic growth is palpable and the government did not wait to support entrepreneurial ventures in letter and spirit, essential for the growth and success of startups.
The recent high point around startups has been the flagship initiative of Prime Minister Narendra Modi - The Start Up, Stand Up India event - that saw thousands of companies descending on the national capital. The Prime Minister made significant announcements, including single point contact, patent protection, creation of fund of funds, and on top of it all, tax incentives.
The challenge, however, is how to demarcate clearly who the actual beneficiary would be, given thousands of startups are already in the arena and many are just waiting to throw their hat into the ring. The government has put in riders for any startup to benefit from the measures. Startups need to meet the definition laid down by the government and fulfill some criteria. For instance, a company should be solving a real problem, filling a gap in the society and should not be more than five years old, among others, to be eligible for benefits.
The announcements made then are worth appreciation, but there are certain measures related to taxation that need to be revisited and some introduced to aid entrepreneurial ventures.
Income tax holiday
The government announced that startups would not be liable to pay income tax for the first three years of inception. This is commendable, but the question is, how many startups will benefit from it. Hardly any, as it is increasingly difficult for them to turn profitable in the first three years. The government must give a re-look to the said announcement and increase the time-frame to at least five years. This would leave startups with more cash in hand to reinvest in their businesses. If not taken note of, the government's aim to ensure that entrepreneurial ventures have enough cash will be defeated.
Reduction in corporate tax
There are certain measures the government must implement with regard to corporate tax. The two immediate steps would be to consider differential tax for startups for a certain time period, say five years. When a startup begins to make profit, it should be charged lower corporate tax as opposed to corporates. They can be charged 20 per cent tax as opposed to normal 30 per cent. Secondly, the carry forward of losses for set-off should be allowed for more than eight years for a startup.
The reason why the government should consider doing so is again because that will leave startups, which are in their early stages and are reaching profitability, with more cash. They have to continuously invest on technology upgradation and R&D. Also, startups are taking more risks, profit-making is difficult for them and above all, are solving some genuine problems.
No tax on capital gains
Coming to capital gains, profit is tax-free if an investor remains invested in a listed company for a year. This should be allowed for investments in startups too that are unlisted, with a rider for the investors to stay invested for minimum 3-5 years, thus making them stay committed and be able to take more risk. Also, the dividend distribution tax should be cut from the current 15 per cent to 10 per cent.
Input credit benefit
The expense that startups bear as service tax is not easy to be set off in one year as the profit for any startup is either negligible or low. So, the benefit of service tax, i.e., input credit, which is currently restricted to one year, should be allowed for more than two years. Else, it becomes a cost after one year of input credit, which is an additional indirect tax burden. Increasing the time period will provide an opportunity to adjust the input credit.
Increase in tax rebate on healthcare spend
The benefit of tax rebate on healthcare expenses should be allowed to encompass the entire tax payer class and not be restricted to only the salaried class. This rebate, currently at Rs 1250 per month, should be increased to Rs 5000, and this should be allowed on online healthcare services as well. This would make more people spend on healthcare, give an impetus to the health-tech startup sector and result in more cash revenue generation for the government. The government can discuss the nuances with the players in the sector to conclude a framework.
The government is doing its bit to make the environment conducive and friendly for the startup community. These measures, if implemented, will give an impetus to the already-thriving startup sector.
Saurabh Arora is founder and CEO of healthcare startup, Lybrate Inc.