India Sets Up Inter-Ministerial Board To Review Startup Tax Exemption Applications

Even as startups look towards the government to solve the credit crunch issues and funding slowdown in certain sectors, the Department for Promotion of Industry and Internal Trade and Startup India programme have together been addressing concerns regarding tax exemptions.

Earlier in a major boost to the angel funding for Indian startups, the Central Board of Direct Taxes has exempted 702 startups under Section 56 (2) (vii) of Income Tax Act, 1961. And now Startup India has announced that an inter-ministerial board will be set up for reviewing startups’ applications for tax exemption under section 80-IAC of IT Act. The board has been reconstituted, and it will be working under revised norms for granting such exemptions.

Startup India said that a larger number of startups are expected to qualify for such exemption now. “The Inter-Ministerial Board held two meetings in June 2019 and approved 55 startups for exemption under Section 80-IAC of IT Act,” it said in a tweet. Totally, 149 startups have been exempted under Section 80-IAC.

Startup-Friendly Tax Regime

Earlier, the minister of commerce and industry Piyush Goyal informed the parliament that these startups had been exempted till June 21. He said that, as of June 21, Department for Promotion of Industry and Internal Trade (DPIIT) had received 944 applications for angel tax exemption. Of this:

• 39 have been found to be incomplete
• 203 applications were repeat or modified applications
• CBDT has exempted 702 startups under this provision

In 2016, the government had announced a 100% tax deduction for any three consecutive years. The startups which did not have a total turnover of INR 25 Cr and was involved in innovation and development of new products were eligible for this benefit. They were also allowed to choose the three-year term during the first seven years.

In November 2018, the Ministry of Consumer Affairs (MCA) issued notices to more than 2,000 startups that had raised money since 2013. The notices were mostly sent to the startups whose valuations had fallen after the first round of fundraising.

At the time, 70 startups and iSPIRT foundation reached out to the Prime Minister saying that startups require significant capital early on and that raising equity funding via angel investors is the only option for them, which can only be raised at a premium for various reasons.

After much protests and discussions, the CBDT and DPIIT had issued the February notification. At the time of notification, it was also widely discussed that a few pain points for startups remain the same: Section 68 was yet to be addressed and the certification process for the tax exemption under Section 80-IAC had been left unaddressed.