Parliamentary Panel Recommends Easier Criteria For Startups To Avail Tax Benefits

The Parliamentary Standing Committee on Commerce on Thursday (August 10) recommended a relaxation in criteria for startups to be eligible for benefits under the income tax law.

The panel noted that only 1% of recognised startups have the eligibility certificate, expressing concern about the low utilisation of section 80-IAC of the Income Tax Act, 1961, which entitles eligible startups to avail of the tax benefit.

According to the parliamentary panel, only 10,165 startups of the 98,119 registered startups have applied for tax benefits under 80-IAC. Further, the panel noted in its report that the inter-ministerial board has only granted eligibility certificates to only 1,173 applicants as of March 31, 2023.

“This means that even after six years of the implementation of Section 80-IAC of the Income Tax Act, 1961, only 1% of recognised startups have received the Certificate of Eligibility,” the committee said in a report.

The low utilisation rate has prompted the committee to recommend that the eligibility criteria for issuing an eligibility certificate by the inter-ministerial board for claiming income tax exemptions be relaxed, to enable more startups to avail of the tax benefits prescribed under Section 80-IAC of the Income Tax Act, which was introduced in 2017.

It also said that 75% of applications sent for resubmission are down due to a lack of clarity in the process. The committee has recommended the government work on making the application processes more transparent and user-friendly. The panel added that the government should educate startups through awareness programmes and interactions.

The panel also recommended the implementation of a supportive ESOP taxation policy, enabling more startups to opt for stock options as a mode of compensation. “The committee recommends that necessary amendments to the Income Tax Act may be considered so that ESOPs are taxed only at the time of sale of shares and not on notional gains,” the report said.

On the issue of angel tax, the panel said there needs to be a well-defined methodology to calculate the fair market value as it impacts taxation for domestic and foreign investments.

The panel also recommended the government seek stakeholder consultation on the matter and the Ministry of Commerce and Industry approach the Ministry of Finance for a speedy resolution.