While the official announcement of Budget 2024 is awaited, startups are eagerly eyeing potential tax benefits similar to those currently enjoyed by the manufacturing sector. This blog post dives into the current tax scenario for startups, the sops available to manufacturing, and the arguments for extending similar benefits to young businesses.
Current Tax Landscape for Startups in India
Indian startups currently operate under a variety of tax regimes, with the benefits depending on their stage of growth and recognition as per government programs. Some prevalent structures include:
- Profit and Tax (PAT) exemption for startups under Section 80IAC: This offers tax exemption for up to 3 consecutive assessment years out of the first 10 years from incorporation. However, it comes with conditions related to minimum turnover and investment in research & development.
- Angel Tax Exemption: This exemption aims to ease the financial burden faced by startups when they raise funds from angel investors.
Tax Sops for the Manufacturing Sector
The government has been actively promoting the manufacturing sector through various tax incentives under the Make in India initiative. Some key benefits include:
- Concessional Tax Rate of 15%: This reduced tax rate applies to new manufacturing companies incorporated after October 2019 and meeting specific criteria. This scheme has a sunset clause, and its extension is a major expectation for Budget 2024.
- Tax Holiday Schemes for Specific Sectors: Certain sectors within manufacturing, like textiles and electronics, enjoy additional tax benefits and exemptions.
Arguments for Extending Tax Sops to Startups
The startup industry is a crucial driver of innovation and job creation in India. Here’s why extending tax sops similar to manufacturing could be beneficial:
- Level Playing Field: Manufacturing benefits from lower tax rates, creating a potentially uneven playing field for startups that often operate on tighter margins.
- Boosting R&D: Tax breaks can incentivize startups to invest more heavily in research and development, leading to long-term technological advancements.
- Attracting Talent: Reduced tax burdens can make it easier for startups to compete for skilled professionals by offering higher salaries or better benefits packages.
Industry Speaks
Easing Esop (employee stock ownership plan) taxation for startups would go a long way in helping companies retain talent, said Mayank Kumar, co-founder & MD at UpGrad. “While Esops are a good wealth-creation tool, tax rates on them are very high and it does not make it a very attractive proposition for lot of employees,” Kumar said.
A reduction in Esop-related taxes, which can currently go as high as around 40%, will encourage more skilled professionals to join startups, said Dhiresh Bansal, CFO at Meesho. Simplifying processes associated with tax compliance and lowering tax rates for startups, at least during the initial years of operation, will ease their financial burden, Bansal added.
Gaming startups, which have been hit hard by a higher GST rate, are looking for tax clarity from govt in the Budget. “We have urged govt to levy GST on gross gaming revenue/platform fees, which is the actual revenue received by a platform. This approach will ensure the sector’s viability and foster growth,” said Paavan Nanda, co-founder at WinZO. Startups are also seeking clarity on the issue of angel tax
Conclusion
The upcoming Budget 2024 holds immense importance for the Indian startup ecosystem. While there’s no confirmation yet, the possibility of tax relief similar to the manufacturing sector has ignited hope and anticipation. Granting such sops could prove to be a significant step forward in fostering a more conducive environment for startups to flourish and contribute to India’s economic growth
