India is known to be the 3rd largest start-up ecosystem in the world. To boost the spirit of entrepreneurship and innovation in the country, the Budget 2023–24 ensured that start-ups benefit from some tax reliefs.
The Union Budget also pointed out that India ranks 2nd in innovation quality amongst middle-income countries. In such a scenario, providing impetus to entrepreneurship is not just vital, but opportune.
The Finance Minister pointed out that the Government has, in the past, already taken measures to bolster the start-up ecosystem, and these have borne fruit. Now, a few more benefits have been added.
As someone at the helm of a start-up, there are two main ways in which you can benefit from Budget 2023. The budget provides for an extension in the incorporation period for the tax holiday under Section 80 IAC. It also relaxed the laws pertaining to the carrying forward of losses.
Here is how you can stand to gain from the income tax benefits of Budget 2023 as a start-up founder.
Roadmap to Profitability for Indian Start-ups
Tax Holiday Under Section 80 IAC for Start-ups Extended
In the Union Budget 2023-24, the Finance Minister proposed that the date of incorporation for tax benefits be extended by a period of 1 year, from 31 March 2023 to 31 March 2024.
More start-ups can now avail the tax holiday that offers a 100% rebate for 3 consecutive financial years out of the start-up’s first 10 years, since incorporation.
According to Section B.7 of the Annexure of the Speech, eligible start-ups could avail an income tax benefit if their date of incorporation was before 1 April 2023. Now, the period of incorporation for such eligible start-ups is proposed to be extended to before 1 April 2024.
The exemption of a tax holiday is available under Section 80 IAC, and you can apply for the same on the Startup India website.
Benefits of availing a tax holiday for start-ups
- This tax holiday gives start-ups a way to accelerate growth and inch towards profitability faster.
- For instance, if the gross profit of your start-up is ₹60 Lakhs, and the tax rate is 30%, you would need to pay ₹18 Lakhs in taxes. However, with the tax holiday, you can funnel these resources back into your start-up as working capital.
- Often, the path to profitability is fraught with many unknowns and is not a simple mathematical equation. Given the current economic scenario and the macroeconomic factors hindering growth, the tax holiday for newer start-ups is expedient.
Eligibility for claiming a tax holiday under Section 80 IAC
To benefit from the income tax exemption under Section 80 IAC:
Your firm should be recognized as a start-up by the DPIIT (Department for Promotion of Industry and Internal Trade)
Your start-up should be a Private Limited or a Limited Liability Partnership
The date of incorporation should be after 1 April 2016
Also, your turnover should not exceed ₹100 Crores in any of the previous financial years, as this is a point of eligibility pertaining to start-up recognition.
Extension for Carrying Forward of Losses Under Section 79
Under Section 79, eligible start-ups can carry forward and set off losses against the income of the previous year. This relief was available in case losses had been incurred for a period of 7 years since the year of incorporation.
However, post the Union Budget, the relief is extended to 10 years.
“The condition of continuity of at least 51% shareholding for setting off of carried forward losses is relaxed for an eligible start up if all the shareholders of the company continue to hold those shares,” reads point B.6 of the Annexure of the Budget.
Before the announcement of the Budget, the relief applied to losses incurred during the first 7 years from the incorporation of the start-up. Now, the period for relaxation is extended to 10 years.
Benefits of carrying forward losses
- Often, in the beginning years of a start-up, the expenditures incurred are more than the revenue generated. Being able to carry forward losses gives start-ups a chance to manage their cash flows better.
- Also, by carrying forward losses to a future accounting term, you can reduce your taxable income and overall tax payment.
India is home to a thriving start-up ecosystem – one that has received global interest. Domestic entrepreneurs are striving to create profitable and scalable business models that not only provide employment but also economic growth.
By disrupting the market with innovation and pioneering new paths, this sector has been a game-change for the economy. The initial years of a start-up are crucial, and that is why Budget 2023–24 makes special income tax provisions for this sector.
While some demands of the start-up ecosystem were left unfulfilled in the budget for FY 23-24, the hope is that the income tax reliefs will provide impetus to growing entities. These benefits can improve the viability of start-ups, spur more innovation, and create a cycle of employment.
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