The Ministry of Commerce & Industry in India has approached the Ministry of Finance with an industry proposal to widen the tax holiday for the start-ups from the current three years to seven years. This would enable the growth and several and new entries in the government’s and Prime Minister Narendra Modi’s pet project Startup India.
Nirmala Sitharaman, Minister of Commerce & Industry stated that “I have been interacting with startups and a lot of them are in touch with us directly. The decision has to be taken by the Finance Ministry, who are favorably inclined to helping them out because this is a major initiative.” She added that Startups want the tax holiday to be extended to up to seven years because no company breaks even in three years. They say a longer-duration tax concession would not only encourage entrepreneurship but also enable companies to expand operations, generate employment and hire quality talent.
The government’s Startup Action Plan had stated with cash constraints and limited avenues of finances available to startups, a tax holiday in the initial years can be very helpful. Besides tax exemption to startups for three years, tax exemption on capital gains and tax exemption on investments above fair market value were the other two announcements made during the Startup Action Plan. Investors may invest in a fund-of-funds, which will in turn invest in startups. If investors reinvest their capital gains in such an approved fund, they will be exempt from paying tax on those gains. In its ‘start-up India Action Plan’, in order to promote the start-up ecosystem in the country, the government has envisaged establishing a Fund of Funds, which intends to raise Rs 2500 crore annually for four years to finance startups.