The Department for Promotion of Industry and Internal Trade has proposed relaxation in terms of sale of residential properties and carrying forward of losses.

DPIIT proposes to relax income tax laws to facilitate fundraising by startups
Atom Startups Tuesday, November 26, 2019 - 17:42

The government wants to take more steps to encourage the startups in the country. The Department for Promotion of Industry and Internal Trade (DPIIT), the nodal agency that looks at startups, is in the process of preparing a vision document ‘Startup India Vision 2024’, reports PTI. One of the proposals being included in this document is that the country’s income tax laws be relaxed to permit startup entrepreneurs to sell their residential properties without attracting capital gains tax.

This relaxation, if the government agrees, will have to be made in Section 54GB  (capital gain on transfer of residential property not to be charged in certain cases) and Section 79 (carry forward and set off of losses in case of certain companies) of the Income Tax Act.

Another concession being recommended by DPIIT in its vision paper is to allow carry forward of losses even if the promoters do not fold 100% equity.

To put these two recommendations in perspective, many aspiring entrepreneurs sell off their own property and invest the proceeds in their startup. Investors and venture capitalists start funding any startup only when it has acquired some mass and is able to show a working formula for a business. To take it till that stage, the funds will have to be sourced by the startup promoter on his/her own. DPIIT is recommending that the tax laws be amended to exempt startup entrepreneurs from paying capital gains tax if they invest the money from the sale of their property in the startup.

On the other Section 79, the current position is that any company is permitted to carry forward losses only if the promoters hold 100% shareholding. In a typical startup environment, the promoters of startups attract investments by offloading their own shareholding with a provision to buy them back at a later date. Hardly any startup will have the promoters holding 100% stake in their startups for a few years down the line. This is also the period the startups incur huge losses as well. DPIIT wants this threshold to be brought down to 26%.

The broad objectives stated in the ‘Startup India Vision 2024’ documents include starting 50,000 new ventures by the year 2024 and to generate 2 million jobs through these startups.

500 new incubators and accelerators are proposed to be setup by 2024. A corpus of Rs 10,000 crore Fund of Funds is also envisaged with CSR funding to incubators being included as a tool to achieve the targets.

The number of government-recognised startups stands now at 18,151.

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