Budget 2018: Did the tax holiday expansion announced last year benefit startups?

Given all the anticipation built up around Budget last year, the actual announcement may have been a tad anticlimactic - especially on taxation issues.

Although startups can now avail income tax exemption for three years in a block of seven, many industry leaders, investor groups and startups feel there is little to celebrate in this development since most startups take a lot more time to just equalize their balance books.

"Getting operationally profitable in India is at least a 5-year cycle, while EBIDTA profitability can take double the time," says Coverfox CEO, Premanshu Singh. "The increase in the window for availing tax benefits will give more time to get profitable, but beyond that it does not do much," he adds.


Moreover, only those startups that have been incorporated after April 1, 2016 are eligible for getting 100% tax rebate under this provision, narrowing the number of startups that can fall within its ambit.

"The qualification date for a startup to avail this is April 2016, so very few startups will be able to derive significant benefit from it," feels Anand Shankar, who has been a venture capitalist at GVFL. "This leaves out a lot of mid to late-stage startups. In fact, only 8% startups who applied for this exemption have been approved," chimes in Singh.

Taxing issues
The Finance Act, 2016 had made provision for a tax holiday period for startups for three years in a block of five, but this was revisited in the Budget last year to extend this period of profit-linked deductions to seven years.

However, one must get a 'Certificate of Eligibility' from the Inter-Ministerial Board of DIPP to benefit from this - a feat few have been able to accomplish. In fact, as per the Startup India status report dated January 4, 2018, only 74 startups have been approved to avail any tax benefits by IMB.

"This may have been a positive move in the right direction and will help startups meet their working capital requirements during the initial years, but it is still a mystery how one can make use of this provision," says co-founder of Avanijal, Vijayeendra H S. "We had registered with the program last year itself, but have not received any communication from them after that," he opines.

Chips in Senior Director and Head-Public Policy and Government Affairs at Nasscom, Bishakha Bhattacharya, "Startups that are eligible would only be a handful, so overall benefits that the provision could bring in has its limitations."

What is more, by excluding MAT from the ambit of this tax break - which essentially taxes daily cash flow and not profits generated through daily operations - the industry is largely unanimous in the opinion that it may negate any likely benefit any tax reforms could bring about.

"Keeping MAT out of the tax holiday period could have helped startups like us avail the benefit of carrying forward losses in a meaningful way," feels Singh.

Concurs Shankar, "If MAT would have been kept out of the purview, that would have helped early stage startups build their growth plans. The money would have been available for capex needs that can help long-term growth of the company."