I-T breather to help loss-making firms conserve working capital

A key amendment to the Income Tax Act proposed in the budget could help loss-making companies with high cash burn, including startups, conserve working capital, tax experts and lawyers said.

This comes at a time when several consumer internet companies and larger startups in India are aiming to achieve profitability amid a slowdown in risk capital funding.

Under Section 194Q of the Income Tax Act, 0.1% of the payment made by a company–exceeding Rs 50 lakh–towards purchase of any goods is to be withheld as tax deducted at source (TDS).


If the company is loss-making, it can claim a refund of this tax, since the actual tax liability is lower than the TDS it is paying. However, this results in working capital getting blocked.

“Most of the startups burn cash during their initial phase of operations, which results in high turnover but still in loss. These startups have to manage their working capital for this 0.1% of TDS on high turnover,” Kunal Savani, partner at law firm Cyril Amarchand Mangaldas, told ET. “While the withholding tax rate is just 0.1%, it turns out to be a sizable sum on high turnover, which is blocked until refund is claimed by filing the income tax return.”

Separately, under Section 197 of the Income Tax Act, any company can obtain a certificate from an income tax officer for deduction of tax at a lower or nil rate under specific provisions.

Through amendments announced in the budget, the government has proposed to include Section 194Q under the ambit of Section 197. This means startups and other loss-making companies can now apply for a certificate to avoid withholding tax while purchasing goods valued in excess of Rs 50 lakh.

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“The amendment allowing the issue of lower or nil tax-withholding certificates in respect of transactions related to purchase and sale of goods is a welcome move. This should significantly help loss-making startups in managing their cash flows better and remove the requirement of obtaining refunds from the (income tax) department,” said Prabhat Lath, partner, Price Waterhouse & Co LLP.

The explanatory memorandum to the Finance Bill stated that the government received representations indicating instances where the taxpayers are incurring losses due to tax deducted under Section 194Q as a result of their funds getting blocked. This also resulted in additional compliance on part of the seller liable for collecting the tax on behalf of the startup.

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Therefore, to “facilitate ease of doing business and to provide an option to seek a lower deduction certificate so as to reduce compliance burden on the assessee”, the finance ministry proposed to amend the relevant provisions of the Income Tax Act.

“The move will certainly help startups in freeing up a fair amount of working capital and also ease compliance burden that rises from tracking multiple instances of TDS that is withheld by different vendors, and then claim refund,” a chief financial officer at a Gurgaon-based unicorn startup told ET.