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Budget 2023: Nirmala Sitharaman Proposes Reliefs For Startups

Intellectual property driven start-ups can now carry forward their losses, according to latest budget proposals.

<div class="paragraphs"><p>(Source: Unsplash)</p></div>
(Source: Unsplash)

The Union Budget has given several relief for startup companies.

First, eligible startups will now be able to carry forward their losses and deduct them from their profits even if there has been a significant change in ownership in the previous year. The Income Tax Act currently requires a stable holding of at least 51% of the shares in both years for the company to avail the benefit of carrying forward the losses.

Eligible startups will now be permitted to carry forward the losses as long as shareholders who held shares at the time of loss continue to hold shares at the time of set-off.

A company or a limited liability partnership would be considered eligible if it was established between April 2016 and April 2023, and is engaged in the development and deployment of an intellectual property-driven product or industry. It should not have a turnover exceeding Rs 25 crore as of March, 2021 and must hold a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette.

Further, to encourage their development, the period of incorporation of eligible start-ups has been extended to April , 2024 from April 2023.

The benefit, however, is limited to losses incurred during the first 10 years after the company's incorporation. This has been extended from a period of seven years to make the provision more compatible to the definition of eligible startups.

The extension of period has been proposed to align the provision with other provisions of Income Tax Act, which allows 100% exemption on tax for the first three years of the startup, according to Suresh Surana, founder of RSM India Pvt..

The provisions, however, are merely an extension of existing benefits accorded to startups, according to Jatin Kanabar, partner at Deloitte India Pvt..

The provisions to accord carry forward benefits to start-ups were part of the Income Tax provisions since for the past few years. The present provisions merely expand the scope of the benefit from seven to 10 years of incorporation to bring the provisions in line with the three-year tax holiday available to such entities.
Jatin Kanabar, Partner, Deloitte India

It is, however, a good change as startups by nature incur losses in the initial years, said Kanabar.

KT Chandy, partner at EY India Ltd., concurs with this view.

Under Section 79, change in voting power of more than 49% results in a lapse of carried forward business losses. Eligible startups were exempted (subject to conditions) from the operation of Section 79 for seven years from the incorporation date. The budget proposes to extend the exemption period to 10 years from the incorporation date.
K T Chandy, Partner, EY India

The changes will come to effect in April 2023.