Budget 2023: Start-ups hail extension of tax holiday, loss carry forward period

India’s start-up community has welcomed Finance Minister Nirmala Sitharaman’s announcement on extension of tax holiday by a year and loss carry forward to 10 year period, but expressed disappointment on lack of initiative around easier Employee Stock Ownership (ESOPs) taxation or enablement of early-stage funding.

“India is now the third largest ecosystem for start-ups globally, and ranks second in innovation quality among middle-income countries. I propose to extend the date of incorporation for income tax benefits to start-ups from 31.03.23 to 31.3.24. I further propose to provide the benefit of carry forward of losses on change of shareholding of start-ups from seven years of incorporation to ten years,” Sitharaman said during her Budget speech.

Founders hailed these moves as positive steps forward that demonstrate the government’s commitment to support and promote entrepreneurship.

Start-ups -- those registered under DPIIT and with turnover not exceeding Rs 100 crore – are eligible to avail these benefits. The government has extended the benefits of various tax relaxations for start-ups registered up until March 31, 2024. Secondly, the provision allowing private start-ups to carry forward and use their past losses to reduce their taxable income has been extended from 7 years after the company's incorporation to 10 years. This change benefits start-ups that have experienced changes in ownership during their first 10 years of operation.

Nageen Kommu, CEO, Digitap said that extending the incorporation benefits will boost sentiment and encourage entrepreneurship in the country besides making start-ups more attractive to investors since a lower tax burden means better income and returns on investment.

“In recent years, the start-up ecosystem in India has expanded rapidly to emerge as a major driver of economic growth. The finance minister's proposal to extend the date of incorporation for income tax benefits to start-ups by another year is bound to further that progress and promote new entrepreneurial talent. The decision to provide the benefit of carry forward of losses on change of shareholding of start-ups from seven years of incorporation to 10 years is another welcome move,” Ritesh Agarwal, Founder & Group CEO, OYO said.

T Koshy, MD and CEO of ONDC, said these initiatives would enable start-ups to carry on with the momentum and reinvest the profits back into the business which will enable further growth.

Kanishk Maheshwari, Co-Founder and Board Member of Primus Partners said these steps will enable the start-ups to counter the issue of high cost of doing business in India.

“Many entrepreneurs will be encouraged to get started to avail the benefit for tax benefits, which is substantial once start-ups get into profitability. We expect many more registration now because of the extension,” Anil Joshi, Managing Partner, Unicorn India Ventures, said. He further said the extension of window to carry forward losses was much needed post change as most of the companies in the process of growth compromise on profitability and this extension takes away any pressure to compromise on growth.

Many founders and investors show disappointment over the lack of new policy framework around ESOPs and early-stage investments in the union budget.

Maheshwari of Primus Partners said the budget could have emphasized on encouraging projects on softer aspects such as collaboration of start-ups with academia and large industry besides bringing policies to make start-up investments easy for investors.

“To unlock India's start-up ecosystem potential, we were hoping for tax breaks and better subsidies to early-stage start-ups. Also, access to funding for early-stage start-ups looking to build for global markets needs ease in the investment process for global investors, it should have been attended,” Birma Ram, Founder, BabyG, said.

Padmaja Ruparel, Co-Founder, IAN and Founding Partner IAN Fund, welcomed the start-up focused polices and said that “more must be done to unlock funding for startups beyond the accelerator level. Whether it be private or public funding, the key is to provide the necessary resources for these start-ups.''

To be sure, the government had allocated Rs 1,000 crore for the Fund of Funds for Start-ups and Rs 283.5 crore for the Start-up India Seed Fund Scheme in last year’s budget.

Prerna Kalra, Co-founder and CEO of Daalchini Technologies, said it was disheartening to see the budget not brining further clarity to the issue of ESOPs, which has been a key demand from the start-up ecosystem.

“Disappointing, though, that the issue of taxation of ESOPs at a sale or a liquidity event rather than on exercise has not been addressed. Unfortunately, because ESOPs are a start-ups' main currency to attract employees and they do not have the capital to pay at the time of exercise for illiquid shares,” Saurabh Srivastava, Founder, IAN and Co-Founder & Past Chairman, NASSCOM, said.

“Some key issues that didn’t get attention are no changes to GST rates for registered start-ups, ESOP taxation, tax parity in base rates for unlisted shares, and tax benefits for angel investors taking up high-risk investing, might adversely affect the start-ups growth that our country needs in order to become world's innovation hub, this may prolong the funding winter,” Yagnesh Sanghrajka, Co-Founder and CFO, 100X.VC, said.

Joshi of Unicorn India Ventures said the government will certainly need to revisit the policy framework around ESOPs as it is leading to tax burden on employees in absence of liquidity events or for forgetting the reward if they are not in position to pay the tax liability. “In case they exercise and have to pay tax and in future if the company faces growth challenges, then it may lead to direct loss without any realised gain,” he added.

Also Read: Union Budget 2023: Income Tax changes to cost govt Rs 35,000 crore annually