From exempting startups from minimum alternate tax (MAT) to reducing taxes on capital gains, tech industry has lined up a slew of recommendations for startups
Reduction of long term capital gain tax, allowing tax sops for angel investors besides exemption from minimum alternate tax are some of the key recommendation suggested by India's apex technology industry body Nasscom to the finance ministry ahead of the Union Budget 2017.
In a note, it suggests Finance Minister Arun Jaitley on how he can harmonise various tax policies in order to boost startup investing in India, which fell almost 50 percent last year:
1) Reduce long-term capital gain tax for startup investors to 10 percent
Issue: The long-term capital gains from sale of unlisted shares in the hands of non-residents attracts a tax of 10 percent whereas it attracts a tax of 20 percent in the hands of residents. Thus, residents are more onerously taxed than non-residents, though the nature of income is identical. This is causing domestic investors being less competitively placed than international investors. There is a substantial private equity interest emerging from high net worth domestic investors, which will nurture and encourage entrepreneurship.
Recommendation: The tax rate for all assesses in respect of long term capital gains from unlisted companies be reduced to 10 percent to maintain parity.
2) Harmonize tax rates for angel investors at 15 percent
Issue: Angel investors invest at the earliest stage of the company. The current tax structure is such that lower risk companies are at a lower taxability as compared to high risk entities. Long term cap gains tax is at zero percent for shares in publicly listed companies, in lieu of security transaction tax levied on sale of listed shares on a recognised stock exchange. Short term capital gains is 15 percent for shares in publicly listed companies and for angel investors the applicable rate is as per the income tax slab of the assesse.
Recommendation: Long term capital gains tax for angel investors investing in early stage companies should be aligned to that applicable for publicly listed companies. Short term capital gains tax be specified at 15 percent for angel investors, for their investments in early stage companies.
3) Definition of short-term capital asset
Issue: The threshold limit for unlisted shares and units of debt mutual funds was increased from 12 months to 36 months by the Finance Act 2014 retrospectively. This amendment increased taxability of gains arising on transfer of unlisted shares and making debt based mutual funds unattractive.
Recommendation: While budget 2016 reduced the holding period from 3 to 2 years, Nasscom has emphasised on its earlier request of bringing the holding period down to 1 year.
4) Remove angel tax - Share premium in excess of fair market value treated as income
Issue: Under The Income Tax Act, 1961, startups receiving any consideration for issue of shares which exceeds the Fair Market Value (FMV) of such shares is subject to tax on such excess consideration as income from other sources. In majority of the cases, FMV is also significantly lower than the value at which the capital investment is made. This results into the tax being levied. According to the recent notification by CBDT providing an exemption to from the provisions of Section 56 to startups as defined by the DIPP. However, companies are not able to avail the benefit due to the certification requirement of the unit to be an innovative startup which is included as part of the definition issued by DIPP.
Recommendation: Any investment made by a domestic investor (individual or corporate entity), be exempted from the provision of Section 56(2) provided that the investment is up to Rs 10 crore within one year of such an investment, with no individual exceeding Rs 5 crore investment.
5) Provide MAT exemptions for startups
Issue: Currently, the MAT (minimum alternative tax) provisions have no threshold limit and all companies, notwithstanding their size, are subject to the provisions of MAT.
Recommendation: Startups as defined by DIPP under the startup India action plan should be exempted from MAT.
6) Align definition of 'Royalty' with global norms in respect of software transactions
Issue: SMEs and startup software companies are suffering from TDS at the rate of 10 percent due to retrospective amendments in the definition of Royalty by Finance Act 2012.
Recommendation: Payments made for use of computer software are mere payment made for right to use and not transfer of copyright. Such payments hence should not be treated as royalty and hence should not be subject to TDS. These companies face blockage in their working capital, leading to serious operational difficulties.