Budget 2023: In a fillip to startups, date of incorporation to qualify for tax benefits extended by a year

The Budget 2023 has extended by a year the date of incorporation for startups to qualify for tax benefits, accepting a key demand of the industry. The Budget also proposes to extend the period for startups to carry forward losses by three years.

"We have taken a number of measures for start-ups and they have borne results. India is now the third largest ecosystem for start-ups globally, and ranks second in innovation quality among middle-income countries," Finance Minister Nirmala Sitharaman said while presenting the Budget on February 1.

Only those startups incorporated before April 1, 2023, were eligible to get tax benefits. Now the date has been extended to April 1, 2024.  The National Association of Software and Service Companies (NASSCOM) had sought an extension of five years.

The minister said startups would be allowed to carry forward losses under section 79 to 10 years from current seven years.

Until now, eligible startups were allowed to carry forward and set off losses if a such loss has been incurred for seven years beginning from the year in which the company was incorporated.

"I propose to extend the date of incorporation for income tax benefits to startups 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," she added.

The announcements will only benefit startups holding Inter-Ministerial Board (IMB) certificates. According to NASSCOM, there are 645 IMB-certified startups in the country, less than 0.8 percent of the over 82,000 DPIIT (Department for Promotion for Industry and Internal Trade)-recognised startups.

"The fiscal measures announced in Budget 2023 will only apply to less than 1 percent of India 84,000 DPIIT registered startups," said Siddarth Pai, Co-Founder 3one4 Capital and Co-Chair, Regulatory Affairs Committee, IVCA (Indian private equity and venture capital association).

"There was no mention of the rationalisation of the IMB regime, which is required to allow startups to avail of any of the benefits under the Income Tax Act, 1961."