Upcoming Webinar :Register now for 'ULIP as an investment during economic recovery' powered by Bajaj Allianz

Why Only A Handful Of Startups Can Avail Government‘S Tax Sops

It‘s quite disappointing that out of the 1600 applicants only 8 startups have been approved for availing the tax benefits.

Jan 25, 2017 / 04:36 PM IST

By Suraj Nangia, Partner, Nangia & Co

A startup in India has to face a number of issues that it must deal with in order to grow into a successful organisation.

Apart from planning the most effective business strategy for the company, the startup needs to look at the regulatory environment, various legal issues, and the various laws that exist in our country.

Last year the launch of “Startup India” program received an overwhelming response by the startup community and the investors alike.

However, it’s quite disappointing that out of the 1600 applicants only 8 startups have been approved for availing the tax benefits. This is totally contrary to the government’s aim of creating an environment for ease of doing business and the aim of Startup India.

The government needs to recalibrate its policy stance for Startups to make the scheme more accessible and hence it seems that Startups are likely to surely get an impetus in the Union Budget 2017 to be announced on February 1, 2017.


Some of the likely introductions/changes expected are as follows:

Broad basing the definition of Startups

One of the main reasons only 8 Startups out of 1600 applicants have been approved by the Inter Ministerial Board is because of a huge list of criteria’s needed to be eligible - such as getting a letter of recommendation from a recognised incubator cell or being funded by a recognised fund.

It is expected that the government would most definitely tweak the definition of startups to include more such startups to be eligible for the tax benefits

Service Tax exemption 

Currently, there is no special exemption for Startups from Service Tax. Cash flow is one of the most important determinants for the survival of a Startup. Also to make services more commercially viable, the government may consider providing exemption to such startups.

Fund Raising

Startup needs funds to survive and grow. Last year the government talked about Rs 10,000 crores of fund of funds for Startups. The same was announced with a lot of fanfare however, we still don’t know that if anyone has actually benefited from the same. Startups also are in need of Credit guarantee which is also missing.

The government is expected to clarify its stance on the above during the current budget.  Luckily entrepreneurs of companies which are successful have helped in incubating new promising startups.

This makes it even more important for the government to incubate startups. The government does aim to start 35 incubators, but that is yet to take off. Jaitley, might want to put timelines of rolling out these incubators, and allocate funds.

Rationalisation of Tax Holiday

Considering significant investments are made in technological innovation and newer types of products / services developed by these startups, very few of these make profits in the first 5 years.

Hence it is very unlikely that startups will use the tax holiday to any avail.  The government should most definitely increase this window to at least 7-10 years, within which startups may be allowed to avail a tax holiday of 3 years.

Digital India

The government has failed to connect social schemes, such as Aadhar, with startups. The Digital India campaign has failed to address larger issues that startups face, neither has it given a fillip to the startup ecosystem.

While the government’s campaign aims at bringing in a large number of Indians under the internet literacy, but the government has failed to work with startups to do that. Budget 2017 could look at ways of connecting the Digital India project with startups.

While 2016 was a year wherein the government made several announcements for Startups, it will be interesting to see how the Finance Minister further enhances the same so there could be more beneficiaries under the “Startup India” Scheme.

(This is an opinion piece)

stay updated

Get Daily News on your Browser