Finance Minister Nirmala Sitharaman announced key reforms for startups in the 2023 Union Budget presented on Wednesday, February 1. The move is set to boost the Indian startup ecosystem and will help young entrepreneurs get access to much-needed capital during their initial years of operations.
Among the major announcements, FM stated that the startups incorporated up till March 31, 2024 will be eligible for income tax benefits. This replaces the earlier date of March 2023 which was set in last year’s Budget.
So far the startups that were incorporated between April 1, 2016, till March 31, 2021, were eligible for this tax benefit scheme. The finance minister extended the eligibility to March 31, 2023, which is an additional year for the startups.
“We propose to extend the date of incorporation for income tax benefits startups from 31.3.2023 to 31.3.2024. I further propose to provide the benefit of carry forward of losses on change of shareholding of startups from seven years of incorporation to ten years,” Sitharaman said.
Carry forward of losses
The Income Tax Act states that eligible startups can avail a 100% tax rebate on profits for three out of seven years from the date of incorporation provided that the annual turnover does not exceed Rs. 25 crores in any financial year.
Arun Jaitley, who was finance minister at the time, stated in the 2017 budget that companies formed after March 31st would be eligible for a tax vacation lasting three out of seven years from the date of registration, provided that their annual revenue did not exceed ₹25 Cr in any given financial year.
However, according to budget presented today, the benefit of carry forward of losses on change of shareholding of startups has been extended to 10 years of incorporation from 7 years currently.
Commenting on the announcement, Mr. Sagar Agarvwal, Co-Founder & Managing Director, Beams Fintech stated, “This year’s budget has been fairly positive for the startup ecosystem. The extension in time-limit of incorporation for IT incentives gives an additional push to the Indian Startup ecosystem. More importantly, the extension of carry forward period on change in shareholding from 7 years to 10 years makes startup acquistions more attractive, supporting consolidation in the industry and hence enabling exit opportunities for founders and investors.”
Speaking on the occasion, Kanika Mayar, Partner, Vertex Ventures, SEA & India said, “We believe the 9,000 crore infusion amount in the corpus would further push the entrepreneurial spirit of the country. Additionally, we applaud the initiative towards enabling upskilling and innovation in artificial intelligence via the centres of excellence for AI proposed in this year’s budget. Overall, the Union Budget 2023 offers various positive steps towards the growth of India’s economy and the development of the overall startup ecosystem."
Startups had emerged as drivers of growth for India's economy and this Budget announcement is likely to provide a major boost to the segment. According to industry experts, the new policy will give a much-needed relief to startups in meeting their working capital requirements, especially during the crucial initial years of their operations.
India is now the third largest ecosystem for start-ups globally and ranks second in innovation quality among middle-income countries. The move is expected to encourage more people to take the entrepreneurial plunge and will further strengthen the startup ecosystem of the country.