We are glad to share our suggestions for the topic “Enhancing Ease of Doing Business and Startup Culture in India”. These suggestions were shared with Indian Government on 30-05-2019 and they must have already been considered by Indian Government till now.
Our suggestions in this regard are as follows:
(1) Power Of Central Government: The first and foremost requirement is to enhance the role and power of Central Government in this field. This can be achieved as follows:
(A) More powers should be exercised by Central Govt to enhance Ease of Doing Business and to promote Startups. These must include power to entertain appeal, review petition, power to remove difficulties and power to give directions. Once corresponding Rules are framed/modified and approved by the Central Govt in this context, a notification in Official Gazette must be published by Central Govt in this regard.
(B) Not only Central Govt but even the CBDT and IMB must have review powers. Review can be granted in exceptional circumstances only where:
(i) The Central Govt, on an application in this regard by the applicant Startup, directs the CBDT or IMB to review a case in hand. Such a direction can be given by the Central Govt on case to case basis, or
(ii) Any member of CBDT or IMB involved in the exemption granting process is satisfied that such a review is required after examining an application made by a Startup in this regard whose exemption application has been rejected by the CBDT/ IMB at the first instance.
Explanation I: Reasons shall be recorded by Central Govt/CBDT/IMB for approval or rejection of such review application.
Explanation II: While deciding upon approval or rejection of such review application, Central Govt/CBDT/IMB shall consider any award, recognition, intellectual property granted or applied for, mention by research scholars and research community about the Startup or its parent/promoting company/organisation, pro bono services provided by the Startup, social services of Startup, any favourable report given by NRDC in favour of Startup, etc.
Explanation III: The Central Govt, CBDT and IMB can ask for such documents, explanation and information from the review applicant as they may deem necessary to decide upon such review application.
(2) Empowering Startups: The Central Govt can strengthen Ease of Doing Business and further empower Startups with the following relaxations in favour of Startups:
(A) Exemption criteria for Startups under Section 80-IAC can further be relaxed. Currently the exemption criteria of Section 80-IAC is heavily relying upon the parameters and essentials of granting of a Patent. A Startup is much more than a business having novelty, originality and innovation.
For instance, if a Startup is providing services crucial to the society should we deny exemption to it simply because it is not innovative? We must ask the question what is more important innovation or utility? A thing may be innovative but it may have limited utility whereas a thing may be of tremendous utility still it may have no elements of originality or innovativeness. For instance, traditional knowledge, plant varieties, etc are well known and there is no innovation in them. Still they are of tremendous utility to people.
There is another reason that supports the utility aspect. A Startup recognised By DPIIT has already cleared the test of innovation, utility and problem solving model. So the same tests should not be rigidly used while granting exemption under Section 80-IAC, especially if the Startup is providing utility services or services that are important for masses.
So exemption criteria should be based upon utility plus innovation instead of innovation plus utility. In case of conflict between utility and innovation, the former (utility) must prevail for exemption purposes.
(B) If CBDT or IMB has rejected an application of a Startup for seeking tax exemption under Section 56(2) (VIIB) and Section 80-IAC respectively, a second chance should be given to the Startup to make the application again. Such second application cannot be made unless:
(i) A period of 1 year or a reduced period, as approved by the Central Government on an application made by the Startup/ Group of Startups, has elapsed, and
(ii) Any ONE of the following conditions is fulfilled:
* There are changed circumstances for the Startup like funding has been granted to the business, chances of the business obtaining scalability are there, the business has created wealth for India or generated employment for at least 10 people, etc. Such changed circumstances have to be proved with supporting documents in this regard by the applicant Startup, or
* There has been a change in the norms, rules or exemption criteria for Startups after the initial application of the Startup has been rejected and such change has now entitled the Startup to apply again, or
* The Central Govt has directed the CBDT or IMB to reconsider such application of the Startup either on its own or on the basis of an application made by the Startup/ Group of Startups requesting such direction.
Provided that the Central Govt may waive the initial waiting period of 1 year to such period as it may deem fit but not below 3 months on its own or on an application made by the Startup/ Group of Startups, generally or for a particular class of Startups, as the case may be.
Provided further that all second exemption seeking applications, except the one where Central Govt has given the direction, shall be forwarded to Central Govt electronically within 48 hours of receiving the same. The Central Govt shall have the power to reject any such application within 7 working days of receipt of such application. In case there is no response from the Central Govt regarding that application within 7 days of receipt of such communication, it shall be deemed that the Central Govt has no objection regarding such application and CBDT or IMB can proceed with such application as per the applicable procedure and norms.
Provided further that unless the Central Govt has itself made the directions, this second exemption seeking opportunity shall not be available to the Startup if the Central Govt is of the opinion that the second exemption application has been made with an intention to evade tax or there would be an unreasonable loss to Govt Exchequer. Such an opinion must be communicated by the Central Govt within 7 days of receipt of communication of second application from CBDT or IMB respectively. In case if no such opinion has been given by the Central Govt regarding any application within 7 days of receipt of such communication, it shall be deemed that the Central Govt has no objection regarding such application and CBDT or IMB can proceed with such application as per the applicable procedure and norms.
(C) 3 years consecutive exemption benefits should be extended to 4 years with an option to claim them together or as 2 years at a time with minimum gap of three years between the second 2 years exemption seeking. For instance, if a Startup has sought exemption for 2 consecutive years after initial 3 years, next exemption for 2 consecutive years shall start after the 8th year of incorporation of the entity. We believe that the time frame for tax exemption purposes has been extended to 10 years from previous 7 years period. If that is not the case, the 7 year period must be extended to 10 years for this suggestion to work. [https://www.startupindia.gov.in/content/sih/en/startup-scheme.html says 10 years].
An option should also be given to the Startup to discontinue 4 years consecutive exemption already sought and granted by IMB and convert it into 2 years exemption after initial 2 years if circumstances of Startup warrant so. Such an option can be given only if the Startup expresses its desire to do so at least 6 months before the expiry of initial 2 years period (i.e. not later than initial 18 months of the exemption period).
Also if a Startup is lucky enough to get a funding in the very first year of incorporation, it should not compulsorily with for 3 years before it can apply for the tax exemption. Such a Startup should be allowed to apply in the first year itself. The IMB can ask for relevant documents to satisfy itself that the funding necessitating such exemption request is actually received or would be received in near future (say within 6 months of granting of exemption).
If the Startup fails to get the funding within 6 months of granting of tax exemption by IMB, such exemption can be temporarily suspended by the IMB till the time funding arrives. If the Startup fails to get the funding even after 1 year of granting of exemption certificate under this clause, the IMB shall have the power to cancel such exemption certificate. If such cancellation happens, any tax or other monetary benefit derived and enjoyed by the Startup shall be refunded by it with reasonable interest, calculated from the date the Startup first availed of the benefits due to such exemption.
(3) Taxation Reforms: We also need few taxation reforms and clarifications in this regard. These are as follows:
(A) We need better and clear taxation treatment of funds granted to Startups by Govt, Private Investment players, PSUs, etc. For instance, if funds are granted to a Startup (Company/LLP), what would be its tax treatment and whether it would be allowed 3 years (or proposed 4 years) tax exemption too?
Currently a DPIIT recognised Startup is eligible to apply to the IMB for full deduction on the profits and gains from business. An entity remains a startup for 10 years if its annual turnover does not exceed Rs. 100 crore for any of the financial years since incorporation/registration. If A Startups is granted funding of 90 crore will that funding be treated as turnover or profits and gains from business for full tax deduction purposes?
Explanation I: For the purposes of this clause and for granting of 3 years (or proposed 4 years) tax exemption under Section 80-IAC, the term profits and gains of a business shall include gross receipts, turnover, funding, financing, investments, etc provided that they do not exceed Rs. 100 crore for any of the 10 financial years for which the Startup has been granted a recognition.
(B) Can a company claim both Section 56(2) (VIIB) and Section 80-IAC exemptions? If yes, how the limits of 100 crore for Startup purposes would be calculated? We need a clarification upon this aspect.
(C) Synergy and coordination between Central Govt, CBDT and IMB should be further improved and their decisions should be communicated instantaneously to all others in a safe, secure and digital manner using digital signatures (DSC). Decisions of Central Govt, CBDT and IMB should also be stored at a centralised location (server) in secure manner, which can be accessed by Central Govt, if and when required.
(D) Binding value of decision by CBDT and IMB must be established and communicated by Central Govt in writing. Decisions once taken by CBDT and IMB must be final and not open to challenge by taxation or other authorities, except through a review application or direction issued by the Central Govt. A notification in Official Gazette must be published by Central Govt in this regard.