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GST: CBIC lays out procedure for inspection of goods under E-way bill

Instructs officials to submit reports within 3 days of intercepting conveyances

Detailing the uniform procedure for interception and inspection of goods under the e-way bill system of the goods and services tax (GST), the Central Board of Indirect Taxes and Customs (CBIC) has instructed field officials to submit inspection reports within three days of intercepting conveyances. The Board has also instructed officials to not issue an order for confiscation of goods or conveyance, or for imposition of penalty, without giving the person in charge of the conveyance an opportunity of being heard. The uniform procedure for interception of goods comes ahead of the launch of intra-state e-way bill system in five states — Andhra Pradesh, Telangana, Kerala, Gujarat and Uttar Pradesh — from Sunday. The e-way bill system for inter-state movement of goods has already been introduced from April 1 along with intra-state e-way bill system for Karnataka.

Stating that e-way bill number by the person in charge of the conveyance in the form of a printout, SMS or on an invoice will be valid, the Board has instructed that in case the proposed tax and penalty are not paid within seven days from the date of the issue of the order of detention, action under Section 130 of the CGST Act shall be initiated by serving a notice, proposing confiscation of the goods and conveyance and imposition of penalty. A release order shall be issued by the designated officer when there are no discrepancies. However, where officer is of the view that goods and conveyance need to be detained, an order of detention and notice, specifying tax and penalty payable, shall be served on the person in charge of conveyance.

Section 129 of the CGST Act provides for a penalty equal to 100 per cent of tax payable on goods detained. In case goods are otherwise exempted from tax, fine shall be lower of 2 per cent of the value of goods or Rs 25,000. The penalty amount rises in case the owner of goods does not come forward for payment of tax and penalty.

The instructions also stated that in case the tax and penalty is not paid within seven days from the date of issue of detention order, a notice can be served proposing confiscation of goods and conveyance and imposition of penalty. Also, where the proper officer is of the opinion that such movement of goods is being made to evade payment of tax, he may directly invoke section 130 of the CGST Act by issuing a notice proposing to confiscate the goods and conveyance.

Once the confiscation order is passed, title of such goods/ conveyance shall stand transferred to the Central Government. Such goods/ conveyance may, however, be released within three months after making payment of demands imposed, but where the payment of dues is not made within the time specified in such order, the officer can also auction the goods/ conveyance and remit sale proceeds to the central government.

Tax experts said such uniform procedures will ensure that businesses do not face hardships in using the e-way bill system. “With responsibilities like time-bound uploading of reports/ forms by revenue authorities, time bound closure of cases where goods have been detained, instructions to release goods where there are no prima-facie irregularities, etc., it is expected that e-way bill inspections may not entail unwarranted hardships to businesses,” .

“While the provisions as regard confiscation of goods and conveyance have already been provided in GST law, such a detailed clarification reminds taxpayer as well the transporter to duly comply with the legal provisions of e-way bill. The industry should re-look at the processes currently being followed for e-way bill generation and explore the possibility of automating the same to avoid unnecessary legal disputes on account of preventable errors.”

Source : Press Reports

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Govt sets up grievance redressal mechanism to address IT related issues on GST portal

The government on Wednesday set up a grievance redressal mechanism to address information technology related difficulties faced by taxpayers while transacting on the goods and services tax portal. The committee will look into issues faced by taxpayers due to technical glitches on the GST portal, the finance ministry said in a statement.

The GST council has given powers to this committee to provide relief to the taxpayers including filling forms or returns or amending forms or returns.

The circular also gives more time to taxpayers to fill the TRAN-1 form (dealing with transitional credit) who were unable to fill it due to IT-glitch such that the process of digitally signing/validating TRAN-1 could not be completed. “The taxpayer would be allowed to complete the process of filing such TRAN-1, stuck due to IT glitches, by 30 April 2018 and the process of completing filing of GSTR-3B which could not be filed for such TRAN-1 shall be completed by 31 May 2018,” the statement said.

However, the last date of filing is not being extended and this will benefit only identified taxpayers. This will benefit 17,573 taxpayers who shall be able to avail Rs2,582.98 crore of central GST credit and Rs1,112.77 crore as state GST credit.

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After 7 months, traders fear GST glitches, says report

Even after seven month of GST implementation, industry is concerned with glitches in GST portal, cumbersome return filing process and e-way Bill, according to a survey done by Ficci.

“All respondents of the survey pointed out issues with the robustness and volume handling capacity of the GST portal. Problems like delayed reflection of updated data as well as payments, delays in process of input credit set offs, inability to upload heavy files of certain formats and lack of provision to modify or revise errors posed major challenges to businesses,” said Ficci.

It said that respondents suggested that a major revamp of the portal was necessary to make it more efficient. There should be provisions for auto set off of the liability against available credit, it said.

Around 59 per cent respondents to the survey comprised of MSME firms whereas the rest 41 per cent were large firms, said Ficci.

“The other pressing issue that all respondents of the survey raised was the cumbersome procedures and documentation for filing of returns. Monthly filing of GST return has been cited as a cumbersome procedure,” said Ficci.

It said that around 78 per cent of the respondents suggested that the periodicity of return filings for those taxpayers having aggregate turnover above Rs 1.5 crore should be changed from monthly to quarterly.

“For services providers, multiplicity of registrations was a concern as a separate registration is now required with every state where service is being provided,” said Ficci.

There should also be a centralised registration for inter-state services, it said.

Implementation issues related to e-way Bills also are also bothering traders. E-way bill is an electronically generated document which is required for the movement of goods of more then Rs 50,000 from one place to another.

All respondents of the survey pointed out issues with the robustness and volume handling capacity of the GST Portal. Problems like delayed reflection of updated data as well as payments, delays in process of input credit set offs, inability to upload heavy files of certain formats and lack of provision to modify or revise errors posed major challenges to businesses. Respondents suggested that a major revamp of the portal was necessary to make it more efficient. There should be provisions for auto set off of the liability against available credit.

Feedback on Return Filing

The other pressing issue that all respondents of the survey raised was the cumbersome procedures and documentation for filing of returnsMonthly filing of GST return has been cited as a cumbersome procedure. Around 78% of the respondents suggested that the periodicity of return filings for those taxpayers having aggregate turnover above Rs. 1.5 crore should be changed from monthly to quarterly. For services providers, multiplicity of registrations was a concern as a separate registration is now required with every state where service is being provided. Respondents to the survey emphasised that filing of returns be made simpler. There should also be a centralised registration for inter-state services.

Feedback on e-way bill

 All respondents have cited likely implementation issues upon the introduction of e-way bill. The respondents found the current limit of 10 kms for the purpose of updating details of goods on the portal to be inadequate. Respondents, especially small businesses, felt that e-way bill need not be introduced as it was only an additional compliance requirement as all details of sale and purchase were readily available on the portal. It was suggested that the minimum limit for requirement be increased to 50 kms and there be no requirement of e-way bill for movement of goods within the city limits.

Businesses, especially exporters faced difficulty to claim refunds. The mismatch between shipping bill date and tax invoice date does not allow initiating refund of IGST paid on exports. They have suggested that this condition of matching shipping bill date and tax invoice should be waived off. Firms which supply raw materials to its SEZs locations located in other states is liable to GST as such a transfer is considered sales and is not getting a zero-rating benefit. Such transfers for captive consumptions should not be charged under GST.

Most respondents also stated that there is a need for greater clarification from the Government on the anti-profiteering provisions to ensure that they do not lead to undue harassment.

Source : Press Reports

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100% FDI to fuel the next phase of growth

Ecommerce Association of India (ECAI) welcomes the government’s decision for allowing 100% FDI in marketplace eCommerce. This is certainly a way forward in fuelling the growth of eCommerce in India. 

India has seen a very high growth in the marketplace eCommerce, which has in turn thrived many new manufacturers, traders and suppliers providing them limitless market with larger customer base. The industry has seen numerous success stories of startups and entrepreneurs and unabated growth. And, moreover, the government’s support and regulation shall make the growth process long-lasting and more stable.

With 100% FDI on the cards, the marketplace eCommerce companies expect to see a larger influx required for the next phase of growth. Existing marketplaces would grow bigger and the newer marketplaces may come up. We may also see niche marketplaces coming up and ultimately everything will lead to bigger opportunities for the sellers. The move will allow more capital infusion in the sector from the foreign investors and the same can be used for financing their development needs.

The marketplace model has been a big driver of growth for the small businesses which again has been on the priority list of the government. Many young entrepreneurs have benefitted from the marketplace model with the large market reach and larger customer base. They are now able to access a pan-India market which was not possible earlier for a small business with very low or zero marketing budget. Since the marketplace manage the entire logistics of sales and even return, the small businesses do not have to invest or manage the same. The marketplace model has also increased the efficiency of the small businesses. With almost 350 million internet users and almost 800 million mobile users and that too a considerable number using smartphones, it offers even a larger opportunity for the eCommerce companies.

Equitable growth

Though the honeymoon discount period may gradually fade away, but the growth will now be more structured and equitable among players. The sales shall also be not discount-driven, and this would be good for the smaller players with less funding support. They would not have to follow the discount race, as they do not have large bellies to do that. So, things will gradually fall in line in the larger interest of the industry.
The marketplace model also compliments the brick and mortar stores. Of late, the physical stores have also got a larger bandwidth of market space through eCommerce. They are now able to sell to a larger number of customers, and also the eCommerce players are also going offline.

The era of discounting will gradually be corrected, and this will certainly give more opportunities for the brands to reach out to larger pool of young customers through the online marketplace. Hence, the role of eCommerce players become even more important, as they have a huge young customer base following. Also, the rise of mCommerce has given rise to a convenience marketplace where anything and everything can be sold at the convenience of customers.

The government has been looking forward to support the growth of eCommerce industry and we are hopeful that we would see more such pro-industry moves by the government for the sector that has been the largest employment generator for the economy in the last five years. The eCommerce sector has also given rise to a more structured and organised businesses, as all the transactions are recorded. This helps in checking tax evasion and illegal transactions.

Also, with the government’s focus on building a strong manufacturing base in India, eCommerce can play an enabling role for manufacturers and suppliers to access the consumer base. With the borderless market, the manufacturers and suppliers can access any regional market and even global market as well.

(The author is the secretary general at e-Commerce Association of India)

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GST effect: Used car business could impact the new car market in India

Organized players in the used car market normally pitch in with an over 20 percent growth. There has been a rising trend of customers veering away from the traditional middlemen in favour of recognised brands, assurance, warranty, and accountability. In addition, present day buyers of second hand vehicles are well-informed and aware of what competition is offering and hence movement towards organized dealers.

The Goods and Services Tax (GST) that will be enforced from 1 July has the potential to realign the largely unorganized used car market into a more organized frame work say industry leaders.

Interestingly, sale of old and new cars is inextricably linked. It is estimated that about 27-28 percent of new car sales accrue through exchange of old models. So if new car sales are pegged at about 3 million, we could be looking at about 8,40,000 used cars being exchanged for new ones at pre-owned outlets.

The GST will be paid on the value of the exchange. For instance, if the new car costs Rs 6 lakh and exchange value of the old car is Rs 1 lakh, the customer will pay Rs 5 lakh but GST will be paid on Rs 6 lakh.

The GST slabs that are yet to be clarified for the pre-owned vehicle segment could well toe the line of new vehicles, with a lag of a couple of months. Cars will attract a base GST rate of 28 percent excluding cess.

Amit Bhagat Partner -Indirect Taxes, PwC India told ETAuto that the dealer will pay GST under reverse charge and take credit of it while the customer will not pay any GST. The dealer can use this credit to pay GST when he further sells the vehicle. “The major issue would be rate of tax which will be as per the new car – ranging between 28 percent to 53 percent whereas currently only VAT is charged at that leg at 15 percent maximum. To be tax cost efficient, dealers will have to be compliant and optimize on their tax credits.”

Source:  Indian Blue Book
Source: Indian Blue Book

Other applicable taxes and levies such as road tax and lifetime tax for the vehicle do not form part of the GST structure and may continue.

GST effect: Used car business could impact the new car market in IndiaTo understand just how critical used cars are to the new car market, Jagdish Khattar managing director of Carnation Auto and former MD of Maruti Suzuki India points out that when a new car is bought, looking at the resale price is very important. “As a manufacturer we used to fix the resale price. If today the Maruti brand is selling so much then it is because it has fixed the resale price at a particular price at True Value outlets.” This also ensures that brokers don’t sell at a different price and dupe the customer.

In fact, Maruti Udyog was the first to enter the organized pre-owned car market with its True Value outlets in 2001 under Khattar’s tenure.

“That is why the used car market is so critical for selling new cars, as people look at the initial price. Keeping the resale value high and maintaining exchange for the new one is important for a manufacturer,” he adds. He founded Carnation Auto, a multi-brand sales and service outlet for new and used cars after demitting office at the country’s largest carmaker.

Today Maruti Suzuki has around 700 outlets of second hand cars. When a customer sells an old Maruti Swift at a True Value outlet for say Rs 3.5 lakh, he can buy a new car in exchange by paying another Rs 5 lakh and upgrading to a new Ciaz sedan under the same roof.
Following up on it, in 2003-04, Maruti Suzuki started the across the counter exchange bonus scheme that offered a Rs 15000 discount for exchanging a new Maruti for an old Maruti model boosting old car sales.

Meanwhile, clarity from the GST Council pre-owned vehicle slabs is expected within the next two weeks.

“If new car prices start falling post GST, expect the same for a second hand vehicle after a couple of months,” says Dr Nagendra Palle, managing director of multi-brand used car business of Mahindra First Choice Wheels (MFCWL).

As dealers earn around a 10 percent margin on second hand vehicle sales, a high tax structure could dent their margins. Palle feels that new car sales would see a marginal dip in prices while SUVs and luxury cars would see a larger drop post GST.

Transiting towards organized structure

Palle is bullish of a positive spin-off of the new tax regime in that it will see the formal shift of the predominantly unorganized second hand vehicle market towards a more consolidated and organized framework.
“Going forward, GST will be very positive for the industry as at present there are about 30 cars per 1000 people in India so it is pretty low on the upside. I think the demand for passenger vehicles will rise and the second hand car market will get a boost becoming more organized,” he adds.

Bhagat feels that GST may stipulate that businesses with a threshold limit of around Rs 20 lakh may be drawn into the tax fold. This will move them towards an organized status. “Tax compliance will become non-evasive after the promulgation of GST, that will consolidate the unorganized sellers,” he adds.

At present, the second hand car market in India is largely unorganized and fragmented. The report on the pre-owned car market by the Indian Blue Book of MFCWL, compares dealers across USA, China and India. Compared to the US, most new car dealers in India and China are not involved in used car retail. The volume of pre-owned vehicles sold per dealer per year in India is pegged at 71, in China 75 and in the US 533.

Source:  Indian Blue Book
Source: Indian Blue Book

In India, organized dealers account for 19 percent of the total used car market, with the semi-organised segment contributing 52 percent and unorganized dealers 29 percent. In comparison, in China, the unorganized dealers are pegged at 73 percent and franchisee dealers at 27 percent.

In the US, franchisee dealers chip in with 54 percent of the market share and independent dealers 46 percent. In India, metros contribute a large 45 percent chunk of the sales with the balance coming from the non-metros.

Normally the pre-owned car market grows at a higher pace to the new car segment with the organized players contributing a major chunk to this growth. For instance, if new car sales report a 10-12 percent growth, a 13-16 percent uptick for the old car segment is expected.

Organized players in the used car market normally pitch in with an over 20 percent growth. There has been a rising trend of customers veering away from the traditional middlemen in favour of recognised brands, assurance, warranty, and accountability. In addition, present day buyers of second hand vehicles are well-informed and aware of what competition is offering and hence movement towards organized dealers.

On growth path

According to a report by Frost and Sullivan, the used car market is pitted to grow at a CAGR of 12.5 percent from 3.94 million units in 2016 to 7.1 million in 2021. While hatchbacks dominate the below Rs 5 lakh price range, SUVs and MUVs hold sway in the above Rs 8 lakh bracket.

In addition, only a fifth of the used luxury car segment is organized that is led by Mercedes Benz with a 50 percent market share followed by BMW with a 32 percent share of the total pie.

In terms of prices, while the average used car price in the US ranges between Rs 11 lakh and Rs 12.5 lakh, in India it hovers around Rs 2.85 lakh to Rs 3.15 lakh. About 90 percent of the used car sales come from the below Rs 10 lakh price bracket, maintains the Frost and Sullivan report.

Changes in the field of safety, emissions as well as connectivity trends are expected to further reduce the holding period of the used car going forward with only 1 in 3 used car customers considering a new car for purchase.

Moreover, the general sentiment prevailing in the second hand car market reveals that sales of diesel cars have tripped with the petrol bouquet comprising 65 percent with diesel contributing the balance 35 percent. A few years earlier, diesel accounted for 45 percent of the share in new cars and the same ratio was seen in the pre-owned car market.

At Berkeley Hyundai, Hyundai Motor India’s pre-owned outlets an executive speaks about the used car market looking up post GST. The outlet sells multi brand cars of which 70 percent are petrol and the balance diesel.

At a Maruti True Value showroom in NCR, optimism prevails about GST as well. The showroom offers warranty on Maruti used cars though it houses other brands as well that come through exchange. The showroom sells about 200-250 cars in a month while a Berkeley Hyundai outlet in Chandigarh markets about 50-60 cars monthly.

Source:  Indian Blue Book
Source: Indian Blue Book

However a common constraint facing this market especially in large metros pertains to the sourcing of vehicles for the second hand car market. Currently many online portals give leads and operate as classified search engines on where to shop for automobiles but sales take place on ground zero.

To ease the issue, Carnation Auto has tied up with half a dozen corporates and leasing companies to maintain a steady supply of vehicles after they complete their service with the respective companies. A benefit is that such vehicles maintain proper records and are of good quality, with limited wear and tear.

With most of the authorised dealerships conducting about 120-140 checks on each second hand vehicle before purchase, besides providing certification and warranty post sales, the future augurs bright for the growing pre-owned car market. GST is expected to further oil the wheels it runs on.

Source : Economic Times

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ANGEL INVESTMENT

ANGEL INVESTMENT:

Angel Investment means investment in equity shares of startup companies by investors. Such investors who invest in the equity shares of startup companies are called Angel Investors. Angel investors are essentially the well-heeled individuals/firms/companies who used to form a group of investors for investment in startup companies or small entrepreneurs.

PROVISION OF ANGEL TAX

The provision of Angel Investment Tax was introduced in the Union Budget of 2012. Under existing rules, funds raised by an unlisted company through equity issuance are covered under this tax to the extent the amount raised is in excess of the fair market value. Such extra inflow was taxable as “income from other sources” under Section 56(2) of the Income-Tax Act, 1961 (IT Act) and charged the corporate tax rate, resulting in an effective tax of over 30%.

Section 56 of the IT Act, 1961 confers on tax authorities the power to levy excess consideration, more than the fair value, against issue of shares. Section 56 (2) (viib) of the Income Tax Act states:

“Any consideration received by a company (startup) from a resident, against issue of shares, exceeds the fair market value of such shares; such excess consideration is taxable in the hands of the startup, as an income.”

Therefore, under Indian tax law, if an Indian company receives share subscription amount from an Indian resident which exceeds the fair value of shares, then the excess amount is taxed as income of such Indian company.

EXEMPTION OF ANGEL TAX

The Government of India had, now as an initiative to promote start ups, scrapped the so-called ‘Angel Investment Tax’ on investors providing funding to startups.

The Central Board of Direct Taxes vide Notification1 dated June 14, 2016 (CBDT Notification) had made the required changes in Section 56(2)(viib) of the Income- Tax Act, 1961 exempting startups raising funds from angel investors.

It may be noted here that for the purpose of this CBDT Notification, “startup” shall mean a company in which the public are not substantially interested and which fulfills the conditions specified in the Notification2 of the Government of India, Ministry of Commerce and Industry, Department of Industrial Policy and Promotion (“DIPP”), number G.S.R. 180(E), dated the 17th February, 2016, published in the Gazette of India, Extraordinary, part II, section 3, sub-section (i), dated the 18th February, 2016.

As per Notification of DIPP dated February 17, 2016 an entity is considered as a ‘startup’-

  1. Up to five years from the date of its incorporation/ registration;
  2. If its turnover for any of the financial years has not exceeded Rupees 25 crore; and
  3. It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property;

Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘startup’. It is to be noted that under the said Notification of DIPP, clarity has been given as to what will qualify as innovation, development, deployment or commercialization.

Accordingly, a firm/company would be considered a start-up if it is incorporated or registered in India not prior to five years, with an annual turnover not exceeding INR 25 Crore in any preceding financial year and at the same time, it should be working towards development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. Further, Startups would need to get a certificate from the Inter-ministerial Board of Certification to get the status of startup.

Therefore, investment in every startup is not eligible for the exemption and only such startups which fulfill the conditions specified by the DIPP, as mentioned herein above, are eligible for exemption from Angel Investment Tax. Further, the said exemption will not apply to retrospective investments.

CONCLUSION

The exemption of Angel Investment Tax for specified startups is a step forwards in implementation of Startup India programme initiated by the Government of India. Due to high tax rate on Angel Investment in India the investors usually hesitate in making investment in such startup companies.

This affects the economic growth rate of the country as well. Now the eligible startup companies need not have to pay Angel Tax even if it exceeds the fair value of shares. This will benefit the resident angel investors as well which are not registered as venture capital funds with Securities and Exchange Board of India.

Although removal of Angel Tax will not benefit all the startups because of the stipulation attached in the Notification of DIPP i.e. only those start ups which have a certificate from the Inter-ministerial Board, fulfill criteria like not being more than 5 years old, turnover not exceeding INR 25 Crore, working towards innovation & commercialization of new products or services and driven by technology or intellectual property, will have the benefit and accordingly, such exemption would be welcomed by the investors as well as by the startup companies which needs such investment.

This will promote the investment in India and definitely provide a huge relief to angel investors and eligible startup companies.

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Union Budget 2017 for Startups

The much-awaited Union Budget 2017-18 seems to have maintained a right balance between populism and fiscal prudence. However, a few sectors like insurance and e-commerce felt disappointed as they hardly found a place in it.

The much-awaited Union Budget 2017-18 seems to have maintained a right balance between populism and fiscal prudence. However, a few sectors like insurance and e-commerce felt disappointed as they hardly found a place in it. With an agenda to Transform, Energize and Clean India, the budget of this year focused primarily on the long-term benefits of the country.

The formal inauguration of the “Startup India” campaign last year and the demonetization drive followed by an aggressive push towards digital economy made the start-ups and SMEs to expect highly from the upcoming budget. Though most of their expectations remained unfulfilled, a few measures have been taken, which can be quite beneficial for the startups.

Let’s see what the Union Budget 2017 has offered to incentivize and encourage start-ups in India.

Timeline for Tax Break Enhanced to 7 Years

Under tax concessions for startups, a new policy is implemented in which the profit-linked deductions are extended from 3 years out of 5 years to 3 years out of 7 years. Most startups struggle to earn profits in the first few years after coming into operation.

However, we expected that the tax exemption period should have been extended from current 3 years to at least 7 years. It is observed that startups begin to experience growth after the completion of initial 1000 days. So, if the government had lifted the tax burden for at least 7 years, it would have been beneficial for the startups to create room for more growth.

Timeline to Claim MAT Credit Extended to 15 Years

MAT (Minimum Alternate Tax) is the minimum amount of tax that a company has to pay irrespective of its size and turnover. The amount of MAT a company pays depends on the registered book profit of the company (20% of the book profit). However, a book profit may be different from the net profit of the company as it doesn’t take into account certain deductions or exemptions. Therefore, in many cases, even if a startup is making book profit, it may incur net losses too. So, we expected the government to exempt startups from the MAT at least for 5 years.

Contrary to our expectation, no measure to relax the MAT limit is taken by the government. Instead, the timeline to claim MAT credit has been extended to 15 years. Till now, the MAT credit could be carried forward up to the 10th assessment year. Though tax experts welcomed the move, but it would have been better for startups growth, had the government abolished or at least reduced the rate of Minimum Alternate Tax (MAT).

The Condition in Respect to Carry Forward of losses Relaxed

Currently, the startups must have a continuous holding of 51% voting rights in order to carry forward losses. This condition has been relaxed in the budget 2017. From now onwards, in order to carry forward losses, only the founder(s) need to hold shares.

A company is allowed to carry forward losses for up to 7 years and then set off against profit after 7 years. But the carry forward of losses was allowed only if there was 51% shareholding intact in the period of loss. However, recently, with an increase in investments and buy-outs, the startup ecosystem experienced significant changes. So, this measure taken by the government is indeed beneficial for the startups.

What Else We Expected but Didn’t Come True

Most startups provide ESOPs or Employee Stock Ownership Plan to their employees additionally with their salary. ESOPs are beneficial as the startups do not earn much profit in the initial years. Hence, ESOPs are provided to compensate for the low amount of salary the employees receive. But as the company grows and the employees want to liquidate the ESOP, a significant amount goes out as tax at the time of selling out the shares. Therefore, we expected that ESOPs will be made tax-free in the hand of employees. Unfortunately, no such measure is taken by the government to incentivize on the practice of giving ESOPs for the financial benefit of the startup employees.

Moreover, currently, any capital gain arising out of shares held more than a year is tax free, if STT is paid even at the time of selling shares. But in the budget, it was announced that Long Term Capital Gain benefit can only be claimed if STT is paid at the time of acquisition of shares. This will have a negative impact on the start-ups which are going to be listed in the coming years.

Conclusion

The finance minister also made an announcement in the budget to abolish FIPB. Instead, the government should have taken serious measures to strengthen FIPB in the direction of providing better funding to startups or new age companies.

Startups are the backbones of economic growth leading to more job creation in the country. Hence, more tax reforms and benefits were expected for the growth of startups in India.

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