Budget 2023: FM Nirmala Sitharaman announces Tax Benefits, Carry-forward of losses, and Extension on the Date of Incorporation

Budget 2023

During her Budget speech, Finance Minister Nirmala Sitharaman highlighted the focused attention from the Government of India on the startup ecosystem. 

“We have taken a number of measures for startups, and they have borne results,” said Sitharaman. “India is now the third largest ecosystem for startups globally and ranks second in innovation quality among middle-income countries.” 

The finance minister also proposed to extend the date of incorporation of these startups to avail income tax benefits from 31st March 2023 to 31st March 2024. She has further proposed to provide the benefit of carrying forward the losses on change of shareholding pattern of start-ups from seven to ten years of incorporation.

The point to be noted to avail of these benefits are:

  • Any startup that becomes eligible for availing these benefits has to get registered with the Department for Promotion of Industry and Internal Trade (DPIIT) as a private limited company, a partnership firm, or as a limited liability partnership (LLP) firm. And such registered entities are eligible to be called a startup for 10 years from the date of their incorporation or registration.
  • At the same time, the annual turnover of such eligible startups couldn’t exceed INR 100 crores in any of the financial years since its incorporation. 
  • And the entity has to be working towards innovation, development, or improvement of processes, products, or services or is a scalable business model with a potential of high employment generation.

A proposal to relieve the carrying forward and offsetting of losses for startups is also mentioned.

Right now, the condition of continuity of at least 51% of shareholding for setting-off of carry forwarded losses is relaxed for an eligible start-up, given all the shareholders are continuing to hold those shares.

Currently, the relaxation applies for losses incurred during the period of seven years from the incorporation of such a startup. The FM proposed to increase this period to 10 years. “Increasing the tax relief period from 7 years to 10 years is a big announcement,” hailed Anil Joshi, Managing Partner, Unicorn India Ventures–an early-stage technology-focused venture fund. “It will help startups redeploy earnings on the growth of the business.” 

The other startup-centric measure is aimed at the extension of the date of incorporation for eligible startups for exemption. As per the last dispensation, registered startups and those registered before April 1, 2023, were meant to be considered as startups ‘eligible’ for various incentives and relaxations offered by the government. 

Finance Minister Nirmala Sitharaman has also proposed to extend the period of incorporation of startups by 1 year that is registered before 1st April 2024.

A finer reading of the memorandum explaining the provisions in the Finance Bill, 2023, reveals that non-resident investors are proposed to be brought within the ambit of section 56(2) (viib) of the Income-tax Act 1961 to eliminate the possibility of tax avoidance. 

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