SKP Tax Alert
Volume 10 Issue 15 |
DIPP expands scope of an entity being regarded as a ‘start-up’, no corresponding amendment made in the Income Tax Act, 1961
The Government of India has introduced a series of measures to promote the set up and development of start-up enterprises. One such incentive is provided under Section 80-IAC of the Income Tax Act, 1961 (ITA). The ITA provides a start-up enterprise with a tax holiday for three consecutive years out of the first seven years from the year of incorporation. The tax holiday applies to enterprises which qualify to be ‘eligible start-ups’ carrying on ‘eligible business’ with both terms defined under Section 80-IAC of the ITA.

The Department of Industrial Policy and Promotion (DIPP) has recently expanded the definition of a ‘start-up’. Earlier, an entity would be considered a ‘start-up’ if it was working towards the innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property. Under the amended definition, an entity can also qualify to be a start-up enterprise if it has a scalable business model with a high potential of employment generation or wealth creation.

This amended definition will bring more enterprises within the purview of ‘start-up’ and will make them eligible to avail government incentives and assistance.

However, while the DIPP has expanded the definition of a start-up, the definition of an ‘eligible start-up’ and ‘eligible business’ under the ITA has not been amended. Consequently, while a business enterprise could get registered as a start-up under the DIPP norms due to its high potential for employment generation or wealth creation, it may not be eligible to avail a tax holiday under Section 80-IAC. This situation could continue until the definitions of ‘eligible start-up’ and ‘eligible business’ under Section 80-IAC are amended.
SKP's comments
The expanded definition of a start-up under DIPP norms is a welcome move to boost the Start-up India initiative of the government. However, the expanded definition may not achieve its intended objectives if start-up enterprises are not provided with a tax holiday under the ITA. Providing the tax holiday will require an amendment in the ITA, which can be done only by an act of Parliament of India. 

This situation arises since the language of Section 80-IAC does not link the definitions of ‘eligible start-up’ and ‘eligible business’ to the announcements made by the DIPP. Therefore, any change made by the DIPP relating to start-up enterprises would require a specific and corresponding amendment to be made to the ITA.

A possibility that the government intends to confer the benefit of tax holiday only to certain start-up enterprises and not to all start-up enterprises, in general, cannot be ruled out. A case in point is that a partnership firm registered under the Indian Partnership Act, 1932 is eligible to obtain registration as a start-up under the DIPP norms but is not eligible for a tax holiday under Section 80-IAC. With this backdrop, it would be interesting to analyse the interplay between Section 80-IAC and Section 80JJAA of the ITA which provides an additional deduction for employment generation. 

Furthermore, there is a lack of clarity as to what constitutes a ‘scalable business model’ and what level of employment generation or wealth creation is ‘high’ enough to be regarded as an eligible start-up. While these matters will be looked at on a case-to-case basis by the DIPP, it is desired that certain guidelines should be issued for the benefit of the participants of the start-up ecosystem.
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