Policy and tax reforms impacting

Start-up sector
The Hon’ble Finance Minister as part of the Budget speech announcing
the reforms towards start-ups recognised the catapulted growth of the
Indian start-up ecosystem ranking as the third largest globally indicating
the vitality of entrepreneurship to our country’s economic growth. The
budget amply reflects and reciprocates the Government’s thinking
towards start-ups by proposing multiple reliefs and significant policy
announcements.
Some of the key proposals such as extending the date of incorporation for
income tax benefits to start-ups from 31 March 2023 to 31 March 2024
and the proposal to extend the benefit of carry forward of losses on
KT Chandy change of shareholding of start-ups from seven years of incorporation to
Leader - Private Tax ten years will definitely go on to boost the growth of start-ups. On the
EY – India other hand, it is important for the stakeholders in the start-up ecosystem
to also take note of proposed changes in the online gaming sector,
widening of angel tax provisions etc., which could have an impact from a
‘compliance/ cost of doing business’ perspective.
We look forward to seeing how the results of the new policies will unfold
as India navigates towards its vision for the Amrit Kaal.

Surabhi Marwah
Co-leader - Private Tax
EY - India

Budget 2023 | #EYonBudget2023

How does the budget impact
Highlights
Start-up sector?
Key amendments – for start-up entities
► Proposal to extend the period of incorporation for start-ups to 1 April 2024
► Section 80-IAC provides for 100% deduction on profits and gains generated
by an eligible start-up for three consecutive assessment years out of ten Start-up tax benefits
years beginning from the year of incorporation.
► Currently, the conditions for qualifying as eligible start-up inter-alia provide
that such start-ups should be incorporated before 1 April 2023.
► In order to further boost the start-up eco-system in India and to provide
them with competitive advantage, the period of incorporation for the
purpose of qualifying as eligible start-ups is proposed to be extended from 1
April 2023 to 1 April 2024 i.e., to include start-ups incorporated before 1
April 2024.
► This amendment also means that the eligible start-ups which are
incorporated before 1 April 2024 also stand to enjoy other beneficial tax
measures which are currently available such as deferral of ESOP taxation
under Section 192(1C), relaxation on carry-forward and set-off of losses
under Section 79, angel tax exemption.
► Rationalization of carry-forward and set-off of losses relief available
to start-ups
► Section 79 restricts carry-forward and set-off of losses in case of closely
held companies in the event of change in shareholding and beneficial
ownership beyond 51%.
► However, a relaxation is available in case of start-ups which provides that
business losses can be carried forward and set off on satisfaction of either of
the following conditions: Carry forward and
► Continuity of 51% beneficial shareholding or voting power set-off of business
► Continuity of 100% of original shareholders loss
► The above relaxation is currently available only for losses for the first seven
years from the year of incorporation.
► However, in order to align with the profit linked deduction which is available
to start-up for three years out a window of the first ten years of
incorporation, the relaxation with respect to carry-forward and set-off of
losses is also proposed to be increased from a period of seven years to
ten years.
► Changes to withholding on winnings from games
► The de-minimis threshold of INR 10,000 for every game which is currently
available under Section 194B for winnings from lottery or crossword puzzle
or card game and other games is proposed to be amended to INR 10,000 per
financial year.
► The budget also proposes to amend Section 194B to specifically include
within its scope “gambling or betting of any form or nature whatsoever “as
part of the scope of Section 194B.
► A separate section is proposed to be introduced for taxation of winnings
from online games, providing for taxation at 30% on the net winnings from
the same. Further a separate section is proposed to be introduced to
undertake withholding on the net winnings by the online gaming platforms at
the rates in force, which shall be effective from 1 July 2023.

Budget 2023 | #EYonBudget2023

► Increase in Tax Collected at Source (‘TCS’) rate for amounts remitted under
Liberalised Remittance Scheme (‘LRS’)
► Section 206(1G) levies liability on authorised dealer or seller of overseas
tour package to collect tax at source for the purposes mentioned below:
Highlights
► Loan obtained from any financial institution as defined in section 80E
exceeding seven lakh rupees
► For the purpose of education exceeding seven lakh rupees

► For the purpose of medical treatment exceeding seven lakh rupees

► Overseas tour package without any threshold limit

► Any other case exceeding seven lakh rupees

► While there are no changes with respect to remittances towards education

and medical treatment, the following amendments have been proposed:
► Increase in the rate of TCS has been proposed from 5% to 20% for all
cases other than the above
► De-minimis threshold of INR 7,00,000 is proposed to be removed in all
cases other than the above.
► Amendment to the definition of ‘cost of acquisition’ of intangible assets in
certain cases
► Currently due to lack of specific prescription around cost of acquisition of
certain assets for which no consideration is paid on acquisition, there has
been many legal disputes with respect to computation of capital gains arising
in such cases.
► In order to put to rest such controversies in future, it is proposed to define
the ‘cost of improvement’ or ‘cost of acquisition’ of a capital asset being any
intangible asset or any other right as ‘Nil’.

Key amendments – for start-up founders/investors

► Widening of the scope of angel tax to include non-resident investors
► Section 56(2)(viib) provides for levy of angel tax in the hands of private
companies where consideration for issue of shares is higher than fair
market value.
► The scope of this angel taxation as per the said section specifically included
only residents thus far.
► However, the budget proposes to omit ‘resident’ from the said section with
effect from 01 April 2024 thereby widening the ambit of taxation in the
hands of startups to include investment received from non-residents.
► Capital gains tax exemption (Section 54 and Section 54F) on investment in
residential houses available to individuals, is now subject to a cap of
INR 10 crores
► Section 54 and section 54F allow deduction on capital gain arising from sale
of residential property and any other long-term capital asset respectively,
for individuals and Hindu undivided family when the sale consideration is
reinvested in purchase or construction of another residential house in India
within the specified period.
► The intent of the provision was to encourage people to own houses and to
amplify growth of housing sector.
► Therefore, in order to provide a more targeted exemption the budget has
proposed to limit the maximum deduction under the said sections to
INR 10 crores with effect from 01 April 2024.
► Consequently, amendment has been proposed to limit the deposit in the
Capital Gains Account Scheme to ten crore rupees.

Budget 2023 | #EYonBudget2023

Key amendments – on personal tax rates
► Higher Surcharge rate for individuals reduced from 37% to 25% in the new
tax regime. Therefore, ETR on highest slab rate for individuals under new Highlights
tax regime is 39% (earlier 42.74%).
► New slab rates under new personal tax regime:

Total Income (in INR) Tax rate

0 – 3 lakhs Nil

3 lakhs – 6 lakhs 5%

6 lakhs – 9 lakhs 10%

9 lakhs – 12 lakhs 15%

12 lakhs – 15 lakhs 20%

Above 15 lakhs 30%

Key policy announcements – relating to start-ups

► An Agriculture Accelerator Fund will be set-up to encourage agri-startups by
young entrepreneurs in rural areas. The Fund will aim at bringing innovative
and affordable solutions for challenges faced by farmers. It will also bring in
modern technologies to transform agricultural practices, increase
productivity and profitability.

Impact analysis

Since inception, the start-up India initiative has rolled out several programs with the objective of supporting
entrepreneurs, creation of jobs and building a robust start-up ecosystem. The Indian start-up sector has been very vocal
about its expectations from the Budget 2023. The budget wish-list included an elaborate set of requirements including
introduction of single window mechanism for claiming tax and regulatory incentives, exemption from long term capital
gain on sale of shares in start-ups by investors.

Budget 2023 has been encouraging for start-ups in several aspects such as extending the sunset clause for start-up tax
exemption and increasing the number of years for carry forward and set-of off loss. Further introduction of measures
such as introduced Permanent Account Number as Common Business Identifier, promise of more selective tax scrutiny
will be crucial towards enabling ease of doing business.

From the long-term perspective, the Government needs to bring more changes in line with tax incentives
offered/practices adopted by other tax jurisdictions to ensure that start-ups with exponential growth potential do not
shift to other jurisdictions which provide simple tax system, easier tax compliances etc.

Budget 2023 | #EYonBudget2023

Glossary
APA – Advance Pricing Agreement

GST – Goods and Services Tax

For details on other sectors and solutions visit our website https://www.ey.com/en_in/tax/union-budget-2023
Download the EY India Tax Insights App for detailed insights on tax and regulatory reforms.

Budget 2023 | #EYonBudget2023

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