The government has suggested exempting start-ups from the levy of minimum alternate tax (MAT), exemptions on earnings from intellectual property rights and a relief from the anti-abuse provisions with regards to capital gains tax, a senior official told The Indian Express.

Listing out a slew of measures to give a shot in arm to start-up companies, the Department of Industrial Policy and Promotion (DIPP) has asked the finance ministry to “exempt the royalty income generated by the IPRs developed by start-ups while also enhancing exemptions for research and development”.

“The DIPP has said that in cases where the start-ups have started earning from the commercialisation of IPRs, in those cases royalty income should not be taxed. Further, it has also sought inclusion of more expenses in the scientific research category for deduction. These measures will give a boost to the ‘Start-up India Stand-up India’ initiative,” the official said.

Currently, the Income-Tax Act, 1961 provides weighted deduction of up to 200 per cent in certain cases for research and development, with an aim to encourage IPR generation and increase innovation. Similarly, expenditure incurred on scientific research is allowed for deduction up to 200 per cent. However, the proposals made by the DIPP run contrary to the finance ministry’s approach whereby it is trying to phase out exemptions given to the corporates. A roadmap for the same has already been announced.

“Anti-abuse provision in the capital gains tax is hurting start-ups given the valuation issues. While valuations of these companies are done on the idea and the future business, several times questions are raised by the income tax authorities on such high valuations by angel investors. Further, these investments usually come from low-tax jurisdictions like Singapore or Mauritius, making use of the DTAA with India. Given the fact that the department is keeping a close eye on treaty abuse, start-ups at times get hit,” another official, looking into the matter said.

There is also the issue of short-term capital gains tax on angel investors, who look for quick exits. “We are looking into these issues and hope to set it right for start-ups,” the official quoted above said.

In August, Prime Minister Narendra Modi in his Independence Day speech had given a call for “Start-up India, Stand up India” to encourage innovation and increase employment opportunities for youths. Further, in September at a start-up event at San Jose, California, Modi had said that start-ups, technology and innovation were effective instruments for India’s transformation, and creating jobs for the youth. “When each of the 500-odd towns produces 10 start-ups and each of our 600,000 villages produce six small businesses, on a regular basis, we will create an enormous economic momentum and generate huge number of jobs in our country,” the Prime Minister had said.

In pursuance of the slogan, the DIPP has started working on a wholesome policy for start-ups and a meeting by the finance ministry was held Thursday to discuss the same.

Officials in the know said that entrepreneurs have made a case for a relief from dual taxation of both VAT and service tax on software products, and enhanced flexibility in carrying forward the losses.

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