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We always find it lucrative to talk about start-ups. But to actually make it real, one needs to work on it and that is really difficult for most of us. We need to consider various factors before working on the start-ups such as marketability, demand, competition and incentives available for the start-ups.

While considering factors, most of us easily calculate all other factors but always struggle to utilize the incentives in the most beneficial manner due to lack of knowledge and information. Incentives related to tax laws always make it difficult for people with sparking aspirations to make them beneficiary.

The very same difficulty would be eased with the readings of this article itself.

Recently, in the Finance Bill, most of us know it as Union Budget, the Government of India has proposed one of the most transforming and needful incentive for all the start-ups.

Taxation is always an important matter to consider since it costs around 30% of the business profits.

In Indian tax laws if any business incurs loss in any financial year the same can be carried forward to future years and can be set off against the future profits and reduces the tax burden on the entity on the fulfillment of the certain conditions. One of the two conditions to carry forward losses in case of a company is,- at least 51% of the total shares should be held by persons who beneficially held shares of the company amounting at least 51% of total shares on the last day of the year or years in which the loss was incurred.

Further second condition for the start-ups, the Government has already relaxed the law to provide with the carry forward of the loss if all shareholders of such company who held shares on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of the previous year and such loss has been incurred during the first 7 years of incorporation of the start-ups.

Both the above-described conditions are applicable only to the companies where public is not substantially interested and the companies are allowed to carry forward the part of losses which was being retained by them in the year just preceding to relevant previous year.

Example- Suppose A (a company) incurs loss of 1 crore in 2016-17 and due to non-satisfaction of the above described conditions the company cannot carry forward the loss of 1 crore in year 2017-18 then it cannot not be retained by the company even if it satisfies the condition in year 2018-19. It is because once the loss becomes ineligible to be carried forward, it cannot be retained back in the subsequent years even on the satisfaction of the conditions prescribed.


Providing with the BIGGEST relief to the START-UPS government has proposed to amend section 79 to provide that loss incurred in any year prior to the previous year, in the case of closely held eligible start-up, shall be allowed to be carried forward and set off against the income of the previous year on satisfaction of either of the two conditions stipulated and discussed above even if it was diluted in any of the previous year.

This means the government has provided the weapon to reclaim carry forward/ set off of the loss which was diluted in any previous year.

Let us understand it with the illustration-

Suppose A (an eligible start-up company) incurs loss of Rs.1 crore in 2016-17, Rs. 5 crore in 2017-18.

Then it can bring forward the loss of Rs. 6 crore in year 2018-19, if in the year 2018-19 it satisfies the mandatory conditions i.e. 51% holding by same persons or all shareholder in the start-ups on the last day of year in which loss was incurred still continue to hold all their share.

If any of the above conditions is satisfied only then the company can carry forward the loss of Rs. 6 crore in year 2018-19 for the next year otherwise the loss of Rs. 6 crore would be lost forever since in the Income Tax Act the loss which is brought forward can only be carried forward.

In this case, the loss of Rs. 6 crore will not be available to brought forward in 2019-20 hence, it cannot be carried forward in any subsequent year.

This was the condition prior to amendment but with the proposed amendment if the company satisfies any of the above 2 conditions in year 2019-20 then the company would be eligible to carry forward the loss of 6 crore in the year 2019-20 even if the loss was already diluted in the year 2018-19.

Hence the government has provided the weapon to win the battle with the carry forward of losses in the hands of start-ups. In this way the proposed amendment has plugged the potential deprivation of 6 crore and now the start-ups can enjoy the additional benefit of carry forward of losses with this relaxation.

The author can be reached at www.theuncommonthink.blogspot.in


Published by

Ajay Agrawal
(Article Assistant)
Category Income Tax   Report

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