Lok Sabha Question No. 2580 (UNSTARRED), answered on 2019-12-04
Subject: Regulation of e-Commerce Companies
Ministry: COMMERCE AND INDUSTRY
Asked by: Pushpendra Singh Chandel

## GOVERNMENT OF INDIA MINISTRY OF COMMERCE & INDUSTRY DEPARTMENT FOR PROMOTION OF INDUSTRY AND INTERNAL TRADE

## LOK SABHA

## UNSTARRED QUESTION NO. 2580.

TO BE ANSWERED ON WEDNESDAY, THE 04 TH  DECEMBER, 2019.

## REGULATION OF e-COMMERCE COMPANIES

## 2580.  SHRI KUNWAR PUSHPENDRA SINGH CHANDEL:

Will the Minister of COMMERCE AND INDUSTRY be pleased to state:

वाणिज्य

## एवं उद्योग मंत्री

- (a) whether there is no uniformity in tax regimes of Indian and foreign e-commerce companies;
- (b) if so, the remedial measures being taken by the Government in this regard;
- (c) whether the Government is also contemplating the review of various business models of e-commerce companies;
- (d) whether  the  Government  is  taking  measures  to  give  impetus  to  the  Indian e-commerce companies and startups; and
- (e) if so, the details thereof?

## ANSWER वाणिज ् य एवं उद्योग मंत्री ( श्री पीयूष गोयल ) THE MINISTER OF COMMERCE & INDUSTRY (SHRI  PIYUSH GOYAL)

- (a): There  is  no  distinction  between  the  taxation  regimes  of  Indian  and foreign e-commerce companies as such, however the taxation regimes applicable to domestic companies and foreign companies differ.

The income of domestic companies is taxed at the rate of 30% plus surcharge and cess however the Finance (No.2) Act, 2019 introduced a  tax  rate  of  25  %  plus  surcharge  and  cess  for  domestic  companies having a turnover or the gross receipt up to Rs. 400 crores.  Further, in order  to  attract  fresh  investment,  create  jobs  and  stimulate  overall economic  growth  the  Taxation  Laws  (Amendment),  Ordinance,  2019 promulgated  on  20.09.2019  gave  an  option  to  existing  domestic companies not availing any incentive/deductions to pay tax at the rate of 22 % plus 10 % surcharge and 4 % cess subject to meeting certain conditions.      In  addition,  it  also  provided  that  new  manufacturing companies  not  availing  any  incentive/deduction,  set  up  on  or  after 01.10.2019 can avail the option to pay tax at the rate of 15 % plus 10 % surcharge and  4 % cess subject to meeting certain conditions.

In  case  of  foreign  companies,  the  income  can  arise  in  India  in  the following scenarios:

- i. As a foreign company
- ii. Through branch of a foreign company operating in India
- iii. Through  a  domestic  company  as  a  subsidiary  of  a  foreign company

The income of a foreign company is taxed at the rate of 40 % when the foreign company has a Permanent Establishment (PE) in India subject to  the  provisions  under  the  Double  Taxation  Avoidance  Agreement between India and the foreign country of which the foreign company is a resident, if any.

In 2016, India enacted and implemented the Equalisation Levy, which is a flat rate tax of 6% on the revenue derived by a non-resident MNE providing  digital  advertising  services  to  Indian  customers,  without having  a  physical  presence  in  India.  The  Levy  is  not  a  corporate income-tax  and  is  not  subject  to  any  limitations  under  India's  tax treaties.

- (b): Not Applicable.
- (c): The  extant  Foreign  Direct  Investment  (FDI)  policy  on  e-commerce sector,  inter-alia,  specifies  that  e-commerce  marketplaces  will  not directly or indirectly influence the sale price of goods or services and shall maintain a level playing field. Violations of FDI policy are covered under the penal provisions of the Foreign Exchange Management Act (FEMA).

In order to provide clarity to the extant FDI policy on e-commerce, this Department has issued Press Note 2 of 2018 on 26.12.2018 (Annexure-I),  and  no  changes  have  been made  in the  recent  past  in the FDI Policy on e-commerce sector.

Further, in order to ensure compliance of FDI guidelines contained in Press Note 2(2018), this Department has requested DEA and RBI to notify the following clause under FEMA:

'e-Commerce  marketplace  entity  with  FDI  will  have  to  obtain  and maintain  a  report  of  statutory  auditor  by  30 th of  September  of  every year for the preceding financial  year confirming compliance  of the ecommerce guidelines.'

- (d) & (e): A National e-Commerce policy is under preparation. The first draft of the  policy  was  placed  in  public  domain  on  23 rd February,  2019  for seeking comments/inputs of stakeholders. On the basis of the inputs/comments  received,  the  draft  National  e-Commerce  policy  is being prepared with an aim to create a facilitative regulatory environment for growth of e-commerce sector in India.

The measures taken by the Government to give impetus to Startups is at Annexure-II.

******

## ANNEXURE-I

## ANNEXURE  REFERRED  TO  IN  REPLY  TO  PART  (c)  OF  THE  LOK  SABHA UNSTARRED QUESTION NO. 2580 FOR ANSWER ON 04.12.2019.

## Government of India Ministry of Commerce & Industry Department of Industrial Policy & Promotion

Press Note No. 2 (2018 Series)

Subject: Review of the policy on Foreign Direct Investment (FDI) in e-commerce

- 1.0 In order to provide clarity to FDI policy on e-commerce sector, Para 5.2.15.2 of the Consolidated FDI Policy Circular 2017 will now read as under:

## 5.2.15.2 E-commerce activities

| Sector/Activity        | %of Equity/FDI Cap   | Entry Route   |
|------------------------|----------------------|---------------|
| E- commerce activities | 100%                 | Automatic     |

- 5.2.15.2.1 Subject to provisions of FDI Policy, e-commerce entities would engage only in Business  to  Business  (B2B)  e-commerce  and  not  in  Business  to  Consumer  (B2C)  ecommerce,

## 5.2.15.2.2 Definitions:

- i) E-commerceE-commerce  means  buying  and  selling  of  goods  and  services including digital products over digital & electronic network.
2. ii)   E-commerce entityE-commerce entity means a company incorporated under the Companies  Act  1956  or  the  Companies  Act  2013  or  a  foreign  company  covered under section 2 (42) of the Companies Act, 2013 or an office, branch or agency in India as provided in section 2 (v) (iii) of FEMA 1999, owned or controlled by a person resident outside India and conducting the e-commerce business.
3. iii)  Inventory  based  model  of  e-commerceInventory  based  model  of  e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.
4. iv)  Marketplace  based  model  of  e-commerceMarketplace  based  model  of  ecommerce  means  providing  of  an  information  technology  platform  by  an  ecommerce entity on a digital & electronic network to act as a facilitator between buyer and seller.

## 5.2.15.2.3 Guidelines for Foreign Direct Investment on e-commerce sector

- i) 100% FDI under automatic route is permitted in marketplace model of ecommerce.
2. ii) FDI is not permitted in inventory based model of e-commerce.

## 5.2.15.2.4 Other Conditions

- i) Digital & electronic network will include network of computers, television channels

and  any  other  Internet  application  used  in  automated  manner  such  as  web pages, extranets, mobiles etc.

- ii) Marketplace e-commerce entity will be permitted to enter into transactions with sellers registered on its platform on B2B basis.
- iii) E-commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services.
- iv) E-commerce entity providing a marketplace will not exercise ownership or control over the inventory i.e. goods purported to be sold. Such an ownership or control over the inventory will render the business into inventory based model. Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies.
- v) An  entity  having  equity  participation  by  e-commerce  marketplace  entity  or  its group companies, or having control on its inventory by e-commerce marketplace entity  or  its  group  companies,  will  not  be  permitted  to  sell  its  products  on  the platform run by such marketplace entity.
- vi) In  marketplace model goods/services made available for sale electronically on website should clearly  provide  name,  address  and  other  contact  details  of  the seller. Post sales, delivery of goods to the customers and customer satisfaction will be responsibility of the seller.
- vii) In marketplace model, payments for sale may be facilitated by the e-commerce entity in conformity with the guidelines of the Reserve Bank of India.
- viii) In marketplace model, any warrantee/ guarantee of goods and services sold will be responsibility of the seller.
- ix) E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field. Services should be provided by e-commerce marketplace entity or other entities in which e-commerce  marketplace  entity  has  direct  or  indirect  equity  participation  or common control, to  vendors  on  the  platform  at  arm's  length  and  in  a  fair  and nondiscriminatory manner. Such services will include but not limited to fulfilment, logistics, warehousing, advertisement/ marketing, payments, financing etc. Cash back provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory. For the purposes of this clause, provision of services to any  vendor  on  such  terms  which  are  not  made  available  to  other  vendors  in similar circumstances will be deemed unfair and discriminatory.
- x) Guidelines on cash and carry wholesale trading as given in para 5.2.15.1.2 of Consolidated FDI Policy Circular 2017 will apply on B2B e-commerce.
- xi) e-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only.
- xii) e-commerce marketplace entity will be required to furnish a certificate along with a report of statutory auditor to Reserve Bank of India, confirming compliance of bove guidelines, by 30th of September of every year for the preceding financial year.

Subject  to  the  conditions  of FDI policy  on  services  sector  and  applicable laws/regulations, security and other conditionalities, sale of services through ecommerce will be under automatic route.

- 3.0 The above decision will take effect from 01 February, 2019.

(Atul Chaturvedi) Additional Secretary to the Government of India

D/o IPP File No.: 5/3/2015-FC-I dated: 26 December, 2018

Copy forwarded to:

1.  Press Information Officer, Press Information Bureaufor giving wide publicity to the above Press Note.
2.  Reserve  Bank  of  India,  Foreign  Exchange  Department,  Mumbaifor  suitably incorporating  the  policy  changes  in  Foreign  Exchange  Management  (Transfer  or issue  of  security  by  a  person  resident  outside  India)  Regulations,  2000  and  the relevant schedules thereof.
3.  NIC Section in the Department of Industrial Policy and Promotionfor uploading the Press Note on DIPP's website.
4.  Hindi Section, DIPPfor providing Hindi version.
5. *******

## ANNEXURE-II

## ANNEXURE  REFERRED  TO  IN  REPLY  TO  PARTS    (d)  &  (e)  OF  THE  LOK SABHA UNSTARRED QUESTION NO. 2580 FOR ANSWER ON 4.12.2019.

## Steps taken under Startup India initiative

## 1. Compliance Regime based on Self-certification

Startups recognised under Startup India initiative can self-certify their compliance against the 6 labour laws and 3 environmental laws.

-  15 States have implemented self-certification for 5 years and 12 States have implemented self certification for 3 years. 9 States/UTs are yet to implement the self-certification.
-  9 States (Haryana, Madhya Pradesh, Maharashtra, Rajasthan, Gujarat, Uttar Pradesh, Punjab, Uttarakhand, and Delhi) have integrated their portals  with Shram Suvidha Portal
-  169 DPIIT recognized Startups have availed the benefits of self-certification.

## 2.  Startup India Hub

-  Startup India works in a hub and spoke model and collaborates with Central & State governments, Indian and foreign VCs and ecosystem stakeholders
-  Startups are assisted through their lifecycle with a specific focus on important aspects like obtaining financing, feasibility testing, business structuring advisory and enhancement of marketing skills
-  Startup India  has  organized  mentorship  programs  in  collaboration  with government organizations, incubation centers, and educational institutions
-  1,57,138 queries  have been addressed by the Startup India team as of 22 nd November 2019.

## 3   Startup India Portal and Mobile App

-  3,60,406  users  registered  on  the  Startup  India  Portal  as  of  22 nd November 2019.
-  2,54,339  aspiring  and  existing  entrepreneurs  logged  in  for  the  learning  and development course as of 22 nd November 2019.
-  6,948 mentor, investor and incubator connections have been established through the portal for Startups as of 25 th November 2019.
-  More  than  175  Innovation  Hunts  and  programs  have  been  hosted  on  the Startup India portal by various government departments and corporates as of 25 th November 2019.
-  Total number of Startups recognized under Startup India Initiative are 24,921 as on 21.11.2019

## 4.  Legal Support and Fast-tracking Patent Examination at Lower Costs

-  Startups  are  eligible  for  80%  rebate  in  patent  filing  fees  and  50%  rebate  in trademark filing fees. Additionally, Startups are also considered for expedited examination of patent applications to reduce time taken in granting patents.
-  1,031 Facilitators have been empanelled for free of cost filing & facilitation
-  1,630 patent applications have been granted 80% rebate on filing fee.
-  2,895 trademark applications have been granted 50% rebate on fill fee.
-  474 applications were granted expedited examination

## 5.  Relaxed Norms of Public Procurement for Startups

-  Startups  have  been  exempted  from  submitting  Earnest  Money  Deposit requirements (Jul'17)
-  Public procurement norms have been relaxed for startups through exemptions on (Nov'16)
- o Prior turnover criteria; and
- o Prior experience criteria

Applicable on all tenders issued by Central Ministries and Central Public Service Undertakings (CPSUs)

-  GeM 'Startup Runway' has been launched  - dedicated  for startups  to  sell products  and  services  to  Government  (Feb'19)- 2,804  Startups  have  been registered  on  GeM; 13,666  orders  have  been  placed  to  startups;    value  of orders served by startups is to the tune of Rs. 463.45 crore

## 6.  Faster Exit for Startups

-  Ministry of Corporate Affaairs has notified Startups as 'Fast track firms'
-  This enables them to wind up operations within 90 days as against 180 days for other companies through Insolvency and Bankruptcy Board

## 7.  Funding Support through a Fund of Funds

-  The Cabinet has approved the establishment of 'Fund of Funds for Startups (FFS) at SIDBI for contribution to various Alternative Investment Funds (AIFs) with a corpus of Rs10,000 Cr. The corpus is to be built up over the 14th and 15th Finance Commission cycles.
-  A total of Rs 700 Crore has been released till now
-  2x Govt. contribution received by venture funds is invested into DPIIT recognised startups
-  SIDBI has committed Rs 3123.20 Cr to 47 SEBI registered Alternative Investment Funds (AIFs).
-  INR 695.94 Cr. have been drawn from the SIDBI Fund of Funds
-  Rs. 2,669.83 Cr. have been invested into 279 startups

## 8.  Tax Exemption on Capital Gains

Tax exemption shall be given to persons who have capital gains during the year if they have invested such capital gains in the Funds recognized by the Government

-  Amendment in Section 54GB of Income Tax Act: Exemption from tax on capital gains arising out of sale of residential house or a residential plot of land if the amount of net consideration is invested in prescribed stake of equity shares of eligible Startup for utilizing the same for purchase of specified asset. (Feb, 2016)
-  Minimum Alternate Tax credit allowed to be carried forward up to fifteenth assessment years instead of ten assessment years. (2017)
-  Extension of benefit under section 54GB shall be available for sale of residential property on or before 31st March 2021

## 9.  Tax Exemption to Startups for 3 years

-  With  a  view  to  stimulate  the  development  of  Startups  in  India  and  provide them a competitive platform, the profits of Eligible DPIIT Recognized Startups are  exempt  from  income-tax  for  a  block  of  3  years  out  of  7  years  since incorporation under Section 80IAC of the Income Tax Act.
-  247 startups have been granted tax exemptions as on 25 th  November2019

## 10.  Tax Exemption on Investments above Fair Market Value

-  DPIIT Recognized Startups are exempt from tax under Section 56(2)(viib) of the Income Tax Act when such a Startup receives any consideration for issue of shares which exceeds the Fair Market Value of such shares
-  1,658 startups have been granted tax exemptions as of 25 th November 2019.

## 11. State's Startup Ranking Framework

DPIIT  launched  the  States'  Startup  Ranking  Framework  on  6th  February 2018.  The  key  objective  of  the  Startup  States  Ranking  Framework  2018 (SRF-  2018)  was  to  encourage  States  and  UTs  to  take  proactive  steps towards  strengthening  the  Startup  ecosystem  within  their  jurisdiction.  There were 38 action points categorized into 7 broad areas such as Startup Policy and  Implementation,  Incubation  support,  Seed  Funding,  Angel  and  Venture Funding, Simplification of Regulations,  Easing  Public  Procurement  and Awareness & Outreach. The ranking methodology aims to create a healthy competition among States to further learn, share and adopt best practices. A compendium of good practices was also launched, listing 95 good practices implemented  by  various  State  Governments.  Knowledge  Workshops  were held  to  assist  States  in  formulating  policies  and  executing  appropriate programs.  Visits  to  USA  and  Israeli  ecosystems  were  facilitated  for  State Government  representatives to enable the transfer of information and knowledge from the best ecosystems of the world. The final rankings of SRF 2018  were  announced  on  20th  December,  2018  and  the  States  were felicitatedby  DPIIT.  27  States  and  3  Union  Territories  participated  in  the exhaustive ranking exercise.

As a result of SRF 2018, new Startup policies were launched, old and archaic laws were abolished, new Government orders were issued and many Startups were supported .Some of the major impacts of the ranking exercise include Implementation  of  Startup  Policies  in  25  States,  Seed  Funding  to  3213 Startups; Funding  of 163  Startups through Venture Funds;  17 States announcing  incentives  for  women  entrepreneurs;  Incubation  area  of  10.2 lakhSq.ft supported by State Governments; Establishment of 596 EntrepreneurshipCells  across  340  districts;  Registration  of  1996  mentors across 19 States and organization of 233 Startup events across 21 States.

## 12. Startup Yatra

-  Startup India launched Startup India Yatra in 2017 to promote entrepreneurship  in  rural  and  non-metro  regions  across  States.  Under  this

program,  grassroot  Startup  aspirants  were  provided  incubation,  mentorship and funding support.

-  The  yatra  starts  with  the  launch  and  flagging  off  of  the  Startup  India  Yatra Van.  This  van  travels  around  the  state  to  different  colleges  spreading awareness  about  the  central  and  state  level  startup  policies  as  well  as providing an opportunity to aspiring entrepreneurs to pitch their ideas online.
-  As  part  of  the  program,  bootcamps  are  also  organized  in  tier-2  and  tier-3 districts of the state where participants attend an ideation workshop and pitch their ideas. The ideas shortlisted from these bootcamps further attend a twoday acceleration program.
-  Startup Yatra has been conducted across 23 States in 207 districts impacting 78346  aspiring  entrepreneurs.  A  total  of  1,424  incubation  offers  have  been given to the startups as on May 2019.

## 13.   Organizing  Startup  Fests  for  Showcasing  Innovation  and  Providing  a Collaboration Platform.

DPIIT  has  organized  various  Startup  events.  Some  of  such  key  events  are  as follows:

- I. Roundtable headed by Minister of Commerce and Industry with Venture Fund    managers in April, 2018 at Mumbai;
- II. Roundtable  with Singapore delegation led by Enterprise Singapore &TiE Singapore in August, 2018 at Delhi;
- III. Roundtable  with Japanese startups led by JETROin September, 2018 at Delhi;
- IV. Roundtable headed by Secretary DPIIT  with Venture Fund managers in August, 2018 at Delhi;
- V. Roundtable with Finance Secretary on banking regulations faced by startups in September, 2018 at Delhi;
- VI. Startup India Global Venture Capital Summit in December, 2018 at Goa;
- VII. Roundtable headed by Secretary DPIIT on Angel Tax regulations in February, 2019 at Delhi;
- VIII. Startup Manthan @ Aero India in February 2019 at Bengaluru;
- IX. Speed Mentoring Session for Women Entrepreneurs in March, 2019 at Delhi;
- X. Roundtable headed by Secretary DPIIT  on Accreditation of investors in  April,  2019 at Delhi;
- XI. Roundtable with Central Government Departments on  best practices for promoting startups in May, 2019 at Delhi

## 14.       Launch  of  Atal  Innovation  Mission  (AIM)  with  Self-Employment  and Talent Utilization (SETU) Program

-  8,878 schools have been selected across the country where Atal Tinkering Labs will be established
-  4,020 have already received INR 12 Lakhs grant each and are operational
-  Total grant of Rs.482.40 Crore has been given to Atal Tinkering Labs
-  NITI has launched Innovation Awards through the challenge route by the name of Atal New India Challenges (ANIC)
-  Call for applications in 24 focus areas across 5 ministries
-  26 Applicants have been shortlisted for funding and handholding support and additional 26 applicants are shortlisted for handholding support

## 15.         Harnessing Private Sector Expertise for Incubator Setup

-  Atal Innovation Mission has selected 102 incubators across the country to provide financial support through grants in aid
-  38 Atal Incubation Centers and 9 Established Incubation Centers are operational across the country
-  INR 139.91 Cr has been disbursed to these 38 AICs and 9 EICs
-  More than 620 Startups incubated in AICs/EICs out of which 121 are womenled start-ups
-  More than 14,000 jobs created
-  More than 150 MSME's supported to build business sustainability
-  More than 500 mentors on-boarded by the AICs/EICs to guide the Startups

## 16.  Building Innovation Centres at National Institutes - Department of Science and Technology

-  11 TBIs (Technology Business Incubators) approved
-  INR 42.2 Cr has been sanctioned out of which 18.7 Cr disbursed
-  21 new TBIs (over and above 15 TBIs envisaged) and 5 Center of Excellence (COEs) are proposed to be established

## 17.  Setting up of 7 New Research Parks

-  INR 575 Cr has been  sanctioned out of which INR 250 Cr has been disbursed
-  The Research Park at IIT Gandhinagar is expected to be operational by January 2020

## 18.        Promoting Startups in the Biotechnology Sector

-  4 bio-clusters at Kalyani, Bangalore, Faridabad, and Pune are operational. INR 401 crore has been sanctioned, and INR 300 crore has been disbursed to these bio-clusters
-  41 bio-incubators have been supported and all of them are operational. INR 272.26 crore has been sanctioned and INR 193.88 crore has been crore disbursed.
- 
- 5 Bio-connect offices established as following: 1. CCAMP, Bengaluru with California Institute for Quantitative Biosciences
- (QB3)
2. CCAMP- Sister Innovation HUB with Roslin Innovation Centre, University of Edinburgh, UK
3. CEIIC BioNEST with European Union
4. KIIT BioNEST - with TECHNOPORT SA - BELVAL Business Incubator, Luxembourg
5. KIIT BioNEST - with Start-Life Centre, Wageningen University Netherland
-  4 BIRAC Regional Centres have already been set up at Hyderabad, Bengaluru, Bhubaneswar, and Pune. INR 16.95 cr has been sanctioned, and INR 9.42 cr has been disbursed.
-  Biotech equity fund has been established as Fund of Funds with INR 150 crore. So far, INR 150 crore has been committed to Alternate Investment Funds (AIFs). INR 25.1 crore has been disbursed
-  BIRAC's SEED Fund with 14 Bio-incubators as Seed fund partners are operational. INR ₹ 26 Cr has been sanctioned for BIRAC SEED Fund; Rs. 18.3 Cr  has been disbursed

## 19.      Innovation Focused Programs for Students

-  This initiative is coordinated by Department of Science and Technology  and Ministry of Human Resource Development.
-  224  applications  have  been  received  under  NIDHI  (National  Initiative  for Developing  and  Harnessing  Innovations).Out  of  30  finalists  selected,  12 student run teams have been awarded Rs 10 Lakh each. 148 projects have been sanctioned and Rs 220.75 crore has been released under the Uchchatar AvishkarYojana scheme. Rs10,000 has been granted to 1,03,497 students in the  last  3  years  under  the  MANAK  (Million  Minds  Augmenting  National Aspiration and knowledge) Scheme.

## Steps specific to taxation for Startups:

In  order  to  provide  an  impetus  to  start-ups  and  facilitate  their  growth  in  the  initial phase of their business various measures have been undertaken by the Government including the following:

1.  In  order  to  facilitate  ease  of  doing  business  and  to  promote  start  up  India numerous tax incentives have been provided as under:

- (a) 100% deductions to the profit of the start-up:

Section 80-IAC in the Act has been provides for 100%, deduction to profits of eligible start-ups for three consecutive years out of seven years from the year in which such start-up is incorporated. The benefit is available to start ups incorporated on or after the 1st day of April 2016 but before the 1st day of April, 2021 and are engaged  in innovation, development or improvement of products or processes or services, or a scalable business model with a high potential of employment generation or wealth creation.

- (b) Exemption from capital gains for investment in start-up:

In  order  to  incentivise  the  investment  in  the  eligible  start-up,  section  54GB  of  the Income-tax Act has been amended so as to provide that capital gain arising from transfer of residential property (residential house or plot of land) to an individual or HUF shall be exempted from taxation if the same is invested in the capital of eligible start-up subject to fulfilment of certain specified conditions.

(c) Relaxation for carry forward & set-off of loss by start-up:

Section 79 of the Income-tax Act contains certain restrictions for carry forward and set-off  of  losses  in  case  of  certain  companies  in  case  of  change  of  majority shareholding. In order to facilitate the new investment in the start-up, the provisions of section 79 have been amended so as to allow an option to an eligible start-up to carry  forward  and  set-off  of  losses  even  in  the  case  of  change  in  majority shareholding if the original shareholders continue to hold their shares. (d) Exemption from deeming of income for excessive share valuation:

Section 56(2)(viib) provides for deeming of income in case the shares are issued at a price  higher  than  the  fair  market  value  of  such  shares.  In  order  to  ease  the compliance  burden  as  well  as  to  promote  the  start-ups,  this  provision  has  been relaxed in the case of recognised start-ups. Under this relaxed regime, the provisions of  section  56(2)(viib)  are  not  applicable  to  the  recognised  start-up  if  it  files  a declaration.  As  this  regime  was  notified  in  February,  2019,  a  circular  has  been issued by the CBDT for making this regime applicable to the assessment completed in the past also.

2.  Further,  a  series  of  announcements  have  been  made  by  the  Hon'ble  Finance Minister in her Budget Speech of 2019 and also on 23 rd August, 2019 addressing the grievances of Startups. To give effect to these announcements, the Central Board of Direct Taxes (CBDT) has issued various circulars/clarifications in the matter.

## (i) Assessment of Startups: -

The  circular  No.  16/2019  dated  7 th of  August,2019  provided  the  following procedure for pending assessment of the Startups so that the process of scrutiny assessment is made hassle free in the case of eligible Startups: -

- a. In  case  of  Startup  companies  recognized  by  the  DPIIT  which  have  filed Form No. 2  and  whose  cases  are  under  'limited  scrutiny'  on  the  single issue of applicability of section 56(2) (viib) of the Act, the contention of the assessee will be summarily accepted.
- b. In case of Startup companies recognized by DPIIT which have filed Form No.  2  and  whose  cases  have  been  selected  under  scrutiny  to  examine multiple  issues  including  the  issue  of  section  56(2)  (viib)  of  the  Act,  the issue will not be pursued during the assessment proceedings and inquiry on  other  issues  will  be  carried  out  by  the  Assessing  Officer  only  after obtaining approval of the supervisory authority.
- c. In  case  of  Startup  Companies  recognized  by  the  DPIIT,  which  have  not filed Form No. 2, but have been selected for scrutiny, the inquiry in such cases also will be carried out by the Assessing Officer only after obtaining approval of the supervisory authorities.

(ii) Procedure for addition made u/s 56(2) (viib) in the past assessment:The clarification  issued  on  9 th August,  2019  provided  that  the  provisions  of  the  section 56(2)(viib)  of  the  Act  shall  also  not  be  applicable  in  respect  of  assessment  made before 19 th February, 2019 if a recognised Startups has filed declaration in Form No. 2 and ensuring a hassle free environment to eligible Startups during appellate stage as well.

(iii) Income-tax  demand:  It  has  also  been  intimated  that  the  outstanding Income-tax demand relating to additions made under section 56(2)(viib) shall not be pursued and no communication with the assessee in respect  of outstanding demand shall  be  made  for  this  purpose.  In  respect  of  other  Income-tax  demand,  it  was decided  that  the  Income-tax  demand  shall  not  be  pursued  unless  the  demand  is confirmed by the ITAT. In  order  to  redress  the  grievances  and  to address various tax related issues in the case of Startups, a Startup Cell at the level August,  2019  .  This  Startup  cell  has  been given  wide  publicity  and  is  placed  at  the  public  forum  so  that  it  remains  easily

(iv) Constitution  of  Startup  cell:of  CBDT  has  been  constituted  on  30 th accessible to all kinds of queries from the Startups.'

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