A parliamentary panel on Thursday recommended relaxation in criteria for eligible startups to claim benefits under income tax law as only one per cent of recognised entrepreneurs have availed the benefit.

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The department-related Parliamentary Standing Committee on Commerce has expressed concern about the low utilisation of section 80-IAC of the Income Tax Act, 1961, which entitles eligible startups to avail the tax benefit. It was implemented in 2017.

Despite the existence of 98,119 recognised startups, only 10,165 of them, accounting for just 10.4 per cent, have applied for income tax exemption under this Act.

Furthermore, the inter-ministerial board has granted the Certificate of Eligibility to only 1,173 applicants as on March 31, 2023.

"This means that even after six years of the implementation of Section 80-IAC of the Income Tax Act, 1961, only 1 per cent of recognised startups have received the Certificate of Eligibility," the committee said in its report.

The committee recommended that "the eligibility criteria for issuing a certificate of eligibility by the inter-ministerial board for claiming income tax exemptions may be relaxed in consultation with the stakeholders so that more startups could avail the tax benefits under Section 80-IAC of the Income Tax Act".

A staggering 75 per cent of applications being sent for resubmission can be attributed to a lack of clarity in the process, it said.

"The committee is of the view that the government should work towards making the application processes more transparent and user-friendly," it said, adding, the government should take special drive to educate startups about the exemptions through awareness programmes and interactions.

It also suggested a supportive ESOP (Employee Stock Option Plan) taxation policy to enable startups to make this mode of compensation attractive to the employees.

Startups use ESOPs to attract employees on low salaries and to conserve cash for investing in the business.

"The committee recommends that necessary amendments to the Income Tax Act may be considered so that ESOPs are taxed only at the time of sale of shares and not on notional gains," it said.

Only 1,173 out of the one lakh startups recognised have been granted the Certificate of Eligibility for availing relaxed ESOP taxation whereas there is a demand from the startup community to bring all the department-recognised startups under the ambit of this eligibility criteria.

On the Angel tax issue, it said the methodology adopted to ascertain the fair market value of shares needs to be unambiguous as it influences taxation for domestic or foreign investment.

"A decision to remove the confusion in this regard is required to be taken in consultation with all the stakeholders," it said suggesting the commerce and industry ministry to engage with all the stakeholders to understand all residual concerns regarding Angel Tax and take up the matter with the Ministry of Finance for a speedy resolution.

On the availability of funding for the sector, it said that there is a need for creating a pool of additional funds which can help good startups get adequate funding during difficult times.

The committee also recommended the creation of a comprehensive database of all startups in the country to effectively ascertain the total number of startups and maintain a holistic record of their presence.

Further, it said that relaxation of regulatory/legal framework to enable direct overseas listing of unlisted Indian startups and steps to facilitate reverse flipping of startups could give a fillip to the entire ecosystem.

A clear roadmap and comprehensive regulatory framework can be laid out to enable unlisted Indian startups to directly list on foreign stock exchanges, it said.

In another report, a parliamentary panel said the north-east region has received less than 1 per cent of the total FDI (foreign direct investment) in the country despite the initiatives taken by the department.

"The committee recommends that an assessment of the schemes implemented to attract FDI in the region may be made and necessary corrective steps may be taken," it added.