Section 79 of the Income Tax Act needs a rethink in the digital age: Snapdeal-PwC report

Restriction on carry forward should be relaxed and tax losses should be set off under section 79 of Income-tax Act to reduce risk for promoters and investors in investor funded digital businesses, says a Snapdeal-PwC joint report released recently.

The report highlights how the start-ups and digital businesses are facing problems around section 79 of the Income-tax Act, 1961 wherein they are unable to carry forward and set off the business losses that they typically incur in the initial years of their operations, because of the dilution of the original promoter shareholding beyond 49%, to other investors/VCs/PE players.

The report titled “Rethinking section 79 of the Income-tax Act” –has some Key recommendations for the government:
1. Venture capital funded businesses should be allowed to carry forward losses despite a change in shareholding pattern, till the time that the original promoters continue to remain shareholders and take part in management.

2. Drawing from Same Business Test in countries like Australia, a company should be allowed to carry forward losses if it continues to remain in the same business and under same management, who were part of it before such change in shareholding.

3. Given the huge upfront costs of digital businesses and online marketplaces, that the period of carry forward of business losses be extended from the current 8 years to 10–12 years in accordance with best international practices

4. In line with the government’s Start Up India initiative, government may consider exempting the application of the provisions of section 79 to all start-ups, as defined under the start-up policy

Mr. Kunal Bahl, Co-founder and CEO, Snapdeal says, “India is the world’s fastest growing digital commerce market in the world with a 60% growth year on year. The impact of global technology trends and fast evolving consumer behaviour means rapid introduction of new business practices. It is imperative that regulation, policy and business evolve in sync and recalibrate often so that the rules of engagement are mutually clear, contemporary and relevant. The responsibility of this lies both with the government and the industry."

India’s digital economy, the report highlights, is disrupting the current business landscape, given that the number of Internet users in India is expected to cross 790 million by 2020. Also, more than 80% of these users will get online through mobile phones. With improvements in network infrastructure, significant investor interest and foreign funding, India has emerged as one of the fastest growing bases of start-ups worldwide. Driven by the progressive technology-centric initiatives launched by the government last year—viz. ‘Digital India’ and ‘Start Up India’—one can expect that for sectors like eCommerce, Internet businesses, Fintech, etc., the best is yet to come.

(Image credits: TOI)