Section 79:-
According to the
income tax provisions, a closely held company is not eligible to carry forward
and set off its losses if 51 % or more of the voting power in the year in which
the set-off is claimed is not beneficially held by the same shareholders who
beneficially held 51% or more voting power on the last day of the previous year
in which the loss was incurred.
Exemptions to section
79:-
The following are the
exemptions to the section 79 of the income tax act 1961:-
a. If the change in
the shareholding takes place on account of death of the shareholder, gift to
any relative of the shareholder.
b. Indian company
which becomes a subsidiary of foreign company as a result of amalgamation or
demerger of a foreign company subject to some conditions.
Growth in
E-Commerce Sector:-
E-Commerce sector is
the fast rising and it has grown by 34 % CAGR since 2009.
According to Morgan
Stanley, the Indian’s E-tail business size to be $159 Billion by 2020.
And, India has the
youngest youth population. With 356 million 10-24 year-olds, India has the
world’s largest youth population despite having a smaller population than
China, according to the UN report.
So, the growth in
e-commerce sector is going to be very huge and it is going to create lot of
employment opportunities, which will naturally increase the GDP growth and
per-capita income.
Why do E-commerce
companies spend huge expenditure?
Very huge expenditure
is being incurred during the growth phase of the company.
Since E-commerce
market is in its nascent stage, company spends huge amount of money in their
growth phase, such as giving huge discount to the products for attracting new
customers and to retain the existing customers and also huge spends on
advertising, marketing and promotion. Since the ‘acquisition cost’ of the
customers is huge, these companies require huge funding to run their
operations.
And the internet
penetration is also quite less when compared to the other countries. India’s
internet penetration with total e-households at 46 million against China’s 207
million is one of the reasons behind India’s poor B2C sales growth.
Also the per-capita income
is very less. The propensity to spend more income in India is very less.
So, taking into
account all these factors, E-commerce companies have long gestation period.
So for meeting these
expenses, the companies go for funding and offer their shares to the angel
investors, venture capital investors.
Section 79 comes into
play:-
So in order to get
funding, the promoters of these companies have to sell their shares to the
angel investors, venture capital investors. So, the promoter’s shareholding
comes down. In some cases, more than 51% of the shares are
interchanged. So these companies were not eligible to get the credit of
previous year’s losses, even though the transactions are purely for business
purpose and not for evading taxation.
Carry forward of losses
– In other countries
Carry forward of
losses in countries like Australia, New Zealand, Singapore, United Kingdom are
for indefinite period, if the companies can prove that the transfer of shares
have been done in genuine manner and not to evade taxation.
Opinion:-
Considering the above
hurdles faced by the E-Commerce companies, section 79 needs to be altered so
that it doesn’t act as burdensome to these start-ups.
Already e-commerce
companies are facing huge challenges and stiff competition from the foreign
players, so the tax provisions relating to the start-ups needs to be tweaked.
Section 79 should be
applicable only to the companies which are transferring the shares for the
purpose of evading taxation.
So in order to be
supportive to the growth of e-commerce companies in India and for the success
of Start-up India Scheme, the section 79 needs to be changed, considering the
scope and potential of the E-Commerce market in India.
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