Tax,regulatory issues in digital business

Snapdeal-PwC launch bimonthly Policy Communiqué series on emerging tax, policy and regulatory issues

New Delhi, 25 February 2016 – : Ahead of the Union Budget, Snapdeal and PwC released a joint first-of-its-kind whitepaper titled ‘Rethinking section 79 of the Income-tax Act for a digital economy’. The whitepaper is first in a bimonthly series which examines changes required in regulatory environment to keep pace with rapidly evolving digital businesses and venture capital funded start-ups. The first issue recommends relaxation of restriction on carry forward and set off of tax losses under section 79 of Income-tax Act to reduce risk for promoters and investors in investor funded digital businesses.

This communiqué covers an important issue facing start-ups and digital businesses 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 paper makes the case that with dynamic infusion of funds in modern start-ups, the shareholding patterns change often. In light of the rigours of this section certain key recommendations have been made.

Rethinking section 79 of the Income-tax Act - Key recommendations:

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

Speaking at the release of the whitepaper, Mr. Kunal Bahl, Co-founder and CEO, Snapdeal said, “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. We are pleased to contribute in this regard through our joint initiative with PwC to publish a series of communiqués focusing on policy matters relevant for digital businesses. We are confident that PwC’s depth of global experience and Snapdeal’s close understanding of industry issues will add value to this on-going discourse that is helping shape India’s digital businesses."

India’s digital economy 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.

About PwC

PwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in Assurance, Tax and Advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com

In India, PwC has offices in these cities: Ahmedabad, Bangalore, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune. For more information about PwC India's service offerings, visit www.pwc.com/in

PwC refers to the PwC network and / or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

About Snapdeal

Snapdeal’s vision is to create India’s most reliable and frictionless commerce ecosystem that creates life-changing experiences for buyers and sellers. In February 2010, Kunal Bahl along with Rohit Bansal, started Snapdeal.com - India’s largest online marketplace, with the widest assortment of 30 million plus products across 800 plus diverse categories from over 125,000 regional, national, and international brands and retailers. With millions of users and more than 275,000 sellers, Snapdeal is the shopping destination for Internet users across the country, delivering to 6000+ cities and towns in India. In its journey till now, Snapdeal has partnered with several global marquee investors and individuals such as SoftBank, BlackRock, Temasek, Foxconn, Alibaba, eBay Inc., Premji Invest, Intel Capital, Bessemer Venture Partners, Mr. Ratan Tata, among others.

For further information, visit www.snapdeal.com