Starting and running a business in India is a challenging task. Despite all the claims of making it easier for people to start businesses, it remains difficult to do so. When you consider the compliance required in terms of licensing (despite the claims of liberalisation), tax returns, government approvals along with the poor infrastructure, it comes across as an uphill task. There is one aspect that makes all these challenges pale in comparison and that has gone unnoticed. In a change to the tax laws brought about in the union budget of 2004-2005, presented by the United Progressive Alliance (UPA) government, there was a clause introduced that now disallows set off of business losses against salaried income. Here’s the clause:
No set-off of business loss against income from salary
Under the existing provisions of sub-section (1) of section 71, the loss computed in the current year under one head of income is allowed to be set off against income computed under any other head. However, losses under the head “ Capital Gains” are not allowed to be set-off against income under any other head. In order to prevent abuse of the provisions of set-off of losses, it is proposed to amend section 71 to provide that an assessee shall not be entitled to set-off of any loss under the head “Profits and gains of business or profession” against income under the head “Salaries”. The proposed amendment will take effect from 1st day of April, 2005 and will, accordingly, apply in relation to the assessment year 2005-2006 and subsequent years.
Assume that you’re employed with a company and plan to start a business. You invest in a new venture in partnership with someone maybe, giving a few hours to it each day and look forward to running your business full time eventually. Meanwhile you continue to draw a salary of let’s say Rs.6,00,000 a year. since you keep your day job. You also keep your living costs low because new businesses can run to losses at least initially and you need your salary to bankroll it. To keep things simple let’s also assume that you spent Rs.3,00,000 in the first year on your business and generated insignificant revenue. Now all you had was Rs.3,00,000 to yourself. You should, ideally, be asked to pay tax on this amount of Rs.3,00,000. With some tax planning such as investing in an equity linked savings scheme, you would be paying zero tax. This is what would happen if you were running one profit making business with a gross profit of Rs.6,00,000 and another loss making one with phentermine without prescription losses of Rs.3,00,000. Unfortunately, you’re salaried and your salary is your source of revenue. With the above clause that prevents setting of business losses against salaried income, the government really hits you where it hurts. At tax time, you’ll find you are liable to pay tax on your entire salary, even on the part of it that you lost in your business! This change brought out in the union budget of 2004-05 probably comes in the way of the dreams of millions of people who aspire to make the transition to running their own businesses. It is hard enough for a salaried person to do away with the certainty of a salary and plunge into the uncertainties of entrepreneurship in a country like India where entrepreneurs are taken seriously only when they are successful. To have to pay tax on a phantom income, that doesn’t even exist is a huge disincentive. Like many other laws in India that stifle freedom, this one stifles the freedom of a salaried person to start a business.
Oddly, there hasn’t been even a token protest about this section though it has been in force for the better part of a decade.
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