TAX EXEMPTIONS FOR START-UPS IN INDIA

TAX EXEMPTIONS FOR START-UPS IN INDIA

Introduction

Start-ups are business ventures built by Entrepreneurs in order to introduce their products and services in the market and promote its growth. Start-up India campaign was introduced in 2016 to encourage the youth of the country to take the Entrepreneurial path by providing various benefits and exemptions to the eligible Start-ups in the country. 

Recognition as a Start-up under Start-up India

A venture is considered as a start-up only up to 10 years of time period from the date of its consolidation, by the Department for Promotion of Industry and Internal Trade (DPIIT). For an entity to qualify to be a start-up, it must either be a Private Limited Company or a Limited Liability Partnership or a Partnership firm, the annual turnover of the company should not exceed Rs. 100 crores; its objective should be to develop something new or improve an existing product/service or generate large scale employment or generate wealth. Merging or divided or regrouped entities do not qualify as a Start-up.  

To be eligible for receiving the benefits under Start-up India, a start-up must also register itself with the DPIIT apart from just being a Start-up. To register for the same, a start-up can submit an application along with proof of incorporation, online at https://www.startupindia.gov.in/ or on the mobile app. Documents like detailed description of the venture, account of funding, achievements, if any, online and ground presence, and details of patented inventions, if any, must also be submitted along with the application for registration. After a complete verification as to the veracity of the application, the DPIIT then registers a start-up under Start-up India and thus, it is then eligible to seek all the benefits provided under the scheme. One of those benefits is tax exemption, which is discussed below, in detail.

Tax Exemptions for Start-Ups

  1. 100% Tax Rebate 

Under Start-up India, the Start-ups can get a rebate of 100% on their profits for 3 years, in the block of 7 years. This step was taken to encourage the incorporation of Start-ups and allow them to be able to invest in their working capital requirements in the starting years of their working. Although, there are certain conditions to be met by the start-ups to be able to claim this benefit:

  1. It must be incorporated before 31st March, 2021 and after April 1, 2016, were eligible for this scheme.

  2. During that block of 7 years, the annual turnover of the start-up must not be more than Rs.25 crores, for any financial year.

 

  1. Exemption under S. 56(2)(viib), Income Tax Act, 1961

This section exempts taxes imposed on investments in a Start-up, that amount to more than the fair market value of the shares. The income from this investment is then considered under ‘income from other sources’ while taxing it. The following conditions are to be met to be eligible for this exemption:

  1. The aggregate amount of paid-up share capital and share premium of the start-up after issue or proposed share must not exceed Rs. 25 crore. This amount shall not include shares issued to a non-resident person or a venture capital company/fund or a listed company that have a net worth of more than Rs. 100 crore or the ones that have a turn over of more than Rs. 250 crore.

  2. It must not have invested in any of the following assets:

  1. building or land or residential house, other than the ones used by the Start-up for renting or held by it as stock-in-trade, in the course of business;

  2. land or building, or both, not being a residential house, other than the ones occupied by the Start-up for its business or utilized by it for renting or held by it as stock-in trade, in the  course of business;

  3. loans and advances, other than the ones extended in the course of business by the Start-up where the lending of money is a substantial part of the business;

  4. capital contribution made to any other entity;

  5. shares and securities;

  6. any vehicle which costs more than Rs. 10,00,000, other than the ones that are held by the Start-up for plying, hiring, leasing or as stock-in-trade, in the course of its business;

  7. jewellery other than what is held by the Start-up as stock-in-trade in the course of business;

  8. any other asset, whether in the nature of capital asset or otherwise.

  1. Exemptions under S. 80IAC, Income Tax Act, 1961

This provision has been added to the Income-tax Act in order to provide an incentive to that start-ups and supplement their growth in their initial phase. It provides for a deduction of 100%, of the profits and gains earned by a start-up with an innovative and developing business idea or commercialization of technology driven products, processes or services or involving other intellectual property. The start-ups shall be eligible to reap this benefit on fulfilling the following conditions:

  1. The start-up must have been incorporated on or after the 1-4-2019 but before the 1-4-2021;

  2. The annual turnover of the previous year relevant to the assessment year for which deduction under section 80-IAC is claimed should not exceed Rs. 25 Crore;

  3. The start-up should be engaged in such a business activity that fosters innovation, development or improvement of products or processes or services, or is a scalable business model with a high potential of employment generation or wealth creation.

  4. The start-up shouldn’t have been formed as a result of a merger or splitting up, or reformation, of such a business that is already in existence or by transferring of the machinery or plant previously used for some other purpose, to a new business.

 

  1. Provision to Set-off & Carry Forward the Losses 

Section 79, Income-tax Act, 1961 provides that the losses incurred by a start-up in the incumbent year, shall be set off against the income of the previous year in cases where in that previous year, there have been changes in shareholding. The objective of this provision is to promote the ease of doing business by the start-ups. There are, however, two conditions to be eligible to seek this exemption:

  1. All those shareholders who held the shares that carry the voting power on the final day of the year or years in which the loss was incurred, shall continue to hold those shares on the last day of the previous year, against the income of which the losses are to be set off; and

  2. The said loss must be incurred within a period of 7 years, starting from the year in which the start-up was incorporated.

 

  1. Exemptions on Long-Term Capital Gains

Under Section 54 EE, Income Tax act, 1961, tax exemption is provided to start-ups on an investment in a long-term capital gain, that remains invested for a time period of at least 3 years, by the start-up. In order to claim compensation under this provision, the conditions to be met by the start-ups are as follows:

  1. Whole or a part of the investment must be made in such a fund which is notified by the Central Government under a time period of 6 months from the date of the transaction.

  2. The amount of Rs 50 lakh is the maximum amount that can be invested in such a long-term asset.

  3. If the investment is withdrawn before completion of the minimum time period of 3 years, the exemption will be revoked for the year in which the withdrawal is made. 

There has never been a better time to become an entrepreneur that the present with various facilities, institutional support, encouragement and tax exemptions..

 

References:

  1. Chaturvedi & Pithisaria, Income Tax Act, (Lexis Nexis, VII edn., 2020)

  2. https://www.startupindia.gov.in/content/sih/en/startupgov/startup-recognition-page.html 

  3. https://taxguru.in/income-tax/benefits-startups-income-tax-act.html

  4. https://cleartax.in/s/startup-india-tax-exemptions-eligibility

By Vareesha Irfan