Benefits to Startups under Income Tax Act
Startup India campaign was formally launched by Prime Minister Shri Narendra Modi on January 16, 2016, from Vigyan Bhawan, New Delhi. Now, we have marked 5 year journey of startup India initiative. Government is focusing to make India a $5 trillion economy but it won’t be possible without building a strong startup ecosystem in India.
Total 27,158 start-ups have already been registered with DPIIT till now out of which 264 startups are funded by the SDIBI. Nasscom published a report stating that there was addition of approximately 1300 IT startups in 2019. With this India has succeeded in reinforcing its position as third largest startup ecosystem in the world.
In this blog, we have discussed various tax incentives provided to startups by the Govt. First, you need to understand ‘Is Your Entity a Startup’?
Definition of Startup
Department for Promotion of Industry and Internal Trade (DPIIT) considers an entity as a startup only upto a period of 10 years from the date of its incorporation subject to the fulfillment of following conditions:
- It should be incorporated as a private limited company, partnership firm or an LLP.
- Turnover for any of the financial years since incorporation should not exceed Rs. 100 crores.
- It should be working towards innovation, development or improvement of product or process or services or business model of the entity is scalable with high potential of employment generation or wealth creation.
- It should not be formed by splitting up or reconstruction of an existing business.
Registration with DPIIT
The benefits available to startups aren’t automatic. These benefits are provided only to DPIIT recognised startups. Here, we have briefed how you can register your startup with DPIIT.
- Application can be made by any incorporated entity fulfilling the above conditions. This online application can be filed from the website https://www.startupindia.gov.in/ or from the mobile app:
- An entity needs to submit following documents along with the application:
- Copy of certificate of registration or incorporation;
- Write-up on the nature of business highlights incorporating how an entity is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation;
- Additional documents providing website link, pitch deck, details of patents, etc., shall also be attached to support the application.
- Information on any award received by the entity.
- Document a proof of funding received by the entity, if any.
Once an application is submitted, DPIIT may call for such other documents or information and make such enquiries, as it may deem fit. DPIIT also has the authority to reject the application only after furnishing the reasons for the same.
In case you need assistance to register your startup, you may visit us here (https://www.startup-movers.com/startup-india-registration/). Our highly professional team will provide seamless experience to get your startup recognized by DPIIT.
Benefits under Income Tax Act
Government has been taking various steps to exceedingly encourage the startups by introducing multiple tax exemptions such as relief from angel tax, reduced tax rates, 80% rebate on patent fees which will be borne by the DPIIT, tax holiday under section 80-IAC for three years etc.
Once your startup is recognized by DPIIT, you may avail the following benefits under Income Tax Act.
1. Exemption from Angel Tax
Section 56(2)(viib) of the Income Tax Act was introduced in the Finance Act, 2012 under the Measures to Prevent Generation and Circulation of Unaccounted Money. If a closely held company raises funds through the issuance of its shares to an Indian resident at a price more than its fair market value (FMV), then the amount received in excess of fair market value of shares will be charged to tax as an income from other sources in the hands of the issuer. It is popularly known as Angel Tax.
To claim this exemption, the startup has to file a declaration in Form 2 with the DPIIT along with the details of the company such as name, date of incorporation, registration/incorporation no., contact details, etc. With the form, a self-declaration form has to be attached in PDF format and it should be printed on the company’s letter head and digitally signed by the authorized signatory. Exemption from levy of angel tax under section 56(2)(viib) is available subject to the following conditions:
- Start-up should be registered with DPIIT; and
- Its aggregate amount of paid-up share capital and share premium after issue or proposed issue of shares, does not exceed Rs. 25 crore. While calculating this threshold limit, issue of shares to following persons shall not be included:
- A non-resident person;
- Venture capital company;
- Venture capital fund
- Category-I AIF and Category-II AIF; and
- Listed company whose net worth exceeds Rs. 100 crore or turnover exceeds Rs. 250 crore for the financial year preceding the year in which shares are issued.
- It does not invest in any of the following assets for a period of 7 years from the end of the latest financial year in which the shares are issued at premium:
- Land or building, being a residential house, other than that used for the purposes of renting or held as stock-in-trade in the ordinary course of business
- Land or building, not being a residential house, other than that occupied by start-up for its business or renting purposes or held as stock-in-trade in the ordinary course of business
- Loans and advances, if start-up is not engaged in ordinary business of lending of money
- Capital contributions to any other entity
- Shares and securities
- Motor vehicle, aircraft, yacht or any other mode of transport, if the cost of such an asset exceeds Rs. 10 lakhs other than that held by the Start-up for the purpose of plying, hiring, leasing or as stock-in-trade in ordinary course of business
- Jewellery held otherwise than as stock-in-trade
- Archaeological collections, drawings, paintings, sculptures, any work of art or bullion
In case of failure to comply with these conditions, the consideration received from issue of shares, as exceeding the fair market value of such shares, shall be deemed to be income of the company chargeable to tax for the previous year in which such failure takes place.
2. Deduction under section 80-IAC
Deduction under section 80-IAC is available of 100% profits to an eligible startup for any 3 consecutive years out of 7 years from the date of its incorporation. A recognized startup is required to file Form 1 along with the specified documents to the Inter-Ministerial Board of Certification. Further, it has to fulfil the following conditions to claim this deduction:
- It is incorporated as a company (Private Ltd. Co. or Public Ltd. Co.) or an LLP.
- It is incorporated on or after April 1, 2016 but before April 1, 2021.
- Its turnover does not exceed Rs. 25 crore in any Financial Year for which deduction is claimed.
- It is not formed by splitting up or reconstruction of a business already in existence.
- It is not formed by transfer to a new business of machinery or plant previously used for any purpose.
- It holds a certificate of eligible business from the Inter-Ministerial Board of Certification.
- It is engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation.
3. Relaxed provisions for set off and carry forward of losses
Section 79 deals with the provisions for set off and carry forward of losses in case of companies. Finance (No. 2) Act, 2019 has relaxed the conditions for carry forward and set off of losses in case of the eligible start-ups.
It has been provided that loss incurred, by the closely held eligible startup, shall be allowed to be carried forward and set off against the income of the previous year on satisfaction of either of the two conditions specified above, i.e. continuity of 51% shareholding or continuity of 100% of original shareholders.
4. Exemption under section 54GB:
This exemption is allowed to the shareholders who make investment in eligible startup. This exemption is available to an Individual an or HUF in respect of any long term capital gains arising from transfer of a residential property. Such exemption is available if the amount of net consideration is invested, before the due date of furnishing of return of income, in equity shares of a company after satisfaction of the satisfied conditions:
5. Grievance Redressal Cell:
CBDT has also formed a special grievance cell for dedicated to the startups which will work under the member of CBDT and will help in relieving the problems faced by them at any time. The cell can be accessed through any of the following modes:
- Physically with the O/o Under Secretary, ITA-I, Room No. 245A, North Block, New Delhi – 110001;
- Electronically by sending an email at firstname.lastname@example.org; or
- Telephonically on 011-23095479/23093070 (F).