CA Tarun Kumar

I remember the remarkable words of Prime Minister Shri Narendra Modi in his 15 August, 2015 address at Red Fort “ Hindustan mein koi aisa zila na ho,aisa block na ho jahan koi startup na shuru ho. ‘Start up India, Stand up India.” Over the last one year, the government is really working hard to build atmosphere for encouraging startups.

With a view to facilitate startups various tax exemptions are provided by Finance Minister Shri Arun Jaitley. In this article we are discussing various tax incentives provided to startups:

1) Tax Exemptions to Startups for 3 Years: Finance minister in his budget speech said “I propose to assist their propagation through 100% depropagation through 100% deduction of profits for three out of five years for startups set up during April 2016 to March 2019. MAT (minimum alternate tax) will apply in such cases.”

Section 80-IAC inserted by the Finance Act, 2016, w.e.f. 1-4-2017.

As per Section 80-IAC-

  • Where the gross total income of an assessee, being an eligible start-up, includes any profits and gains derived from eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent of the profits and gains derived from such business for three consecutive assessment years.
  • The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any three consecutive assessment years out of five years beginning from the year in which the eligible start-up is incorporated.

Analysis

  • 100% Profits of Startup are exempt from tax for three consecutive assessment years.
  • Deduction can be claimed for any three consecutive years out of five years beginning from the year in which the eligible start-up is incorporated.
  • Deduction is available to eligible start-up carrying on eligible business.

As per Sub Section (4) of Section 80-IAC

“Eligible business” means

  • a business which involves innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property;

“Eligible start-up” means a company or a limited liability partnership engaged in eligible business which fulfils the following conditions, namely:—

  • it is incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2019;
  • the total turnover of its business does not exceed twenty-five crore rupees in any of the previous years beginning on or after the 1st day of April, 2016 and ending on the 31st day of March, 2021; and
  • it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government;

Thus by introducing Section 80-IAC government has provided three years tax holiday to eligible startups carrying on eligible business. However the imposition of MAT on startups will not allow the full impact of the benefits to be realized.

2) Capital gains shall not be taxed on investments in regulated fund of funds for startups: To promote the startup ecosystem in the country, it was envisaged in ‘Startup India Action Plan’ to establish a Fund of Funds which intends to raise Rs 2500 crore annually for four years to finance the startups.

To achieve this objective Section 54EE inserted by the Finance Act, 2016, w.e.f. 1-4-2017:

As per Section 54EE

  • Capital Gains are exempt from tax if the long term capital gains proceeds are invested by an assessee in units of such specified fund, as may be notified by the Central Government in this behalf, subject to the condition that the amount remains invested for three years failing which the exemption shall be withdrawn. The investment in the units of the specified fund shall be allowed up to Rs. 50 lakh.
  • If the units of specified fund transferred by the assessee at any time within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged under section 45 shall be deemed to be the income chargeable under the head “Capital gains” relating to long-term capital asset of the previous year in which the long-term specified asset is transferred.

3) Promoting Investment in Startups: Provisions of Section 54GB are amended so as to provide that long term capital gains arising on account of transfer of a residential property shall not be charged to tax if such capital gains are invested in subscription of shares of a company which qualifies to be an eligible startup.

  • For the purpose of Section 54GB “eligible start-up” and “eligible business” have the same meaning as assigned to them in Section 80-IAC.
  • Benefit of Section 54GB is available only to an Individual or HUF.

4) Abolishment of ‘Angel Tax’: The Central Board of Direct Taxes (CBDT) has notified via Notification No. 45/2016, Dated June 14, 2016 that if a startup gets investment from resident angel investors, it will not be taxed even if the investment is made in excess to the fair value. With the abolishment of this so called angel tax, startups can now issue shares to investors at higher than fair value without worrying about tax consequences.

For the purpose of this section:

  • “Startup” shall mean a company in which the public are not substantially interested and
  • Which fulfills the conditions specified in the notification of the Government of India, Ministry of Commerce and Industry, Department of Industrial Policy and Promotion.

(Submitted by – Tarun Kumar (B.Com, ACA) Mobile: +91-888-282-8112- Email-ID: catarunkumar92@gmail.com)

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