As we celebrate 75 years of independence, India becomes home to 75,000 recognised startups.
Startup may choose to avail recognition with Department of Promotion of Industry and Internal Trade (‘DPIIT’) as a recognized startup under the Startup India initiative. Below is a snapshot of income-tax tax, intellectual property and compliance benefits conferred upon recognized startups:
1. INCOME TAX EXEMPTIONS
1.1 Deduction of Taxable Profits
As per section 80-IAC of the Income-tax Act, 1961 (‘Act’), eligible startups can be exempted from paying tax on its profits for 3 consecutive financial years out of their first 10 years of incorporation.
1.2 Angel Tax Exemption
If a closely held company issues shares at a premium which is in excess of fair value of the shares, such excess (i.e. Issue Price – Fair Market Value) is taxable in the hands of the issuing company as income from other sources, under section 56(2)(viib) of the Act. The fair market value is determined under Rule 11UA(2) of the Income-tax Rules, 1962, at a formula based on book value or discounted cash flow method. However, it is common phenomenon for angel investors to invest in startups at a high valuation which is based on future potential valuation. In order to provide impetus to such angel investors, the Government has provided an exemption from provisions of section 56(2)(viib), subject to below conditions:
i) The aggregate amount of paid up share capital and share premium (post issuance) does not exceed INR 25 crores;
ii) The startup has not invested in specified classes of assets (e.g. land or building, loans and advances, capital contribution to other entity, shares and securities, etc.). The bar on investment in specified assets shall be applicable for a period of 7 years from the end of financial year in which investment is received by the startup.
1.3. Deferred Taxation on Employee Stock Option Plan (‘ESOP’) for Employees
Ordinarily, in case of receipt of ESOPs, the difference between the fair value of the shares and the exercise price is taxed as a perquisite in the hands of employee at the time of exercise of options. The tax on perquisite is required to be paid at the time of exercising of option which may lead to cash flow problem as this benefit of ESOP is in kind. In order to ease the burden of payment of taxes by the employees of the eligible start-ups or TDS by the start-up employer, the provisions of deduction of tax on ESOP are deferred. The tax on ESOP is required to be deducted at source before 14 days from earlier of below dates:
(i) after the expiry of 48 months from the end of the relevant assessment year; or
(ii) from the date of the sale of such sweat equity share by the assessee; or
(iii) from the date of which the assessee ceases to be the employee of the startup
1.4. Eased restrictions for carry forward and set off losses in case of change of shareholding
As per section 79 of the Act, a closely held company is not allowed to carry forward and set off its losses if 51% or more of its shareholding has changed in the year of set off of losses vis-a-vis the year in which such losses were incurred. However, in case of a startup, even if such condition is not fulfilled, it may carry forward and set off such losses if all the shareholders who held shares carrying voting power on the last day of the year(s) in which the loss was incurred, continue to hold those shares on the last day of such previous year. Also, it is required that such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.
2. Startup Patent Application & Intellectual Property Rights:
Given its core nature, startups are likely to own intellectual property rights in connection with its innovation. Filing a patent has historically been an expensive and time consuming process which can be out of the reach of many startups.
Recognition of startups would enable fast tracking of patent application, as well as upto 80% rebate in patent filing fee vis-à-vis other companies. This is also coupled with Government funded panel of facilitators who would provide general advisory on different intellectual property.
3. Other Benefits
3.1. Ease of winding up of company
In order to encourage entrepreneurs to experiment with new and innovative ideas and avoid their capital from getting stuck in a company in the event of business failure, startups with simple debt structure can be wound up within 90 days from application. The same will involve appointment of an insolvency professional and liquidator who will be responsible for swift closure of the business, sale of assets and repayment of creditors.
3.2. Access to Government and State Owned Enterprises as potential customers
Government and state owned enterprises purchase goods and services through public procurement route and represents a huge market for startups.
Recognition as an eligible startup provides opportunity of listing product on Government e-marketplace for selling to Government entities directly. Further, the Government shall exempt Startups in the manufacturing sector from the criteria of “prior experience/ turnover” without any compromise on the stated quality standards or technical parameters. Further, DPIIT recognised startups have been exempted from submitting Earnest Money Deposit (EMD) or bid security while filling government tenders.
Parting Keynote:
The relaxations provided to startups under various provisions of the Act merit consideration and can provide a meaningful boost to startups availing the same.
As per extant provisions of section 80-IAC of the Act, an eligible startup is defined to inter alia include entities incorporated before 1st April 2023. Hence, entities which fulfill the conditions for recognition of startups should evaluate the benefits available to them and seek recognition in a due time.
Author Bio
