India has emerged as the third largest start-up ecosystem in the world, with over 84012 recognized start-ups by the Department for Promotion of Industry and Internal Trade (DPIIT) as on 30th November 2022. The Government of India intends to build a strong ecosystem for nurturing innovation and startups in the country that will drive Sustainable economic growth and generate large-scale employment opportunities.
The GOI grants various tax exemptions and benefits which an eligible start-up can avail of. Let’s understand first the meaning of an eligible Startup. Because it is these definitions that will ultimately form the basis of all current and future tax Implications.
Who and how is recognized as a Start-up company in India (Meaning of an eligible Start-up company)
Start-up India Plan is governed by the Ministry of commerce and industry (Department for promotion of industry and internal trade). Through as per notification no. G.S.R 127 (E) dated 19 February 2019 An entity shall be considered as a start-up.
- Up to a period of ten years from the date of incorporation/ registration. if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
- Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded INR 100 crore rupees.
- The entity is working towards innovation, development, or improvement of products or processes, or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds one hundred crore rupees.
Tax exemptions and benefits for Eligible Startup companies are ;
1. No tax on share issuance to Domestic investors at a premium over the FMV of the shares
Section 56 (2) (VIIb) provides that in unquoted shares are issued at premium by closely held company, the excess of premium over the FMV of the shares shall be taxable and income from other sources in the hands of the company.
However, if a start-up has been recognized by DPIIT and the aggregate amount of paid-up share capital and share premium of the startup after the issue or proposed issue of share, if any, does not exceed, twenty-five crore rupees and some other certain conditions prescribed notification no. G.S.R 127 (E) dated 19 February 2019 then the provision of Section 56 (2) (VIIb) will not apply.
Further, Note that in computing the aggregate amount of paid-up share capital and share premium of twenty-five crore rupees in respect of shares issued to any of the following persons shall not be included;
(a) a non-resident; or
(b) a venture capital company or a venture capital fund;
To claim this benefit an eligible startup shall file a duly signed declaration in Form 2 to DIPP that it fulfills the conditions mentioned in notification no. G.S.R 127 (E) dated 19 February 2019 On receipt of such declaration, the DPIIT shall forward the same to the CBDT.
2. Set-off of earlier Year Losses
In order to carry forward losses and set off against the income of the previous year, the following condition needs to be fulfilled:
51% of the voting Power of the company is beneficially held, as on the last day of the previous year in which the loss is sought to be set off, by the same person who holds at least 51% of the shares on the last day of the financial year in which the loss was incurred
However in the case of Eligible Startup Even if the above-referred condition is not satisfied the loss incurred in any year (prior to the previous year) shall be allowed to be carried forward and set off against the income of the previous year if the following condition is satisfied:
- All the shareholders having voting power on the last day of the previous year in which loss was incurred continue to be holding shares on the last of day of the previous year in which income is to be set off.
- The above relief is available in case the loss is incurred during the period of 7 years beginning from the year of incorporation.
Exemption under section 54 GB
As per section 54GB, any capital gain arising to an individual or HUF from the transfer of a long-term capital asset being a residential property (a house or plot of land) shall be exempt proportionate to the net consideration price so invested in the subscription of equity shares of an eligible Startup company before the due date of furnishing the return of income under section 139(1).
And such a Startup company has utilized this amount for the purchase of new assets within one year from the date of subscription of Equity Share by the assessee.
Deduction under Section 80IAC
Section 80-IAC of the Act allows a deduction of an amount equal to 100% of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of ten years, beginning from the year of incorporation, subject to the condition that,
(i) the total turnover of its business does not exceed one hundred crore rupees,
(ii) it is holding a certificate of eligible business from the Inter-Ministerial Board of Certification, and
(iii)it is incorporated on or after 1st day of April, 2016 but before 1st day of April 2023.
To claim this benefit An eligible Startups filed a duly signed application in Form-1 along with documents specified therein to the Board and the Board may, after calling for such documents or information and making such enquires, as it may deem fit, —
(i) grant the certificate referred to in sub-clause (c) of clause (ii) of the Explanation to section 80-IAC of the Act; or
(ii) reject the application by providing reasons.
5. Deferment of payment of tax on Esops
ESOPs are an important tool employed by businesses to attract and retain talent and help employees participate in the growth journey of the business. Currently, ESOPs are taxed at two stages in the hands of the employees. Firstly, at the point of the exercise, when the difference between the FMV on the date of exercise and the exercise price is taxed as perquisite i.e. part of the salary. Secondly, at the time of sale, when the difference between the sale price and the FMV on the date of exercise is taxed as capital gains.
In nutshell, there is tax paid out by the employees immediately upon exercise of the ESOPs. Practically, this could be a challenging scenario in the case of employees as at that stage sufficient funds may not be available.
To incentivize start-ups to hire and employ talent by granting ESOPs, an amendment was made by the Finance Act, 2020 wherein the tax deduction at source (TDS) with respect to perquisite income on ESOPs of eligible start-ups was deferred. Thus, an option has been provided to ‘eligible start-ups’ to deduct tax on perquisite income on exercise of ESOPs within 14 days of the following events, whichever is earlier
- After the expiry of 48 months from the end of the relevant assessment year;
- From the date of sale of shares; or
- From the date, the taxpayer ceases to be an employee of the eligible start-up
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Disclaimer: The views expressed in this article are the personal views of the author. Neither the views nor the analysis constitute a legal opinion and are not intended to be advice
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