With an aim to encourage innovations and to promote entrepreneurship, the Government had launched the Start-up India Programme. The various tax benefits given to the recognised start-ups under the programme acts as a booster for the entrepreneurs. This article will drive you through the various tax benefits available to the Recognised Start-up entities under Income Tax Act, 1961 through Start-Up India Programme.
Let us first understand;
- What is an eligible start-up Entity?
As per the Notification No. G.S.R. 34 (E) dated January 16, 2019
1. The Private limited company incorporated under the companies act,2013 or a partnership firm registered under the Partnership Act, 1932 or a Limited Liability partnership firm registered under the LLP Act, 2008 in India can only be recognised as a start-up entity; and
2. it shall be considered as a startup only up to 10 years from the date of incorporation/registration; and
3. the turnover of the entity for any of the financial years since incorporation/ registration shall not exceed one hundred crore rupees and
4. the entity should work 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.
- An entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
- The 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.
- “turnover” shall have the meaning as assigned to it in clause (91) Section 2 of the Companies Act, 2013
- PROCESS OF RECOGNITION AS STARTUP (NO FEES IS CHARGED FOR RECOGNITION)
- STEP 01 – New User- Click on ‘Register’ and provide details OR Simply register using any of your social media accounts
Existing User – Login using your credentials (Go to step 4)
- STEP 02- Provide OTP and other details like, startup as type of user, name and stage of the startup, etc.
- STEP 03- Go to ‘Get Recognised’ directly (new users) OR
- STEP 04- On the ‘Recognition Application Detail’ page, click on ‘View Details’ under the Registration Details section
- STEP 05- Dashboard > DPIIT Recognition (existing users) Fill up the ‘Startup Recognition Form’ and click on ‘Submit
- Provide the following details in the Start-up Recognition application :
Entity Details: Nature of Entity, Industry, Sector, Categories and Company Incorporation Number and Registration Date
Full Address of the Entity
Details of the Authorized Representative
Directors or Partner Details
Details of Intellectual Property Right
Details of funding
Recognition received by the entity
- The application shall be accompanied by—
- Incorporation/Registration Certificate
- Authorisation letter
- A proof of concept (website link/video/pitch deck) for startups in the Validation stage. For the Early Traction and Scaling stage, it is necessary to provide a video or pitch deck in addition to a company website. Ideation stage startups are not mandated to submit a proof of concept.
- The DPIIT may, after calling for such documents or information and making such enquires, as it may deem fit, —
(a) recognise the eligible entity as Startup; or
(b) reject the application by providing reasons.
- What is the time-frame for obtaining certificate of recognition as a ‘Startup’ in case an entity already exists?
The certificate of recognition is issued typically within 2 working days upon successful submission of the application.
- If a startup has applied for DIPP-recognition and the application gets rejected or marked incomplete due to missing documents or insufficient information, should the startup edit the existing application or submit a new one?
If the application for recognition has been marked incomplete, the startup needs to follow the given steps:
1) Log in with their startup credentials on www.startupindia.gov.in
2) Select ‘Recognition and Tax Exemption’ button on the right panel
3) Select the ‘Edit Application’ button and proceed with completing your application
If the application has been marked ‘Incomplete’ thrice, the application is rejected.
Rejected applications cannot be edited, and a new application can be submitted after three months from the date of communication of the rejection email.
- BENEFITS OF DPIIT RECOGNITION
1. INTELLECTUAL PROPERTY RIGHTS (IPR)-
- Fast-tracking of startup patent applications
- The panel of facilitators to assist in IP applications (Cost of facilitators borne by Govt.)
- Rebate on filing of application- 80% rebate in filing of patents vis-a-vis other companies, bringing down the cost from INR 8,000 to INR 1,600 and 50% rebate is also provided in
filing of trademarks vis-a-vis other companies decreasing the cost from INR 10,000 to INR 5,000.
2. RELAXATION IN PUBLIC PROCUREMENT NORMS
- get listed as sellers on the Government of India’s largest e-procurement portal: https://gem.gov.in/
- become preferred bidders on CPPP portals, which sees over 2,00,000 tenders every year. (Visit eprocure.gov.in and etenders.gov.in)
3. SELF-CERTIFICATION UNDER LABOUR & ENVIRONMENT LAWS
- self-certify their compliance under 9 Labour and 3 Environment laws for a period of 3 to 5 years from the date of incorporation.
- In respect of 3 Environment laws, units operating under 36 white category industries (as published on the website of Central Pollution Control Board) do not require clearance under 3 Environment-related Acts for 3 years.
4. FASTER EXIT FOR STARTUPS
- wind up operations within 90 days vis-a-vis 180 days for other companies.
- Startups with simple debt structures or those meeting such criteria as may be specified may be wound up within a period of 90 days from making an application for winding up on a fast track basis.
5. FUND OF FUNDS FOR STARTUPS
- To provide equity funding support for the development and growth of innovation-driven enterprises, the government has set aside a corpus fund of INR 10,000 Cr managed by SIDBI.
- The flow of funds is Government > SIDBI > Venture Capitals > Startups
6. SEED FUND SCHEME
- Startup India Seed Fund Scheme (SISFS) with an outlay of INR 945 Crore aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market entry and commercialization. This would enable these startups to graduate to a level where they will be able to raise investments from angel investors or venture capitalists or seek loans from commercial banks or financial institutions. The Seed Fund will be disbursed to eligible startups through eligible incubators across India.
7. TAX EXEMPTION U/S 80-IAC of Income Tax Act,1961. (not for registered Partnership firms)
- The eligible start-ups shall in relation to the profits and gains derived from eligible business be allowed while 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 out of its first ten years since incorporation.
“eligible start-up”– company or a limited liability partnership engaged in an eligible business which fulfils the following conditions, namely:—
(a) it is incorporated on or after the 1st day of April 2016 but before the 1st day of April 2022;
(b) 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, 2022**; and
(c) it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government;
** Budget 2021 has extended the eligibility to 31st March 2022.
“eligible business” – business which involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property;
- Certification for the purposes of section 80-IAC of the Act
- Make an application in Form-1 along with following documents to the Board (https://www.startupindia.gov.in/content/sih/en /form80iac.html)-
- Memorandum of Association for Pvt. Ltd./LLP Deed
- Board Resolution (If Any)
- Annual Accounts of the startup for the last three financial years
- IT returns for the last three financial years.
- Refer to your Dashboard on the Startup India Portal for the status of your application. This can be found on the top right of the page after you log in.
For any clarifications, please email: [email protected]
- 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.
8. EXEMPTION UNDER SECTION 56 (ONLY FOR PRIVATE LIMITED COMPANIES)
- A Startup shall be eligible for notification under clause (ii) of the proviso to clause (viib) of sub-section (2) of section 56 of the Act and consequent exemption from the provisions of that clause, if it fulfils the following conditions:
(i) it has been recognised by DPIIT.
(ii) aggregate amount of paid-up share capital and share premium of the startup after issue or proposed issue of share, if any, does not exceed, twenty-five crore rupees:
iii) It has not invested in any of the specified assets. ( Startup shall not invest in any of the assets specified for the period of seven years from the end of the latest financial year in which shares are issued at premium)
File declaration in Form 2 to DIPP that it fulfils the conditions mentioned .(https://www.startupindia.gov.in/content/sih/en/Form-56.html)
On receipt of such declaration, the DPIIT shall forward the same to the CBDT.
Declaration by a Startup for exemption under Section 56(2)(viib) of the Income Tax Act, 1961
I, _____________________________ Son/ Daughter of ______________________ having Permanent Account Number (PAN) __________________________ in my capacity as __________________ of ________________________ (Company’s Name) _________________ having DPIIT recognition number____________________________and Permanent Account Number (PAN) ________________________ hereby certify and declare that the said company has not invested and shall not invest for a period of seven years from the end of the latest financial year in which shares are issued at premium by the said company in any of the assets specified in para 4(iii) of the notification number G.S.R. 127(E) dated 19th February 2019 issued by Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry.
2. I understand that failure to comply with the above declaration will result in revocation of exemption with retrospective effect.
9. Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups u/s 54GB.
If an individual or HUF sells a residential property and invests the capital gains to subscribe the 50% or more equity shares of the eligible startups, then tax on long term capital will be exempt provided that such shares are not sold or transferred within 5 years from the date of its acquisition.
The startups shall also use the amount invested to purchase assets and should not transfer assets purchased within 5 years from the date of its purchase.
10. Set off of carry forward losses and capital gains allowed in case of a change in Shareholding pattern.
The carryforward of losses in respect of eligible start-ups is allowed if all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of the previous year in which such loss is to be carried forward. The restriction of holding 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in the case of eligible startups.
- BENEFICIAL CHANGES FOR ELIGIBLE STARTUP (MAY OR MAY NOT BE RECOGNISED)
1. DEFERRING TDS OR TAX PAYMENT IN RESPECT OF INCOME PERTAINING TO EMPLOYEE STOCK OPTION PLAN (ESOP) OF STARTUPS- TDS or tax payment has been deferred by five years or till the employee leave the company or sell their shares, whichever is earliest
2. ALLOWING NON-GOVERNMENT PROVIDENT FUNDS, SUPERANNUATION, AND GRATUITY FUNDS TO INVEST IN AIFS
3. IRDAI has allowed investments by insurance companies in Fund of Funds (FoF), which will lead to increased capital flow into AIFs via FoFs.
4. Ministry of Labour and Employment now allows Employees Provident Fund Organization (EPFO) to invest its 5% of investible surplus into Category I and Category II AIFs.
NOTES FOR EXEMPTION U/S 56-
1. For calculation, 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
2. considerations received by such startup for shares issued or proposed to be issued to a specified company shall also be exempt and shall not be included in computing the
3. the aggregate amount of paid-up share capital and share premium of twenty-five crore rupees
a) building or land appurtenant thereto, being a residential house, other than that used by the Startup for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
(b) land or building, or both, not being a residential house, other than that occupied by the Startup for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business;
(c) loans and advances, other than loans or advances extended in the ordinary course of business by the Startup where the lending of money is substantial part of its business;
(d) capital contribution made to any other entity;
(e) shares and securities;
(f) a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds ten lakh rupees, other than that held by the Startup for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;
(g) jewellary other than that held by the Startup as stock-in-trade in the ordinary course of business;
(h) any other asset, whether in the nature of capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of
section 56 of the Act.