The COVID 19 pandemic persists to be a health and human crisis, but the impact on business organisations is sagacious. Amidst this crisis, the major focus of Government is on promotion of start-ups as they are much more flexible, easier to run and demand much lesser compliances which is a boon during COVID 19. Also, the start-ups can turn out to be a major task force for e.g. in delivering essential items, tracking movement, logistics etc.

This article emphasizes on the criteria to be met for being a start-up and the eligible exemptions and incentives:

What Is A Startup; Recognition By DPIIT [Department For Promotion Of Industry And Internal Trade]

  • REGISTRATION TYPE: Incorporated as a private limited company as defined under Companies act 2013 or registered as a partnership firm registered under Sec 59 of Partnership Act 1932 or a limited liability partnership under the Limited Liability Partnership Act 2008.
  • COMPANY AGE: The existence of the company should not be more than 10 years from the date of incorporation.
  • ORIGINAL ENTITY: The entity should not be formed by splitting or reconstruction of a business already in existence.
  • TURNOVER: The Company’s turnover should not have exceeded Rs. 100 crores since incorporation year.
  • SCALABLE AND INNOVATIVE: Should be working towards innovation development or improvement of products or services or should have scalable business model with a high potential of employment generation or wealth creation.

Why To Register As A Startup? (Benefits to DPIIT Recognised Start-ups)

  • SELF CERTIFICATION: Start-ups are allowed self-certification of 6 labour laws and 3 environmental laws. No verification is done in case of labour laws for a period of 5 years.
  • IPR BENEFITS: We all are aware that patent filing is a very expensive and time consuming process. However in case of start-ups government bears the process of facilitators for any number of patents, trademarks or designs a company shall file. Also the patent applications of start-ups are fast tracked making the valuation process flexible and quick and they are required to pay only 20% of fees for filing patents.
  • SECTION 80 IAC EXEMPTION BENEFITS: Recognised Start-ups incorporated after 1st April 2016 are exempted from paying income tax for 3 consecutive financial years out of first 10 years since incorporation. Also, it is required to note that even if a partnership firm may be a recognised start up by DPIIT but it shall not be eligible for exemption under 80 IAC. i.e. only private limited companies or limited partnerships are eligible for exemption under this section. Requires approval from inter-ministerial board (IMB).
  • SECTION 56 EXEMPTION BENEFITS: Section 56(2)(viib) popularly known as ANGEL TAX introduced back in AY 2013-14 provides that where a closely held company issues shares at a price which is more than its fair market value then the amount received in excess of fair market value of shares will be charged to tax as income from other sources. However, as per DIPP notification dated 19/02/2019 angel tax shall not be applicable to a start-up which has been recognised by DPIIT And whose paid up share capital and share premium after issue or proposed issue of shares does not exceed 25 crores (excluding the amount of paid up share capital and share premium received from non-residents or a venture capital company or venture capital fund).

Secondly the consideration received by start-ups for shares issued or proposed to be issued to specified company (A company whose shares are traded within SEBI and whose net worth on last date of financial year preceding the year in which shares are issued is more than 100 crores or turnover is more than 250 crores) shall also be exempt and shall not be included in paid up share capital and share premium of 25 crores.

To be Noted Start-ups should not have invested in prohibited assets as given in the notification by DPIIT dated February 2019 to avail the exemption under section 56.

Incentive Under Section 79 of Income Tax Act:

Section 79 clause (a) of Income tax act provides that no loss incurred in any year before the previous years shall be carried forward and set off against income of previous years unless on the last day of the previous year the shares of the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held the shares of the company of not less than 51% of voting power on the last day of year or years in which loss was occurred. For facilitating business of start-ups.

However start-ups were given flexibility through clause (b) of section 79 whereby eligible start-ups can carry forward and set off losses if all the shareholders of the company who held shares carrying voting power on the last day of the year or years in which loss was incurred continue to hold those shares on the last day of such previous year and such losses have been incurred during the seven years beginning from the year in which it is incorporated.

The start-ups have to satisfy ANY of the two clauses mentioned above.

Incentive Under Section 54GB of Income Tax Act:

Section 54 GB of income tax Act allows exemption from tax on long term capital asset being residential property on investment of proceeds of such a transfer in subscribing equity shares if a start-up

The condition of minimum holding in start-up is relaxed to 25%.

CONCLUSION: It seems that start-ups can bridge the gap of where Indian economy stands now and where it has been targeted to reach by 2024. However, the Red-Tapism needs to be checked in the system and the government should ensure that DTIIP recognises start-ups so that they can avail the incentives and benefits. Inter-ministerial approvals should be made quickly. Everyone in the start-up ecosystem should adopt a proactive approach to make it successful.

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March 2021