10 most important changes made to tax & Regulatory framework for startups in 2018

10 most important changes made to tax & Regulatory framework for startups in 2018

According to Merriam and Webster, startups means to act of setting in operation or motion. In business terminology, the startups are the young companies which are incorporated by founders or individual to offer a product or service which is not available in the market or owner believes that such product or service is available in inferior quality.  Union Budget 2018 provides an exemption to various taxes and Regulatory frameworks for startups. Department of Industrial Policy and Promotion(DIPP) is registration and recognition body for the startups in India. It is responsible for making rules and regulations for startups. DIPP through an official notification No. G.S.R. 364(E). dated 11th April 2018 notified procedures to avail tax benefits for startups. This notification was based on the finance bill of the Union Budget 2018.

As per DIPP notification startup can be in a form of Private Company, Partnership firm or Limited Liability Partnership. Turnover of startup for any of the financial years has not exceeded Rs 25 crore from since incorporation. An organization formed by splitting or by reconstruction of the existing business will not be treated as a Startup. If in any fiscal year turnover of the startup exceeds to Rs 25 crore, it will be ceased to be called startup.

Change in Procedure for Registration of Startups

For getting recognition of the DIPP for the startups, investor or promoter needs to file the online application through DIPP mobile app or its website with the required documents and stating the nature of the business.  

The application process will require the following documents

1. A copy of the certificate of incorporation
2. A Write-up – stating the nature and details related to the business

DIPP after examining the application and documents attached with

1. Will recognize the entity as a startup or
2. Reject the application by giving some reasons

DIPP via notification dated 11 April 2018  changes the period for recognition as Startups. New notification requires  10 years and 7 years for Biotechnology Industry and other startups respectively to be considered as Startups

10 most important changes made to tax & Regulatory Framework for startups in 2018

1. Reduction of Corporate Tax

In Budget 2018, government cuts the corporate tax from 30% to 25% on the companies with the turnover up to 250 crores in the financial period of 2016-17. It will help to reduce the corporate tax burden on the startups. This corporate tax reduction will help startups to generate more revenue and it will create more job opportunities which will lead to high earnings. Reduction of 5% corporate tax will bring transparency & consistency and new players will join the business sector via opening new startups. Thus it will lead to the growth of the economy. This regime eases compliance in the business sector. Capital will be easily available to the Startups. This reduction of corporate tax will reduce the cost of doing business.

2.  Amendment in Section 80IAC

Section 80IAC is a special provision for startups. It states that when startups come under the meaning of eligible startups then it can get 100% tax exemption o profits of 3 consecutive years. The startup can claim this benefit in any 3 out 7 years. In Union Budget 2018, the government has extended the period of incorporation of startups from 1 April 2016 to – 1 April 2019 to 1 April 2016 to – 1 April 2021 to avail benefits under Section 80 IAC of Income-tax Act. Under Section 80IAC startups can claim 100% tax exemption on profits for 3 out of 7 years. From this amendment Startups will enjoy tax exemption for 3 out 7 financial years. To get benefit under this, approval certificate of exemption is necessary from the inter Ministry Board. These 7 years will be counted from the date of incorporation of the company

3. Startups included in  Definition of Eligible business under Section 80IAC

Also In Budget 2018 and through DIPP notification, The government included startups in the definition of Eligible business under the Explanations of  Section 80IAC of the Income Tax Act. As per amendment in 2018, eligible business means a business carried out by an eligible start-up engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation.  This amendment helps to boost the growth of startup companies.

4. The composition of the Inter-Ministerial Board

Inter-Ministerial Board is responsible for issuing a certificate for the tax exemption to the startups of taxes under Section 80IAC and 56(2) (viib) and  Income tax Acts, 1961. Department of Industrial Policy and Promotion via a notification on 1 April 2018 changed the composition of the Inter-Ministerial Board. As per the new notification, Inter-Ministerial Board will comprise of the :

1.Convenor: Additional Secretary of DIPP
2.Members: Representatives of the Department of Science and Technology and Department of Biotechnology,  MCA, MEIT, CBDT, RBI, SEBI.

5. Change in Procedure for applying Certificate under Section 80IAC

DIPP via notification dated 11th April 2018, changes the procedure for applying certificate for exemption of tax to the Inter-Ministerial Board. Application for the issuance of the certificate shall be made in form 1 containing the name of the startup, date of incorporation, PAN, Address etc. Annual Financial Statement and Copies of the Income-tax returns for past 3 years should be attached with the form

Form 1 is available at  https://taxguru.in/income-tax/sec-562viib-applicable-startups-paid-share-capital-upto-rs-10-crore.html

6. Amendment under Section 56(2) (viib)

Section 56 of the Income Tax Act talks about Income from other sources. Section 56(2) (viib) states that when company who receives in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares then Income arising from this will be considered as Income from other source and income tax will be charged on  it. To take benefit under this section the company should be such company where the public is not substantially interested. Section 56(2) (viib) of Income Tax is amended via notification dated 11th April 2017 of DIPP. This amendment provides an exemption of income tax to the eligible startups on share premium under Section 56(2) (viib) of Income Tax Act.

7.  Exemption on Angel Tax

Angel tax is a tax levied on the Angel investors of the startups. Startups are new in the market and bank does not trust to give a loan to startups. So Startups raised money from family members and when it cannot be able to raise money from the family members then it raises money from the outsiders. Outsiders investing in Startups by taking equity shares of the company are called Angel Investors. A tax levied on these Angel Investors are called Angel Tax.

DIPP via a notification on 11 April 2018, made amendment in Angel Tax for the startups. According to the notification, Startups which are incorporated before 2016 and they have raised money from angel investors up to 10 crores has not to pay Angel Tax. This is applicable only to the startups which have revenue of less than 25 crore

Before getting an exemption on Angel tax  certain conditions need to be fulfilled they are:

1. The average amount of paid-up share capital of the startup after the proposed issue of shares should not exceed ten and

2. An investor needs to furnish valuation report obtained from Category I Merchant banker specifying  Fair Market Value (FMV) of the shares in accordance with Rules 11UA of the Rules

3. An investor needs to submit either:

• The average returned the income of twenty-five lakh rupees or more for the preceding three financial years or
• The net worth of two crore rupees or more as on the last date of the preceding financial year

4. Application for getting benefit under Section 56(2) (viib) is to be made in form 2.  The startup has to furnish following details to IMB

• Name of the startup
• Pan and address of the existing shareholder along with their shareholding and amount at which shares are issued to them
• Financial Statements from the date of Incorporation
• Copy of Investor’s income tax returns for the last three financial years
• Copy of Investor’s balance sheet on the last date of preceding financial year along with
• Application for approval for the purpose of Section (56(2) (viib)

If IMB found that such approval has been obtained by giving false information then IMB has the right to revoke such approval. Once such approval or certificate is revoked, it will be considered that such approval was never granted by the IMB.

Form 2 is available at  https://taxguru.in/income-tax/sec-562viib-applicable-startups-paid-share-capital-upto-rs-10-crore.html

8. Exemption on Salary up to 40,000

In Union Budget 2018, the central government provided some reliefs to the salaried sector by putting standard deduction on salary up to 40,000. Thus It will create more job opportunities and enhance the growth of the economy. This will attract more to employers to apply for job and startups will not find difficulties in searching and recruiting personnel in its business.

9. No Education Cess on the Import of goods

In Budget 2018, government abolishes Education Cess and Secondary and Higher Education Cess on the import of goods. One who is planning to open the startup on the import of goods will need not to pay Education and Secondary and Higher Education Cess.

10. 12% Contribute of the government to the wages of new employees in EPF.

In Union Budget 2018, the government formed the policy that the government will contribute 12% of wages of new employers in EPF for all the sectors for the next 3 years. If one is planning to open startup he or she will not find difficulties for recruiting the personnel for his business. As by the above policy of the government, employees himself will apply for the jobs.

Startup India Scheme

Startup  India is an initiative of the Government of India launched on 16th January 2016 with an aim and objective of transforming India from job seekers to job creators. Startup India program empowers startups to grow through innovation and design. The objective of the government behind this initiative is to boost startup businesses, generate economic stability and increase employment opportunities in the country. All forms and policies program, notifications related to Startups is available at https://www.startupindia.gov.in/content/sih/en/home-page.html

Benefits for the  Startups under Startup India Scheme

1. Tax Exemption

2. Self Certification compliance for the startup under 6 labor law startups They are:

• Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996
• The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979
• The Payment of Gratuity Act, 1972
• The Contract Labour (Regulation and Abolition) Act, 1970
• The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
• The Employees’ State Insurance Act, 1948

3. Startup Patent Application and Intellectual Property Protection

4. Easy Available of  funds to startups through Alternate Investment Funds

5. Easy Public Procurement Norms

6. Easy winding up of the company

7. All rules, procedures, programs, forms, details, guidelines benefits related to Startups are available on one website. https://www.startupindia.gov.in/content/sih/en/home-page.html

8. Startup India has a big network of experts and startups.

9. Various Courses such as Startup India course by up grade, Web Development, and Programming, Design Thinking, Financial courses, Legal courses etc are available at Startup India Website https://www.startupindia.gov.in/content/sih/en/home-page.html

You can also give your opinions or views under Startup India Program.

References

1. Finance Bill, 2018   https://www.incometaxindia.gov.in/Budgets%20and%20Bills/2018/Finance-Bill-2018.pdf
2. Department of Industrial Policy and Promotion(DIPP) Notification dated 11 April 2018, https://dipp.gov.in/sites/default/files/Startup_Notification11April2018_0.pdf
3. Startup India https://www.startupindia.gov.in/content/sih/en/home-page.html
4. EY tax Alert, https://www.ey.com/Publication/vwLUAssets/start_upsCBDT/$FILE/start_upsCBDT.pdf
5. Department of Industrial Policy and Promotion,  https://dipp.gov.in/
6. Income Tax Act, 1961