Summary: The advisory on taxation for startups, Alternative Investment Funds (AIFs), and International Financial Service Centres (IFSCs) highlights key areas of management consultancy and compliance. Startups in India, defined as entities within ten years of incorporation with a turnover not exceeding ₹100 crores, benefit from tax exemptions under Section 80IAC and have recently seen the removal of angel tax provisions. Unicorns, privately held startups valued at over $1 billion, exhibit unique characteristics but face undefined tax treatment. For AIFs, categorized into three types based on investment focus, taxation varies: Category I and II funds are subject to profit and gains taxation, while Category III funds, including hedge funds, benefit from exemptions in IFSCs. IFSCs, such as the GIFT city in Gujarat, provide substantial tax advantages including lower MAT and AMT rates, exemptions on income from specified securities and royalties, and benefits for non-residents. The establishment of IFSCs aims to enhance India’s financial services sector by attracting qualified professionals and facilitating complex financial transactions, with various tax incentives designed to support their growth and operational efficiency.
Introduction: Through this write up we are going to see taxation aspects pertaining to start up, International financial service centre (‘’IFSC’’) and Alternative Investment Fund(‘’AIF’’). The three topics are a very unique area of management consultancy / advisory as the entire transaction need to be understood from accounting till litigation. We will analyses topic by topic.
A. Advisory on taxation for startups
Most of the youngsters and especially women who have entrepreneur mindset like to work in start up considering the innovation new modern technologies. The Bangalore city is referred as start up capital of country. Going by definition start up means an entity
√ Up to period of 10 years from the date of incorporation/ registration if it is incorporated as a private limited(as defined in the Companies Act 2013) or registered as a partnership firm or a limited liability partnership in India.
√ Turnover of entity for any of financial years since incorporation/registration has not exceed Rs 100 crores.
√ Entity is working towards innovation development or improvement of products or processes or services or with scalable business model with a high potential of employment generation.
Provided that an entity formed by splitting or reconstruction of an existing business shall not be considered as startup. If only not formed as splitting or reconstruction business then eligible for tax benefits.
Start up have tax benefit under 80IAC of the Income tax Act(‘’Act’’). This Section start up entity can claim tax benefits which states 3 consecutive Assessment year(‘’AY’’) out of 10 AY beginning after AY in which start up is incorporated.
Based on recent amendment the concept of angel tax stands abolished. Hence Section 56 would not be attracted.
Now a new concept called Unicorn has emerged. Various examples of unicorn like Paytm, Quikr.
Unicorn has the following features
- Privately held start up
- Valuation of start up reaches US1 billion.
- Emphasis is on the rarity of success of such start up.
- Other common features are new ideas disruptive innovation consumer focus high on technology.
The taxation has not been mentioned especially in provision of the Act as regards to unicorn.
The interesting part is that Employee stock option plan when given to employees the same is taxable as perquisite in the hands of employee. The liability of payment or deduction of tax on such perquisite is allowed to be deferred for start up.
B. Advisory on taxation for AIFs
To understand in layman language AIF refers to any privately pooled investment fund, in the form of trust or a company or a body corporate or a limited liability partnership.
As per Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 Alternative Investment Funds shall seek registration in one of the three categories
- Category I: Mainly invests in start- ups, SME’s or any other sector which Govt. considers economically and socially viable.
- Category II: These include Alternative Investment Funds such as private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator
- Category III: Alternative Investment Funds such as hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended and for which no specific incentives or concessions are given by the government or any other Regulator.
Category I and Category II shall be for 3 years and shall be open ended.
Coming to taxation of AIF for category II Profit and gains of business or profession(‘’PGBP’’) is taxable in the hands of Fund whereas other income is taxable in the hands of unit holder. Investment fund is required to file return under 139(4) of the act. With regard to losses incurred by the fund any loss arising from PGBP shall be carry forward in the hands of unit holder whereas any loss under other head if more than 12 months shall be carry forward in the hands of unit holder.
Section 10(4d) of the Act states that category III AIF located in IFSC or investment division of an offshore banking unit which has been granted a Category 1 shall be exempted.
Form 10 IG shall be furnished by residents in the annual statement of exempt income.
C. Advisory on taxation for IFSCs
IFSC is a financial center that caters to the needs of customers outside their jurisdiction. There are various benefits from IFC is that
- Stops brain drain from India
- Trading of Complicated financial derivative can be started from India.
- Opportunity for qualified professionals working outside India come here and practice their profession.
GIFT city in Gujarat is India first IFSC. Here GIFT exchange controls cannot apply hence Foreign exchange management Act does not apply.
Soke income tax concessions are described here
- Minimum alternative tax(MAT) and Alternative minimum tax(AMT) is levied at 9% for foreign currency convertible income. However the provisions of MAT and AMT would not apply for companies opting under new scheme.
- Section 47(viiab) of the Act provides that any transfer of specified securities by a Non-resident on a recognised stock exchange located in any IFSC shall not be regarded as a transfer.
- 100 % tax exemption for 10 out of 15 years under Section 80LA.
- Category-I and Category-II AIF regulated under the IFSC Authority Act, 2019 are provided pass-through status under the Act as per Section 115UB read with Section 10(23FBA) and Section 10(23FBB).
- Section 10(4F) of the IT Act provides tax exemption on royalty and interest income of a non-resident on lease of an aircraft if it is paid by a unit in IFSC. Such tax exemption is also extended to royalty and interest income of a non-resident on the lease of a ‘ship’ if it is paid by a unit of IFSC.
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