Benefits for start-ups under income tax act

Startup India is a flagship initiative of the Government of India which launched on 16th January, 2016, the Startup India Initiative has rolled out several programs with the objective of supporting entrepreneurs, building a robust startup ecosystem and transforming India into a country of job creators instead of job seekers. These programs are managed by a dedicated Startup India Team, which reports to the Department for Industrial Policy and Promotion (DPIIT). In this initiative to support the startups in all aspects, the Government has given numerous benefits under the various laws likes exemption under income tax act, fast track process of IPR and rebate for filling the same, self-certification for 9 labour and environmental laws for period of 3 years, easy finance availability under stand up India scheme, exemptions from EMD in government contracts and easy exit system.

Eligible Startup as per Startup India Action Plan:

Under the Startup India Action Plan, startups that meet below criteria are eligible to apply for recognition under the program.

a) The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership

b) Turnover should be less than INR 100 Crores in any of the previous financial years

c) An entity shall be considered as a startup up to 10 years from the date of its incorporation

d) The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth. An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Startup”

Startup Recognition Procedure:

The process of recognition of an eligible entity as startup shall be as under: —

(i) A Startup shall make an online application over the mobile app or portal set up by the DPIIT.

(ii) The application shall be accompanied by—

(a) a copy of Certificate of Incorporation or Registration, as the case may be, and

(b) a write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.

(iii) 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.

Section 80-IAC exemption under Income Tax Act:

Eligibility Criteria for applying to Income Tax exemption (80IAC):

a) The entity should be a recognized Startup

b) Only Private limited or a Limited Liability Partnership is eligible for Tax exemption under Section 80IAC

c) The Startup should have been incorporated after 1st April, 2016 but before the 1st day of April, 2021

d) The total turnover of its business does not exceed twenty-five crore rupees in the previous year relevant to the assessment year for which deduction is claimed and

e) it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government. 

Post getting clearance for Tax exemption, the Startup can avail tax 100% deduction from profit and gains derived from eligible business for 3 consecutive financial years out of its first seven years since incorporation.

“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;

Conditions for deduction under section 80-IAC.

This section applies to a start-up which fulfils the following conditions, namely: —

(i) it is not formed by splitting up, or the reconstruction, of a business already in existence:

Provided that this condition shall not apply to business undertaking which was discontinued by reason of extensive damage to, or destruction of, any building, machinery, plant or furniture owned by the assessee and used for the purposes of such business as a direct result of—

(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or

(ii) riot or civil disturbance; or

(iii) accidental fire or explosion; or

(iv) action by an enemy or action taken in combating an enemy and, thereafter, at any time before the expiry of three years from the end of such previous year, the business is re-established, reconstructed or revived by the assessee

(ii) it is not formed by the transfer of machinery or plant previously used for any purpose to a new business.

Explanation 1. —For the purposes of this clause, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if all the following conditions are fulfilled, namely: —

(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;

(b) such machinery or plant is imported into India;

(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.

Explanation 2.—Where in the case of a start-up, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, the condition specified therein shall be deemed to have been complied with.

Other conditions to be complied for deduction under section 80-IAC

(1) or the purposes of determining the quantum of deduction, compute as if such eligible business were the only source of income of the assessee during the previous year.

(2) The deduction shall not be admissible unless the accounts of the undertaking have been audited by a chartered accountant and the assessee furnishes, along with his return of income, the report of such audit.

(3) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date :

Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.

Explanation. —For the purposes of this sub-section, “market value”, in relation to any goods or services, means—

(i) the price that such goods or services would ordinarily fetch in the open market; or

(ii) the arm’s length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA.

(4) Where any amount of profits and gains of an undertaking or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading “—Deductions in respect of certain incomes“, and shall in no case exceed the profits and gains of such eligible business of undertaking or enterprise, as the case may be.

(5) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:

Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm’s length price as defined in clause (ii) of section 92F.

(6) The Central Government may, after making such inquiry as it may think fit, direct, by notification in the Official Gazette, that the exemption conferred by this section shall not apply to any class of industrial undertaking or enterprise with effect from such date as it may specify in the notification.

Certification for the purposes of section 80-IAC of the Act

A Startup being eligible startup may, for obtaining a certificate for the purposes of section 80-IAC of the Act, make an 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 section 80- IAC of the Act; or

(ii) reject the application by providing reasons.

Form-1

Application for certificate for the purposes of section 80-IAC of the Income-tax Act, 1961

1. Name of the Startup – …………………………………

2. Date of incorporation/ registration of Startup – …………………………………

3. Incorporation No./ registration No. …………………………………

4. Address and business location- …………………………………

5. Nature of business …………………………………

6. Contact details of Startup (Phone No. and Email)- …………………………………

7. Permanent Account No. …………………………………

8. Existing/ proposed activities – …………………………………

(Enclose copy of Memorandum of Association, LLP/partnership Deed, Board Resolution etc.)

Declaration

I/ We hereby certify that the above information furnished by me is true and no relevant information has been concealed.

For (Name of the Startup)

(Name of the authorised signatory) Designation

Place: __________

Date: __________

This form shall be accompanied by the following documents (if applicable)-

1. Annual Accounts of the startup for the last three financial years

2. Copies of income-tax returns for the last three financial years

Section 56(2)(viib) exemption under Income Tax Act:

Extract of section 56(2)(viib)

“Where a company, not being a company in which the public are substantially interested, 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, the aggregate consideration received for such shares as exceeds the fair market value of the shares”

Eligibility Criteria for Tax Exemption under Section 56 of the Income Tax Act:

a) The entity should be a DPIIT recognized Startup

b) Aggregate amount of paid up share capital and share premium of the Startup after the proposed issue of share, if any, does not exceed INR 25 Crore

Provided that in computing the aggregate amount of paid up share capital, the 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;

Provided further that 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 aggregate amount of paid up share capital and share premium of twenty five crore rupees.

“specified company” means a company whose shares are frequently traded within the meaning of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and whose net worth on the last date of financial year preceding the year in which shares are issued exceeds one hundred crore rupees or turnover for the financial year preceding the year in which shares are issued exceeds two hundred fifty crore rupees.

c) It has not invested in any of the following assets─

i. 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;

ii. 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;

iii. 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;

iv. capital contribution made to any other entity;

v. shares and securities;

vi. 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;

vii. jewellery other than that held by the Startup as stock-in-trade in the ordinary course of business;

viii. any other asset, whether in the nature of capital asset or otherwise, of the nature of archaeological collections; drawings; paintings; sculptures; any work of art; or bullion;

Provided the Startup shall not invest in any of the assets specified in sub-clauses (i) to (viii) for the period of seven years from the end of the latest financial year in which shares are issued at premium;

Scope of exemption under section 56 

(a) The above exemption shall apply irrespective of the dates on which shares are issued by the Start up from the date of its incorporation, except for the shares issued in respect of which an addition under section 56(2)(viib) of the Act has been made in an assessment order made under the Act before the date of issue of the notification.

(b) The above exemption shall be applicable only in respect of applicability of the provisions of section 56(2)(viib) of the Act to the Startup and shall not grant any exemption in respect of applicability of other provisions of the Act.

Procedure to get the exemption under section 56 

A startup fulfilling the above conditions shall file duly signed declaration in Form 2 to DIPP that it fulfils the conditions. On receipt of such declaration, the DPIIT shall forward the same to the CBDT. 

Form 2

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 _______ dated _________ 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.

Place: _______________

Date:_______________

*Signature: _________________________

Name: _____________________________

Designation: ________________________

*This declaration is to be signed by a person who is authorised to verify the return of income under section 140 of the Act.

Revocation of exemption under section 56 

a) In case it is found that any certificate of exemption u/s 56 has been obtained on the basis of false information, the Board reserves the right to revoke such certificate or approval.

b) Where the certificate or approval has been revoked under sub-para (1), such certificate or approval shall be deemed never to have been issued or granted by the Board.

c) In case the Startup which has furnished declaration in Form-2 invests in any of the assets (in which investment not allowed) before the end of seven years from the end of the latest financial year in which the shares are issued at premium, the exemption provided under section 56(2)(viib) of the Act shall be revoked with retrospective effect.

Conclusion:

The Government of India has launched the Startup India scheme with abundant benefits under the various laws out of which we have articulated the benefits, under the income tax act, of 100% tax exemption for 3 years and exemption from capital gain tax under section 56(2)(viib). These benefits are for new innovative and small startup to support in the initial years of struggle which will not be given in case of restructuring of existing business. The main purpose is to motivate young entrepreneurs who can create employment in the country for others also. Government is giving exemption from capital gain tax on additional issue of share at more than fair value also but the consideration received should not be invested in non-business activities.