Startup India is a flagship initiative of the Government of India, intended to catalyze startup culture and build a strong and inclusive ecosystem for innovation and entrepreneurship in India. Since the launch of the initiative on 16th January, 2016, Startup India has rolled out several programs with the objective of supporting entrepreneurs, and transforming India into a country of job creators instead of job seekers.
As of today more than 50K startups recognized under DPIIT.
The Government of India under its flagship programme “Startup India” introduced the concept of an “Eligible Startup”. Government also laid down the criteria for recognition as an “Eligible Startup”
“Eligible Startups” entitled to benefits announced by government under various programmes, schemes and regulations.
Startup can get DPIIT recognition through an online application on https://www.startupindia.gov.in/
Through this article I am trying to cover the following topics in relation to Startup:-
1. Meaning of startup and eligibility criteria.
2. Process of recognition under DPIIT.
3. Benefits of Startup.
4. Meaning of Angel Tax and Exemption to Startup under section 56(2) (viib) of Income Tax Act, 1961
5. Exemption u/s 80 IAC.
6. Summary of Relaxations under Income Tax Act.
8. Summary of Startup Structure
1. Meaning of startup and eligibility criteria :-
As per Notification dated 19th February, 2019 in Official Gazette of Government “DPIIT”
An entity shall be considered as a Startup, if satisfy following conditions:
i. Eligible Startup Entity
A. Private Limited Company or
B. Limited Liability Partnership (LLP) or
C. A Registered Partnership Firm.
The above said entities should be not being more than 10 years old from the date of incorporation and registration.
*Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded 100 Cr. Rupees.
* Turnover means as defined in clause 68 sections 2 of the Companies Act, 2013.
iii. Entity working towards:
A. Innovation or
B. Development or improvement of products/processes/ services or
C. A scalable business model in terms of employment generation and wealth creation.
Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered as an ‘Eligible Startup”
2. Process of recognition under DPIIT:-
The process of recognition under DPIIT of an eligible entity as startup shall be as under: —
a. Register on www.https://www.startupindia.gov.in/
b. Apply for recognition as an “Eligible Startup”.
c. Submit a write up about the nature of business of your startup by way of answering predefined questionnaire :-
1. Is the offering a product/service?
2. Is the product Innovative/an Improvement of an existing process?
3. Is the offering resulting in Employment Generation/Wealth Creation?
4. A brief note supporting the options chosen above for innovation/ improvement?
5. Details of all the Director/Partner of the Company/LLP/Partnership.
6. What is the problem the startup is solving?
7. How does the startup propose to solve this problem?
d. Submit the online application along with attachments such as Certificate of incorporation, etc.
e. The Department will review the application and if satisfy, send DIPP Recognition Certificate over the registered email ID.
3. Benefits to Eligible Startup:-
|1||Companies Act, 2013||
|2||Income Tax Act, 1961||
|3||Fema and RBI||
|4||Labour and Environment Law||
|6||Intellectual Property Right||
|7||Public Procurement Right||
|8||Corpus Fund for startup||
4. Meaning of Angel Tax and Exemption to Startup under section 56(2) (viib) of Income Tax Act, 1961
What is Angel tax u/s 56(2) (viib) –
Angel Tax is a tax proposed to be levied on consideration received by privately held companies on issue of shares for a value that exceeds the face value of such shares (called “Securities Premium” or “Premium”), than the aggregate consideration received for such shares which is exceeds the fair market value of the shares, shall be chargeable to Income Tax in the hands of recipient Company.
Fair market value of the shares shall be the value—
(i) as may be determined in accordance with such method as may be prescribed under rule 11U and 11 UA; or
(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;
Exemptions to Startup:-
A Startup shall be eligible for exemptions u/s 56(2) (viib) of the Income Tax Act, 1961, if it fulfills the following conditions:
i. It should be recognized under DPIIT.
ii. Aggregate amount of paid up share capital and share premium of the Eligible Startup after issue or proposed issue of share, if any, does not exceed INR 25 Cr.
Following persons or transaction is exempt while calculating aggregate amount of paid up share capital and share premium of Rs. 25 Cr.:-
a. Investment from Non-resident (shares issued to non-resident)
b. Investment from Venture Capital Company or Venture Capital Fund (shares issued to VC funds or company)
c. Shares issued to “Specified Company”
Note: – “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 rupees 100 Cr. or turnover for the financial year preceding the year in which shares are issued exceeds rupees 250 Cr.
iii. For claiming exemption u/s 56(2)(viib) of the Income Tax Act, 1961 (Angel Tax Exemption) eligible startup who already recognized under DPIIT shall furnished duly signed self declaration in form -2 (Annexure-A) to DPIIT.
iv. Exemption will be revoked if the investments are made in Specified Assets* for the period of 7 Years from the end of latest financial year in which shares are issued as premium, as mentioned in para 4 sub para (iii) sub clause (a) to (h) of the Notification dated 19th February, 2019.
*Specified Assets: –
(a) Land and Building being a Residential House :-
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 and Building not being a Residential House :-
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:-
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:-
Capital contribution made to any other entity.
(e) Shares and securities.
(f) Motor vehicle, aircraft:-
a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds 10 lakhs 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.
Jewellary other than that held by the Startup as stock-in-trade in the ordinary course of business.
(h) Any other asset:-
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.
5. Exemption u/s 80IAC of the Income Tax Act, 1961
80IAC. (1) where the gross total income of an assessee, being an *Eligible Startup, includes any profits and gains derived from **Eligible Business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee:-
i. An eligible startup who already recognized under DPIIT wants to take exemption u/s 80IAC of the Income Tax Act, 1961 (Tax Deduction) shall apply in form -1 to DPIIT (Annexure-B).
ii. The Eligible Start-up should be incorporated on or after 01.04.2016 but before 01.04.2022
iii. Startup not formed by splitting up, or the reconstruction, of a business already in existence ; Startup not formed by the transfer to a new business of machinery or plant previously used for any purpose (subject to 20% limit for transferred machinery).
*Eligible Startup for claiming 80IAC exemption –
i. It has been recognized by the DPIIT.
ii. Registered Private Limited Company and b. Registered Limited Liability Partnership (LLP)
iii. Turnover does not exceed 100 Cr.
Note – Partnership firm cannot claim exemption under 80IAC although they are eligible for DPIIT recognition
**Eligible Business under section 80IAC –
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.
6. Summary of Relaxation under Income Tax Act, 1961
|1||ESOP Tax Deferment||Deferment of demand notice u/s 156(2), for Eligible Startup referred to in section 80IAC|
|2||Angel Tax Exemption||Angel Tax Exemption u/s 56 (2) (viib) & No Income Tax Scrutiny on Valuation|
|3||100% Tax Deduction||100% Tax Deduction u/s 80IAC|
|4||Section 54GB Capital Gain Benefit||Exemption of Long term Capital Gain Tax on Transfer of Residential Property if Net Consideration is Invested in the Equity Shares of Eligible Start-up referred in section 80IAC.|
|5||Section 79 Set off and Carry forward Benefit||Condition of section 79 not applicable – An Eligible Startup referred in section 80IAC is not denied to carry forward and set- off of previous year losses even if there is change in 51% Shareholding, provided all shareholders as on year of losses continue to be shareholder in current year.|
|S. No||Particulars||Only DPIIT Recognition||DPIIT Recognition (+) Furnished declaration under form-2 (Angel Tax )||DPIIT Recognition (+) Furnished declaration under form-2 (Angel Tax ) (+) Certification under 80IAC|
|1||Regulatory Benefits under Company Law, FEMA, RBI, IBC, Labour Law, Employment law, IPR, Public Procurement and Reserved Funds||Yes Available||Yes Available||Yes Available|
|2||Angel Tax exemption benefit (u/s 56 (2) (viib)||Not Available||Yes Available||Yes Available|
|3||80IAC Tax Deduction along with other Income tax Benefits (Sec -54GB and Sec- 79)||Not Available||Not Available||Yes Available|
8. Summary of Startup Structure
|S. No||Particulars/ Head||Registered partnership Firm||Limited Liability Partnership (LLP)||Private Limited Company|
|1||Regulatory Benefits under Company Law, FEMA, SEBI, RBI, IBC, Labour Law, Employment law, IPR, Public Procurement and Reserved Funds||Yes Available||Yes Available||Yes Available|
|2||Angel Tax exemption benefit (u/s 56 (2) (viib)||Not Available||Not Available||Yes Available|
|3||80IAC Tax Deduction||Not Available||Yes Available||Yes Available|
|4||Other Income Tax Benefits (Sec -54GB and Sec- 79)||Not Available||Not Available||Yes Available|
|5||Income Tax Rate||30%||30%||22% and 15%|
Declaration by a Startup for exemption under Section 56(2) (viib) of the Income Tax Act, 1961
<To be issued on Company Letterhead>
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.
I understand that failure to comply with the above declaration will result in revocation of exemption with retrospective effect.
*This declaration is to be signed by a person who is authorized to verify the return of income under section 140 of the Act.
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 – ………………..
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 authorized signatory) Designation
a. Copy of Memorandum of Association / LLP Agreement
b. Annual Accounts of the startup for the last three financial years
c. Copies of income-tax returns for the last three financial years
d. Video link explaining the product/service the startup engaged
Disclaimer: – The information shared above is true and correct to the best of my knowledge. The author or publisher will disclaim any liability in connection with the use of this information. The author shall not liable for any direct, indirect, special or incidental damage resulting from arising out of or in connection with the use of the information.
FCA Vikas Aggarwal | | [email protected]