Start up is the policy measure of the government of India, Ministry of Commerce and Industry to give stimulus and boost to the Innovative Talents to set up the business. These start up needs to get registered with Department of Industrial Policy and Promotion (DIPP) which will grant them a certificate, if all the conditions of start up are fulfilled. The Conditions to be recognized as eligible start up is covered vide. Notification No. G.S.R. 127(E) dated 19th Feb, 2019.
Definition: An entity Shall be considered as Start up:
1. Upto 10 years if it is incorporated as a Private Limited Company, Registered Partnership firm or Limited Liability Partnership in India. (On completion of 10 years from date of Incorporation or formation the entity shall cease to exist to be a start up)
2. Its turnover for any Financial year since incorporation or registration shall not exceed Rs. 100 crores. (if in any previous the turnover exceeds Rs. 100 crore Rupees, than entity shall cease to be a start up)
3. If it is working towards innovation, development or improvement of product or processes or services, or if it is a scalable business model with high potential employment generation or wealth creation.
All the above conditions are cumulative, and all the conditions needs to be fulfilled. Further, the entity should be a new entity and should not be formed by splitting up or reconstruction of a business already in existence.
Process of Recognition: An entity should make an online application on portal of the Department named gov.in.
Application shall be accompanied with the following:
1. a copy of certificate or Incorporation.
2. 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.
There are various tax benefits to the entities registered as start up which fulfil the conditions as mentioned in various sections of the Income Tax Act, 1961. We would go through the section wise analysis of the same as under:
1. 100% deduction of profits and gains derived from eligible business (eligible business means business as defined in Point 1(c). of Definition above), for 3 consecutive years, these deduction shall be allowed at the option of the assessee can be claimed for any 3 consecutive years out of 7 years from date of incorporation of eligible start up.
2. It should not be set up by splitting up, reconstruction of business already in existence.
3. Plant and Machinery used in the start up shall be new (Max. 20% of Value of Plant and Machinery can be old). However if the Plant and Machinery was used outside India by any person other than assessee and following conditions are fulfilled than it would be treated as New Machinery:
a. Such Machinery or plant was never before installation used by assessee in India.
b. Plant or machinery was imported to India.
c. No deduction on account of Depreciation in respect of plant of Machinery is allowed or allowable under Income Tax law of any person for a period prior to date of installation of plant and Machinery by the assessee.
4. For the Purpose of Deduction under section 80-IAC, partnership firm is not recognized, so even the start up Partnership firms recognized by DIPP cannot claim exemption under section 80-IAC.
5. In order to claim deduction under 80-IAC, company or LLP should fulfill the below mentioned conditions:
a. Incorporated after 1st April, 2016 but before 1st April, 2021.
b. Turnover does not exceed 25 crores in the year of which deduction is claimed.
c. Registered as start up with Inter Ministerial board of Certification (i.e. DIPP as stated in point viii. below).
6. Accounts are to be audited by a Chartered Accountant in order to claim the Deduction.
7. For the year of Deduction, Previous year and subsequent years it would be treated that the it is only source of Income of the asssessee.
8. Company or LLP fulfilling the above conditions shall make an application to Inter Ministerial Board in Form 1, and after calling for the documents and making the inquiry the Board may grant a certificate, which is required to claim Deduction.
Section 56 (2) (viib):
If a company issues shares, and the issue is at the price above face value, then in such case the difference between the issue price and fair market value of the shares shall be treated to be the income of the company. However, this provision is not applicable to Notified entities (Start up is a notified entity as stated in Para 4. Of Notification No. G.S.R. 127 (E) dated 19th February, 2019.
In order to escape this provision following conditions need to be fulfilled:
1. A start up company shall be a company registered with DIPP (as stated in para 2 above).
2. Total of paid up share capital and Share Premium after issue or proposed issue shall not exceed Rs. 25 crores.
3. For the calculation of Rs. 25 crores, shares issued to non – resident or venture capital company or venture capital fund shall not be included. Further, shares issued to listed companies whose more than 10% shares of the total share capital are traded during the previous 12 calendar months, shall also not be considered for above limit of Rs. 25 crores.
4. It should not invest in any of the following assets (for the period of 7 years from the end of the latest F.Y. in which the shares are issued at premium):
a. Building or land, being a residential house (except when used for renting or stock -in-trade or in ordinary course of business)
b. Land or Building other than residential house (except occupied by start up, used for renting purpose, or as a stock-in-trade or in ordinary course of business)
c. Loans and advances (except when loans as advances extended in ordinary course of business, where money lending is substantial part of business).
d. Capital contribution to any other entity.
e. Shares and securities.
f. a motor vehicle, yacht, or any other mode of transport, the actual cost of which exceeds ten lakh rupees (except when held by start up for plying, hiring, leasing or as a stock in trade).
g. Jewellery (except when held as stock in trade)
h. Archaeological collection, drawings, painting, sculptures, any other work of art, bullion.
5. On fulfilling all the above mentioned conditions, company shall file a duly signed declaration in form 2 to DIPP.
6. In case the company invests in assets which are not permitted as stated above, exemption given shall be revoked.
7. However, if company fails to comply with any of the conditions on a later it shall be deemed that company had under reported the income to the extant of consideration over fair Market value and tax should be payable further penalty is leviable at the rate of 200% of the amount of tax payable on under reported Income.
Above mentioned is the brief coverage of the Taxation aspects with regards to Start Up Entities.