The Start-ups were having high expectations from the first budget of Modi Govt. 2.0 and the Finance Minister, Smt. Nirmala Sitharaman hasn’t let down their expectations. She proposed to start a television programme within the DD bouquet of channels exclusively for start-ups. Further, tax proposals made by Finance Minister were aimed to encourage start-ups by releasing entrepreneurial spirits. The key tax proposals announced in the union budget impacting start-ups are discussed as under.

1. Investment of LTCG from Residential House Property in shares of Eligible Start-up

[Applicable from Assessment Year 2020-21]

Section 54GB provides exemption to an Individual and HUF from the long-term capital gains arising from transfer of a residential house property. The exemption is allowed if the amount of capital gains is invested in equity shares of an ‘eligible company’. The exemption is allowed subject to fulfilment of following conditions:

a. The company is incorporated in India on or after April 1 of the previous year, in which capital gains arises, and up to the due date of furnishing the return of income.

b. It is engaged in the business of manufacture of any article or thing or in an eligible business.

c. The transferor (assessee) of residential property has more than 50% share capital (or voting right) of such company (after subscription).

d. The company is either an eligible start-up or SME.

e. The company utilizes the amount to purchase new assets, which shall not be transferred for 5 years from the date of acquisition.

The exemption is available only if the original asset is transferred between April 1, 2012 and March 31, 2017. However, if the capital gain has to be invested in an eligible start-up, the original asset can be transferred up to March 31, 2019.

To incentivize the start-ups, the Finance Bill 2019 proposed following amendments in section 54GB:

a. It extended the sunset date for transfer of original capital asset (residential property) for investment in eligible start-ups from March 31st 2019 to March 31st 2021

b. The condition of minimum holding of 50% of share capital or voting rights in the start-up is proposed to be relaxed to 25%

The condition which restricts the transfer of new asset for 5 years is proposed to be reduced to 3 years in case of computer or computer software.

2. Exemption given to Category II AIF from ‘Angel Tax’

[Applicable from Assessment Year 2020-21]

As per section 56(2)(viib), if a closely held company receives, from any resident person, 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 is taxable as income from the other sources.

However, exemption from this provision has been provided for the consideration received by a venture capital undertaking from a venture capital company or a venture capital fund or by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Currently the benefit of exemption is available to Category I Alternative Investment Fund (AIF). The Finance Bill, 2019 proposed to amend this provision to extend the exemption to capital received by venture capital undertakings from Category II AIF as well.

3. Exemption given to Category II AIF from ‘Angel Tax’

[Applicable from Assessment Year 2020-21]

As per section 56(2)(viib), if a closely held company receives, from any resident person, 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 is taxable as income from the other sources.

However, exemption from this provision has been provided for the consideration received by a venture capital undertaking from a venture capital company or a venture capital fund or by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Currently the benefit of exemption is available to Category I Alternative Investment Fund (AIF). The Finance Bill, 2019 proposed to amend this provision to extend the exemption to capital received by venture capital undertakings from Category II AIF as well.

4. Conditions of Section 79 relaxed to allow an eligible start-up to carry forward the losses

[Applicable from Assessment Year 2020-21]

The current provisions of Section 79 have imposed following certain conditions to carry forward the losses in case of closely held companies:

a. In the year of set-off of losses, at least 51% of voting power should be beneficially held by the same persons who held them on the last day of the year in which loss was incurred.

b. In case of an eligible start-up, 100% of shareholders, on the last day of the previous year in which loss was incurred, should continue to hold the shares on the last day of the previous year in which loss is set-off. Further, losses should have been incurred during the period of 7 years from the year of incorporation.

To further facilitate ease of doing business in case of an eligible start-up, it is proposed to amend section 79 so as to provide that loss incurred, by the closely held eligible start-up, shall be allowed to be carried forward and set off against the income of the previous year on satisfaction of either of the two conditions specified above, i.e. continuity of 51% shareholding or continuity of 100% of original shareholders.

Author Bio

Qualification: CA in Practice
Company: Praveen K & Associates, Chartered Accountants
Location: New Delhi, New Delhi, IN
Member Since: 10 Jun 2019 | Total Posts: 7
Praveen K & Associates was founded by CA. Praveen Kumar who has a diversified exposure in Finance, Accounts, Taxation and Advisory across various corporate houses in India. This firm has Head office in New Delhi and very soon other parts of India would be duly covered. View Full Profile

My Published Posts

More Under Income Tax

One Comment

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

December 2020
M T W T F S S
 123456
78910111213
14151617181920
21222324252627
28293031