Startups are in the news nowadays especially in relation to multiple rounds of funding and lay-offs due to increasing loss margins & no hope of becoming profitable in the near future. Mainly the startups used the money to grow their revenue and not to reduce their cost to become profitable.
Following are the beneficial provisions introduced by Government of India under Income-tax Act in order to encourage Entrepreneurs to open their businesses in India for employment generation and growth of the overall economy:
I. Section 80-IAC [Eligible Start-up]
1. Where the gross total income of the eligible startup includes profits or gains derives from eligible business, shall in accordance with and subject to provisions of this section be allowed deduction of amount equal to 100% of the profits or gains derived from such for 3 consecutive assessment years from gross total income.
2. Following conditions needs to be satisfied in order to claim deduction u/s 80-IAC:
a. Eligible startup means a Company or LLP which has been incorporated between 01-04-2016 to 31-03-2023;
b. Eligible business means a business carried out by an eligible startup 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;
c. The total turnover of the startup does not exceed INR 100 crores in the previous year relevant to the assessment year in which deduction is claimed;
d. The eligible startup holds a certificate of eligible business from the Inter-Ministerial Board of Certification which has been setup by Department of Industrial Policy and Promotion [“DIPP”];
e. Eligible startup has not been formed by splitting or reconstruction of a business already in existence or by the transfer to a new business of plant or machinery previously used for any purpose.
Note – As per Guidelines for Recognition of Startups dated 05.07.2021 issued by Department for Promotion of Industry and Internal Trade [“DPIIT”], merger or amalgamation under section 233 of the Companies Act, 2013 between any of the following class of companies will be allowed subject to fulfillment of norms of DPIIT notification by the resultant company:
i. two or more start-up companies; or
ii. one or more start-up company with one or more small company.
3. Further, any plant or machinery which was used outside India by any person other than the assessee shall not be regarded as previously used for any purpose, if all the following conditions are fulfilled, namely:
a. such plant or machinery was not, at any time previous to the date of the installation by the assessee, used in India;
b. such plant or machinery is imported into India;
c. no deduction on account of depreciation in respect of such plant or machinery 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.
II. Section 56(2)(viib) [Angel Tax]
1. As per section 56(2)(viib), where any company not being a company in which public are substantially interested, receives any sum from any person being a resident as consideration for issue of shares that exceeds face value of shares, the aggregate consideration received exceeds fair market value of shares, the consideration received will be chargeable as income of the company in the previous year in which such consideration is received.
2. Following entities which has received consideration for issue of shares are exempt from the above clause:
a. Venture capital undertaking received consideration from a venture capital company or a venture capital fund or a specified fund [specified fund means a fund established or incorporated in India in the form of a trust or a company or a LLP or a body corporate which has been granted a certificate of registration as a category Alternative Investment Fund (“AIF”) I or AIF II and is regulated by SEBI or regulated under the International Financial Services Centres Authority Act, 2019 (“IFSC”)];
b. Company from a class or classes of persons as may be notified by the Central Government in this behalf.
3. As per Notification dated 19.02.2019 issued by DPIIT, Ministry of Commerce & Industry, a startup which has been recognised by DPIIT having aggregate amount of paid up share capital and share premium of the startup after the proposed issued of share does not exceeds INR 25 crores and has not invested in the following assets for the period of 7 years from the end of financial year in which shares are issued at premium are covered under the clause b of point 2 mentioned above:
a. Land or building appurtenant thereto other than used for the purpose of renting or held as stock in trade in the ordinary course of business;
b. Loans and advances other than loans or advances extended in the ordinary course of business where the lending is substantial part of business of the startup;
c. Capital contribution made to other entity;
d. Shares & securities;
e. Motor vehicle, yacht, aircraft or any mode of transport, the actual cost of which exceeds INR 10 lakhs other than held by the startup for the purpose of plying, hiring, leasing or stock in trade in the ordinary course of business;
f. Jewellery other than held in the ordinary course of business;
g. Any other asset whether in the nature of capital asset or otherwise of the nature being specified in clause (d) of explanation to section 56(2)(vii).
4. Further, as per the said notification, consideration 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 INR 25 crore.
[“Specified Company” means a listed company whose net worth as on last date of the financial year preceding the year in which shares were issued exceeds INR 100 crores or turnover for that financial year exceeds INR 250 crores].
III. Section 54GB [Capital Gains]
1. Where the capital gain arises from transfer of a long-term capital asset being residential property [a house or plot of land], owned by the eligible assessee [Individual or HUF] and the assessee before the due date of furnishing of return of income u/s 139(1), utilises the net sales consideration for subscription in the equity shares of an eligible company and the eligible company shall utilise the money received for purchase of new asset. The capital gains arising from the transfer shall not be charged to tax subject to amount invested out of the net sales consideration.
2. The amount of the net sales consideration received by the company which has not been utilised before the due date of furnishing ROI u/s 139, the said amount shall be deposited in the Capital Gains Account Scheme before the due date of ROI as per section 139.
3. “Eligible company” means
– company incorporated during the period from 1st April of the previous year to the assessment year in which capital gain arises to the due date of furnishing ROI u/s 139(1);
– it is engaged in the business of manufacture of an article or a thing or in an eligible business as per section 80-IAC (supra);
– it is the company in which assessee has more than 25% share capital or more than 25% voting rights after the subscription in the shares; and
– it is a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises, Act 2006 or is an eligible startup.
4. The provisions of this section shall not apply in respect of transfer of residential property on or after 31st March 2022.
IV. Section 79 [Carry Forward & Set-off of Losses]
In case of eligible startup referred to in section 80-IAC (supra), the loss incurred in any year prior to the previous year shall be allowed to be carried forward and set off against the income of the previous year if all the shareholders of such company who held shares having voting rights on the last day of the year or years in which loss was incurred, continue to hold shares on the last day of such previous year and such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.
V. Section 192(1C) read with section 17(2)(vi) [Perquisites]
1. For the purpose of deducting tax by a person being a eligible startup referred to in section 80-IAC (supra) responsible for paying any income to the assessee being perquisite in the nature specified in section 17(2)(vi) [“the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee”] in any previous year relevant to assessment year beginning from 1st April 2021, shall deduct tax on such income within 14 days –
– after the expiry of 48 months from the end of relevant assessment year; or
– from the date of sale of such specified security or sweat equity share by the assessee; or
– from the date of the assessee ceasing to be the employee of the person
whichever is earliest, on the basis of rates in force in the financial year in which specified security or sweat equity shares were allotted.
2. The value of such specified security or sweat equity shares shall be the fair market value on the date on which the option is exercised by the assessee as reduced by the amount actually paid or recovered from the assessee in respect of such security or shares.
Disclaimer – Above article is only meant for educational purpose. Kindly consult a competent person before taking any view on the basis of above article and the author is not responsible for any views taken on the basis of above article.
–xx–
Author Bio
