Startup India Scheme is an initiative by the Government of India under leadership of Mr. Narendra Modi for generation of employment and wealth creation. The goal of Startup India is to develop and innovate products and services and increase the employment rate in India.
To promote growth and help Indian economy, many benefits are being given to entrepreneurs establishing startups.
Department for Promotion of Industry and Internal Trade (DPIIT) considers an entity as a startup only up to a period of 10 years from the date of its incorporation subject to the fulfillment of following conditions:
Benefits under Startup India Scheme
- Tax exemptions under Income Tax Act
- Self-certification of 6 labor laws and 3 environmental laws
- 80% rebate in patent cost/ IPR protection
- Easier public procurement norms
- Easy winding up process (within 90 days)
Registration with DPIIT
The benefits available to startups are provided only to DPIIT recognized startups. Here is the brief on how a startup can be registered with DPIIT.
An application can be made by any incorporated entity fulfilling the above conditions. This online application can be filed from the website https://www.startupindia.gov.in/ or from the mobile app along with:
- Copy of certificate of registration or incorporation
- Write-up on the nature of business highlights incorporating how an entity is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation. This forms the very basis of rejection/ approval of the application and has to be well put.
- Additional documents providing website link, pitch deck, details of patents, etc., shall also be attached to support the application.
- Information on any award received by the entity.
- Document a proof of funding received by the entity, if any.
Once an application is submitted, DPIIT may call for such other documents or information and make such enquiries, as it may deem fit. DPIIT also has the authority to reject the application only after furnishing the reasons for the same.
Income Tax benefits
Government has been taking various steps to exceedingly encourage the startups by introducing multiple tax exemptions such as relief from angel tax, reduced tax rates, 80% rebate on patent fees which will be borne by the DPIIT, tax holiday under section 80-IAC for three years etc.
Once the startup is recognized by DPIIT, one may avail the following benefits under Income Tax Act.
1. Corporate Tax Holiday under sec 80-IAC
Deduction under section 80-IAC is available up to 100% profits to an ‘eligible startup’ for any 3 consecutive years out of 10 years from 01 April, 2021 from the date of its incorporation.
A recognized startup has to fulfil the following conditions to be considered as an “Eligible Startup” for claiming this deduction:
- It should only be a company or LLP (not a partnership firm)
- It is incorporated on or after April 1, 2016 but before April 1, 2021.
- Its turnover does not exceed Rs. 25 crore ( 100 Crore from 01 April 2021) in any Financial Year for which deduction is claimed.
- It holds a certificate of eligible business from the Inter-Ministerial Board of Certification (IMB) (by filing Form 1).
2. Relief from Angel Tax u/s 56(2) (vii b)
Section 56(2) (vii b) of the Income Tax Act was introduced in the Finance Act, 2012 under the Measures to Prevent Generation and Circulation of Unaccounted Money. Angel tax is a term used to refer to the income tax payable on share capital raised by unlisted companies via issue of shares to an Indian resident where the share price is seen in excess of the fair market value of the shares sold.
Exemption from levy of angel tax is available (vide Notification GSR-127E, dt.19 Feb 2019 by DPIIT) to startups subject to the following conditions:
a) Start-up should be registered with DPIIT (‘eligible startup’ not required); and
b) It’s aggregate amount of paid-up share capital and share premium after issue or proposed issue of shares, does not exceed 25 crore. While calculating this threshold limit, issue of shares to following persons shall not be included:
-
- A non-resident person;
- Venture capital company/ fund;
- Any listed company;
- A specified company whose net worth exceeds Rs. 100 crore or turnover exceeds Rs. 250 crores for the financial year preceding the year in which shares are issued.
Valuation of shares for the purpose of sec 56(2) (vii b) shall be done by applying Rule 11UA (2). Accordingly, at the option of assessee, either the book value or, DCF valuation by merchant banker can be taken.
c) It does not invest in the assets (as specified and prohibited by DPIIT) for a period of 7 years from the end of the latest financial year in which the shares are issued at premium.
The said startup has to file self-declaration in Form 2 for availing this exemption. There is no requirement of valuation, IMB approval or CBDT approval. In case of breach of any above condition, the consideration received from issue of shares, as exceeding the fair market value of such shares, shall be deemed to be income of the company chargeable to tax for the previous year in which such failure takes place, along with penalty u/s 270A.
3. Capital Gain Tax exemption u/s 54GB and s 54EE
Exemption u/s 54GB is available to an Individual or HUF in respect of any long term capital gains arising from transfer of a residential property. Such exemption is available if the amount of net consideration is invested, before the due date of furnishing of return of income, in equity shares of the eligible startup on complying with below conditions:
- At least 25% of shareholding or voting power of that investor in startup
- That startup purchases new asset (plant and machinery, equipment, computer and software) within one year of date of subscription
- The new asset shall not be transferred for 5 years (or 3 years for computer and software)
- Invested Shares also shall not be transferred till 5 years
This benefit is extended till 31st March 2021.
Exemption u/s 54EE
A new section 54EE has been inserted in the Income Tax Act for the eligible startups to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by Central Government (*though fund is not notified as yet) within a period of six months from the date of transfer of the asset. The maximum amount that can be invested in the long-term specified asset is Rs. 50 lakh. Such amount shall be remain invested in the specified fund for a period of 3 years. If withdrawn before 3 years, then exemption will be revoked in the year in which money is withdrawn.
4. Relief for set off and carry forward of losses u/s 79
Finance Act, 2019 has relaxed the conditions for carry forward and set off of losses in case of the eligible start-ups.
It has been provided that losses incurred within 7 years of incorporation by the closely held eligible startup, 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 (irrespective of the shareholding they hold).
5. ESOP taxation benefit u/s 17(2)(vi) and 192(1C)
Finance Act 2020 has relaxed the condition of taxability of ESOP by introducing section 192(1C). Accordingly, if an eligible startup is responsible for paying any income to the employee being perquisite (specified security or sweat equity shares at concessional rate) of the nature specified in sec 17(2)(vi) in any previous year relevant to the assessment year, beginning on or after the 1st day of April, 2021, shall deduct or pay, as the case may be, tax on such income within fourteen days:
(i) after the expiry of forty-eight months from the end of the relevant assessment year; or
(ii) from the date of the sale of such specified security or sweat equity share by the assessee; or
(iii) from the date of the assessee ceasing to be the employee of that startup,
whichever is the earliest, on the basis of rates in force for the financial year in which the said specified security or sweat equity share is allotted or transferred.
6. Reduced tax rate on royalty income from patents u/s 115BBF
Section 115BBF is beneficial for startups not registered under the Startup India Program and who have patents developed and registered in India. For innovative products startups with a portfolio of granted patents who missed the Startup India Program scheme can make use of this opportunity under Section 115BBF at a concessional rate of 10% on royalties arising from licensing, sale or other commercial exploitation of patents developed and registered in India.
About the Author
Author is Neeraj Bhagat, FCA helping foreign companies in setting up of business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. He is also founder of Neeraj Bhagat & Co. Chartered Accountants, a Chartered Accountancy firm established in the year 1997 with its head office at New Delhi.
Author Bio
Pl tell the fund for investing against section 54ee
Nice article sir,
One query – A recognised startup formed as pvt Ltd co for 80IAC tax benefits is converted into Public Ltd company after the tax holiday period of 10 years, whether the tax benefit claimed during the tax holiday period by the Pvt Ltd Co will be reversed of relooked by the Tax Authorities ?
If you can throw some light on my above query ?