Introduction
In the realm of fostering innovation and entrepreneurship, governments worldwide deploy fiscal incentives. Section 80-IAC of the Indian Income Tax Act stands as a testament to India’s commitment to nurturing its startup ecosystem. This provision grants tax holidays to qualifying startups, alleviating their financial burdens and fostering growth. Let’s delve into the intricacies of this tax holiday scheme and its implications for startups.
In a bid to foster innovation, encourage entrepreneurship, and stimulate economic growth, governments around the world often institute various fiscal policies and incentives. One such Indian initiative aimed at nurturing the burgeoning startup ecosystem is the provision of tax holidays under Section 80-IAC of the Income Tax Act. Under Section 80-IAC, qualifying startups can avail themselves of a tax holiday for a specified period, thereby reducing their financial burden and enhancing their viability. This article delves into the intricacies of tax holidays claimed under Section 80-IAC, exploring the eligibility criteria, benefits, and implications for startups.
Application for DPIIT Certificate (Start-up Certificate):
Eligible Start-ups should first apply to Department for Promotion of Industry and Internal Trade (DPIIT), under the Ministry of Commerce and Industry in India.
Below is the list of Eligibility criteria:
- Either a company or an LLP or registered partnership firm:
The startup must either be a Company or a Limited Liability Partnership or registered as a partnership firm. Startups established as any other business structure cannot claim this deduction.
- Incorporated after 1st April, 2016:
The startup must be incorporated/registered after 1st April,2016
- Not Exceeded 10 years since Incorporation:
The startup is a recognized startup for 10 years from the date of incorporation. After 10 years are completed from the date of incorporation, the entity ceases to be a startup.
- New and Original Entity:
The startup must not be formed by splitting up or reconstruction of an existing business entity. There are few exceptions u/s 33B of the Income Tax Act which are start-up which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking .
- Operates with New Plant and Machinery:
The startup must not be formed by the transfer of existing plant and machinery already in use.
- Turnover not exceeding Rs.100 crores:
The turnover must not exceed Rs.100 crores in the Financial Year for which the deduction is claimed.
- Objective of the said startup:
The startup must be operating with the primary aim of financial growth, employment generation, and wealth creation or the concerned startup must either develop new innovative products, services, or processes, or innovate an improved version of the existing ones. However, the entities formed by splitting up or reconstruction of an existing business are not eligible for DPIIT Startup Tax Benefits.
Application for inter-ministerial certificate:
After obtaining DPIIT certificate, startups can apply for Tax Holiday for which a certificate is to be obtained from inter-ministerial board. However, the chances of obtaining the certificate is relatively stringent and the whole process takes approx. 9months to get completed.
Following is the list of Documents required for application of inter-ministerial certificate.
- CIN / LLPIN
- MOA / Partnership Deed
- Business PAN
- DPIIT Recognition Certificate
- CA Certified Balance Sheet for last 3 FY
- ITR of last 3 FY
- Section 56 Exemption Certificate
- Eligibility Criteria for Tax Exemption under Section 56 of the Income Tax Act:
- The entity should be a DPIIT recognized Startup
- Aggregate amount of paid up share capital and share premium of the Startup after the proposed issue of share, if any, does not exceed INR 25 Crore.
- Video Presentation
- Pitch Deck
- Board Resolution (for company only)
Claiming Tax Benefits under Income Tax Act
Startups having certificate from inter ministerial board can get 100% tax deduction for any 3 consecutive years but the same shall not be after ten years from the year of incorporation. Only startups who are private limited company or limited liability partnership can avail the tax holiday benefits.
Process for claiming deduction u/s 80IAC in Income Tax Return
1. File Form 10CCB certified by Chartered Accountant before one month of Due date of filling of ITR.
2. Books of Accounts should be audited and audit report is submitted before one month of Due date of filling of ITR.
3. Select ‘Yes’ for “whether you are recognized as startup by DPIIT”.
4. Enter your start up recognition number alloted by DPIIT.
5. Select ‘Yes’ for “whether Certificate from Inter Ministerial Board for certification is received?
6. Enter your certificate number for above point.
7. Select Yes/No for “Whether declaration in Form-2 in accordance with para 5 of DPIIT notification dated 19/02/2019 is filed before filing ITR?”. Form 2 is for Angel Tax benefit u/s 56(2)(viib).
Conclusion:
In conclusion, Section 80-IAC of the Income Tax Act gives startups a break from paying taxes for a while. This helps them grow without worrying too much about taxes. It’s a good thing for new businesses and can boost innovation and jobs. But to benefit from this tax break, startups need to follow the rules carefully. Also, the government should keep improving such incentives to help startups grow and make our economy stronger. Overall, this tax holiday is a big help for startups and can make a big difference in India’s business world.
Authors:
Dishank Shah | Associate Consultant | Email: dishank.shah@masd.co.in
Disha Shah | Associate Consultant | Email : disha.shah@masd.co.in
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