START UP COMPANIES AND EXEMPTION AVAILABLE UNDER INCOME TAX ACT, 1961

 Indian economy is now running on right path and will achieve target of a developed economy. We have come a long way since our independent in the year of 1947. We have seen a lot of ups and downs in our economy and sailed successfully to reach today. The Indian economy is even after COVID-19 Pandemic, recovered successfully and achieved its fixed target. We are moving to become World third largest economy and soon will achieve first position also.

The policies of new government are business friendly and has done a lot to ease the way of doing business. The government has proclaimed the Start-up India Campaign in 2016 to boost entrepreneurship in India.

Being a Nationalist Government, the current government is given a slogan to become “Vocal for Local”, this has changed whole scenario and given boost to Indian products and Indian market.

The new industrial policies of government are very supportive and encourages youths to start their own business. The new business policies encouraged for production of new and innovative products. The government has started “Start Up Scheme”, to encourage educated youths to start their own business and to provide employment to other people also.

The government has decided some criteria, to be fulfilled by such Start-up Companies before enjoyment of such benefits and exemptions.

 A. RELAXATIONS FOR STARTUPS AND PRIVATE COMPANIES

The following provisions have been amended in terms of their application for startups and private companies in India under the Companies Act, 2013:

Cash flow statement: Startups will no longer be required to include their cash flow statements as part of their financial statements.

Quarterly board meetings: Startups will now be exempt from holding quarterly board meetings every year. The MCA now allows startups to hold two board meetings in a calendar year, that is, once in six months. The gap between two consecutive board meetings must be at least 90 days.

Interested directors: In this provision, the MCA has permitted interested directors to be counted as quorum for board meetings. Such persons must disclose their interest to the board in advance.

Corporate insolvency process: Sections 55 to 58 of the Bankruptcy Code that deal with the fast tracking of corporate insolvency have come into force from June 14, 2017. Pursuant to this, startups who are legally identified as corporate debtors can avail of the fast track corporate insolvency process.

The fast track period is 90 days from the commencement of the insolvency process, as opposed to 180 days.  

Annual return: The annual return will only calculate the aggregate of remuneration drawn by directors (as opposed to including the aggregate of remuneration of key managerial personnel as well).

Further, in case of startups, the annual return can be signed by the director of the company – in case the firm does not have a company secretary.

Auditor report: Auditors have a right to inspect the books and records of the company, and prepare their report with required inclusions as defined by the Companies Act. This auditor’s report is then submitted before the members at the annual general meeting (AGM) along with the financial statements of the company. Among other things, the auditor’s report includes an assessment of the adequacy and effectiveness of the company’s internal financial controls system.

Deposits – Clauses (a) to (e) of Section 73 (2) shall not apply to a Private Company-

(A)which accepts from its members monies not exceeding 100 % of aggregate of the paid up share capital, free reserves and securities premium account; or

(B) which is a start-up, for 5 years from the date of its incorporation;

(C) which fulfils all of the following conditions, namely:-

(a)which is not an associate or a subsidiary company of any other company;

 (b)if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or 50 Cr. rupees, whichever is lower; and 

(c) such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section:

Exemption under Labour Laws for Start-Ups; 

Startups shall be allowed to self-certify compliance with nine labour and environment laws. In the case of labour legislation, no inspections will be conducted for three years. Startups may be inspected on receipt of a credible and verifiable complaint of a violation, filed in writing and approved by at least one level senior to the inspecting officer.

 In the case of environment laws, Startups which fall under the ‘white category’ (as defined by the Central Pollution Control Board (CPCB)) would be able to self-certify compliance, and only random checks would be carried out in such cases.

 B. SECTION 56(2) (VIIB) OF THE INCOME TAX ACT, 1961: DEALS WITH TAX EXEMPTIONS OF START-UP

Eligibility for Start-up India

As per the Startup India Action plan, the followings conditions must be fulfilled in order to be eligible as Start-up or an entity shall be considered as Start-up if below mentioned conditions are satisfied:

i) It is incorporated as a private limited company or registered as partnership firm or as LLP; 

ii) The entity shall not be formed up or reconstruction of an existing business; 

iii) Turnover of entity for any of the financial years since incorporation/registration has not exceed Rs. 100 Cores; 

iv) The Aggregate amount of Share capital and Share Premium of the Start-Up after issue (or proposed issue) of share, if any does not exceed Rs. 25.00 Crores; 

v) Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation; 

vi) An entity (which satisfies the above conditions) is considered as a “Start-up” up to a period of 10 years from the date of its incorporation/registration.

PROCEDURE FOR APPLICATION WITH GOVERNMENT; An entity wants to be designated as Start-Up entity shall apply through Mobile App/ Portal set up by Government of India, Department for Promotion of Industry and Internal Trade (DPIIT).

The DPIIT after review of all documents and records submitted or after calling for more documents and information required, as it may deed fit;

i) Recognise the eligible entity as “Start-Up”; or

ii) Reject the application by providing reasons, thereof.

LETS’ DISCUSS ELIGIBILITY CONDITIONS IN DETAILS

1. AGGREGATE SHARE CAPITAL

The Aggregate amount of Share capital and Share Premium of the Start-Up after issue (or proposed issue) of share, if any does not exceed Rs. 25.00 Crores. For the purpose of calculation of Rs. 25.00 Crores shares issued to the following persons shall not be included;

a) A Non-resident;

b) A Venture Capital Company or Venture capital Fund;

c) A Specified Company.

 SPECIFIED COMPANY; means

a) A company whose shares are frequently traded within the meaning of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,2011 and; 

b) On the last date of financial year (preceding the year in which shares are issued), Net Worth of company exceed Rs. 100 Crores (or Turnover exceeds Rs. 250.00 Crores).

2. THE START-UP HAS NOT INVESTED IN FEW ASSETS; the Start-up has not invested in any of the following assets at the time of issue or proposed issue of shares at premium (moreover, start-up shall not invest in any of the assets for the period of 7 years from the end of the latest financial year in which shares are issued at premium)-

Sr. No. Investment cannot be made in these assets. Exceptions (investment can be made in these assets)
1 Residential Building (or land appurtenant thereto). If the building is used by Start-up for the purposes of renting or held by it as Stock-in-trade, in the Ordinary Course of business.
2 Land-non-residential building, or both If such asset is Occupied by the Start-Up for its business or used it for the purposes of renting or held by it as Stock-in -trade, in the ordinary course of business.
3 Loans and advances. Loans or advances extended in the Ordinary Course of business by the Start-Up where the lending of money is substantial part of its business.
4 Capital contribution made to any other entity.
5 Shares and Securities.
6 Motor Vehicle, Aircraft, Yatch or any other mode of Transport, the Actual Cost of which exceeds Rs. 10.00 Lakhs. If such vehicle, Aircraft etc., is held by the Start-Up for the purpose of plying, hiring, leasing or as Stock-in-trade in the ordinary course of business.
7 Jewellery If jewellery is held by the Start-Up as Stock-In-Trade in the ordinary course of business.
8 Archaeological Collections, Drawings, Painting, Sculptures, any work of Art or Bullion (whether in the nature if Capital Assets or Otherwise).

NOTE:

i) A Start-Up complying with above conditions and wants to avail exemptions under provisions of Section 56(2) (viib) of the Income Tax Act, 1961 submit a Form 2 with DPIIT. On receipt of above declaration in Form 2, the DPIIT will forward the same to CBDT for further approval.

ii) If a Start-Up entity, which has given above declaration in Form 2 has invested any amount within a period of 7 years from the latest financial years in which shares has been issued at premium. The exemption provided U/s 56(2) (viib) shall be revoked with retrospective effect. 

iii) Section 56(2)(viib)(2) provides that with effect from Assessment year 2020-21 in case of a company failure to comply with the aforesaid conditions , the consideration received for issue of shares ( which exceeds Fair Market Value of such shares) , shall be deemed to be income of the Company chargeable to tax for the previous year in which the failure to comply with any of the aforesaid conditions has taken place. 

iv) Under conditions referred iii) above the company has deemed that it has not reported or misreported its income during the previous year in which any of the above conditions have not been complied and provisions of Section 270A (8) & (9) will be applicable. 

3. TAX EXEMPTIONS ALLOWED TO ELIGIBLE STARTUPS UNDER STARTUP INDIA PROGRAM’

Following tax exemptions have been allowed to eligible startups:

i) 3-year tax holiday in a block of seven years; 

ii) The Start-up incorporated between April 1, 2016, till 31st March 2021 were eligible for this scheme. Budget 2021 has extended the eligibility to 31st March 2022. Such startups will be eligible for getting 100% tax rebate on profit for a period of three years in a block of seven years provided that annual turnover does not exceed Rs 25 crores in any financial year.

 4. EXEMPTION FROM TAX OLONG-TERM CAPITAL GAINS:

 A new section 54 EE 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 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 remaining 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. 

5.  TAX EXEMPTION ON INVESTMENTS ABOVE THE FAIR MARKET VALUE; 

The government has exempted the tax being levied on investments above the fair market value in eligible startups. Such investments include investments made by resident angel investors, family or funds which are not registered as venture capital funds. Also, the investments made by incubators above fair market value is exempt.

6. TAX EXEMPTION TO INDIVIDUAL/HUF ON INVESTMENT OF LONG-TERM CAPITAL GAIN IN EQUITY SHARES OF ELIGIBLE STARTUPS U/S 54GB; 

The existing provisions u/s 54GB allows the exemption from tax on long-term capital gains on the sale of a residential property if such gains are invested in the small or medium enterprises as defined under the Micro, Small and Medium Enterprises Act, 2006. But now this section has been amended to include exemption on capital gains invested in eligible start-ups also. 

Thus, if an individual or HUF sells a residential property and invests the capital gains to subscribe the 50% or more equity shares of the eligible startups, then tax on long term capital will be exempt provided that such shares are not sold or transferred within 5 years from the date of its acquisition. The start-up shall also use the amount invested to purchase assets and should not transfer asset purchased within 5 years from the date of its purchase. 

This exemption will boost the investment in eligible startups and will promote their growth and expansion. 

7. SET OFF OF CARRY FORWARD LOSSES AND CAPITAL GAINS ALLOWED IN CASE OF A CHANGE IN SHAREHOLDING PATTERN; 

The carry forward of losses in respect of eligible start-ups is allowed if all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of previous year in which such loss is to be carry forward. 

The restriction of holding of 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in case of eligible startups. 

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DISCLAIMER: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Some judgements of counts have been taken as it is available. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.

Download Start Up Companies & Exemption available under Income Tax Act 1961

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A Qualified Company Secretary, LLB from Purvanchal University UP and a Science Graducate , Alumni of Banaras Hindu University (Bsc.), having more than 19 years of experience in the field of Secretarial Practice, Project Finance, Direct Taxes ,GST, Accounts & Finance and recently working as a M View Full Profile

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