Start-up India initiative is one of the pertinent initiatives that every budding entrepreneur should be aware of. It enables the start-up to gain various benefits under Income-tax Act, 1961. The requirement is nothing but registration on the Start-up India portal. However, there are some pre-requisites for being eligible to get registered as a Start-up.

Vide Notification dated 19th February 2019, a new notification [G.S.R 127(E)] superseding the notification dated 11th April 2018 [G.S.R 364(E)] was issued which laid down certain conditions.

Thus for an entity to be considered as an eligible start-up, the following conditions must be satisfied:

1. The entity shall be recognized as a start-up only 10 years from the date of incorporation or registration. However, it must be incorporated only as a

1. private limited company

2. registered partnership firm

3. limited liability partnership

2. Further, the turnover of the entity for any financial year must not exceed INR 100 crores

3. The pertinent condition is that the entity must work towards

1. Innovation

2. development or improvement of products or processor services

3. Or if it is a scalable business model with a high potential of employment generation or wealth creation

However, if there is any entity that has been formed by splitting up or reconstruction of an existing business, it shall not be eligible to get registered as a start-up.

Further, if an entity completes 10 years from its incorporation or registration or its turnover exceeds INR 100 crores during any financial year, it shall cease to be recognized as a start-up since happening of any one of the aforementioned events is earlier.

The process for applying is as under:

The application has to be made over the mobile app or portal set-up by DPIIT and the application must consist of:

1. Copy of Certificate of Incorporation or registration

2. A write-up also has to be submitted which shall highlight the nature of the business is working towards any of the aspect mentioned above i.e.

1. Innovation

2. development or improvement of products or processor services

3. Or if it is a scalable business model with a high potential of employment generation or wealth creation

After getting the same registered, such start-up can avail the benefits as provided in the Income-tax Act but for which a few conditions must be satisfied.

Deduction under Section 80-IAC

For a start-up to claim deduction under section 80-IAC, it has to apply for the same with the Central Board of Direct Taxes (CBDT). The eligibility criteria are similar to the aforementioned conditions with one additional condition that it has to get registered as a Start-up as aforementioned.

Section 80-IAC provides for 100% deduction of business profits for 3 consecutive assessment years of any 7 assessment years beginning from the year in which the start-up is incorporated.

The section reiterates that start-ups which are formed by splitting up or reconstruction of any existing business shall not be eligible for deduction. However, for any undertaking referred to in section 33AB, the abovementioned condition shall not apply.

Further, even if the start-up is formed by transfer of machinery or plant previously used for any purpose, deduction under section 80-IAC cannot be availed.

However, if such machinery was used outside India by any person other than the start-up, shall not be regarded as used for any purpose i.e. won’t affect the eligibility of deduction under section 80-IAB if:

1. The plant and machinery was not used in India at any time previous to the date of installation

2. And such plant and machinery is imported into India

3. And no deduction on account of depreciation has been allowed or allowable to any person before the date of installation in India

However, 20% of the total assets which were used for any purpose in India can be a part of the total asset of the start-up without getting concerned about the aforementioned conditions.

Further, the start-up has to get its books of accounts must be audited under section 44AB within the specified due date by a Chartered Accountant or any other person as provided in section 288.     

No Angel-Tax for eligible start-ups

Angel tax meant tax to be payable by unlisted companies on capital raised by them when the share price at which the investment is being made in the companies is higher than the fair market value of the share.

It is a natural phenomenon for start-ups to attract high-value investments by leveraging their business model and vision even though the company is running at negligible or no profits or is at the pre-revenue or ideation stage. At this stage, the FMV of the share is negligible or quite low but the funding it receives by selling its shares is quite high.’

And the same attract section 56(2)(vii)(b) which states that if any company receives from any person considered for the issue of shares exceeding face value as well as FMV, the difference between the amount received and the FMV is liable to be taxed.

However, this is a huge hardship for start-ups. But, the start-ups registered as an eligible start-up as mentioned above for which due relief has been provided as under:

It has to primarily fulfill the following 2 conditions before making the declaration to the effect with DIPP which shall forward the same to CBDT.

1. Be an eligible start-up i.e. get registered with DPIIT as mentioned procedure of which is stared in the initial paragraphs of the article.

2. The aggregate amount of paid-up share capital and share premium of the start-up after the issue or proposed issue does not exceed INR 25 crore.

However, the aforementioned limit of INR 25 crores shall not include the consideration for shares received from:

  • A non-resident
  • A venture capital company or a venture capital fund
  • A company whose shares are frequently traded within the meaning of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and whose net worth on the last date of the financial year preceding the year in which the shares are issued exceeds INR 100 crores or turnover of such financial year exceeds INR 250 crore.

Further, the start-up shall not invest in the following assets up to 7 years from the end of the financial year in which the shares are issued at a premium.

    • a building or land appurtenant thereto, being a residential house, other than that used by the Startup to rent or held by it as stock-in-trade, in the ordinary course of business; 
    • land or building, or both, not being a residential house, other than that occupied by the Startup for its business or used by it for purposes of renting or held by it as stock-in-trade, in the ordinary course of business; 
    • loans and advances, other than loans or advances extended in the ordinary course of business by the Startup where the lending of money is a substantial part of its business; 
    • the capital contribution made to any other entity;
    • shares and securities; 
    • a motor vehicle, aircraft, yacht, or any other mode of transport, the actual cost of which exceeds ten lakh rupees, other than that held by the Start-up to ply, hire, leasing or as stock-in-trade, in the ordinary course of business;
    • jewelry other than that held by the Start-up as stock-in-trade in the ordinary course of business; 
    • any other asset, whether like a capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act.

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May 2021