Deepa Bakhru, Smriti Gangwal and Disha Mehta
Background
Start-up India is a flagship initiative, launched by government in January 2016, within the ambit of the ‘Make in India’ programme. Start-up India was brought in with the intention to build a strong eco-system for promoting innovation, improve sustainable economic growth and to generate large scale employment opportunities.
In order to augment the Make in India plan, the government instituted the Start-up India Action Plan that addresses all aspects of the start-up ecosystem. Further, in order to promote such an ecosystem, it was envisaged to establish a Fund of Funds which intends to raise INR 2,500 crore[1] annually for four years to finance start-ups.
As on 23 November 2018, 14,036 start-ups applications have been recognised by the Department for Promotion of Industry and Internal Trade (DPIIT)[2] and 91 start-ups have been approved as eligible start-ups for availing tax benefits by the Inter-Ministerial Board of Certification[3].
Certain deductions / exemptions were also introduced in Finance Act, 2016 to provide impetus to start-ups. In her Union budget speech of 2019-20 (Budget Speech), the Finance Minister also acknowledged that start-ups in India have been taking up firm roots and their continued growth needs to be encouraged.
What is a tax ‘eligible start-up’?
The term ‘eligible start-up’ is defined under the Income Tax Act, 1961 (Act)[4] to mean a company or limited liability partnership holding a valid certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the central government, subject to fulfilment of following conditions:
- It should be incorporated on or after 1 April 2016, but before 1 April 2021; and
- It shall not have turnover exceeding the threshold limit of INR 250 million
Further, the term eligible business is defined under the Act[5] to mean a business carried out by an eligible start-up 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.
Income tax benefits for start-ups[6]
- Deduction of 100% of the profits:
An eligible start-up is allowed a deduction of an amount equal to 100% of the profits and gains (derived from a qualified business) for any 3 consecutive assessment years among the 5 years beginning from the particular year in which the eligible start-up is incorporated.
- Carry forward and set-off of losses:
In order to carry forward losses and set-off against the income of the previous year by closely held eligible start-ups, either of the below mentioned conditions[7] need to be satisfied to carry forward and set-off its losses:
i) At least 51% of the voting power was beneficially held by persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which loss was incurred.
ii)
a. All shareholders who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of the previous year; and
b. loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.
- Roll over benefit
Under the provisions[8] of the Act, capital gains arising from transfer of residential property, owned by an individual or HUF is not taxable if the net consideration is utilised for subscription to the equity shares of an eligible company (being small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006, or an eligible start-up) to purchase new asset before the due date of filing its tax return and the eligible start-up has utilised this amount for purchase of new asset within one year.
In order to incentivise investments in eligible start-ups, in addition to relaxation of certain conditions, the sunset date of transfer of residential property for investment in eligible start-ups has been extended from 31 March 2019 to 31 March 2021.
- Incentives for Alternative Investment Funds
Under the provisions of the Act[9], the aggregate consideration in excess of Fair Market Value (FMV) of the shares issued to a resident shall be subject to tax, provided:
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- the company issuing shares is a company in which the public is not substantially interested;
- the consideration for issue of shares exceeds face value of such shares.
However, the aforesaid provisions are not applicable if the consideration is received by venture capital undertaking from a venture capital company or a venture capital fund or by a company from a class or classes of persons as may be notified by central government in this behalf. The benefit of the aforesaid exemption has been extended to Category – I and II Alternative Investment Funds.
Further, the Finance Minister mentioned in her Budget Speech that start-ups shall not be subjected to any kind of scrutiny in respect of valuations of share premiums. Also, the tax officer would need to obtain approval of his supervisory officer before carrying out any inquiry or verification in such cases. Recently, the Central Board of Direct Taxes (CBDT) has issued a clarification[10] in respect to assessment of start-up companies involving application of section 56(2)(viib) of the Act.
- Circular issued by CBDT in relation to section 56(2) (viib)
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- Start-up recognised by DPIIT:
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- Where the case is selected under ‘limited scrutiny’ on the single issue of valuations of share premiums, the tax officer shall not verify such issue and contention of the assessee will be summarily accepted;
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- Where the case is selected under ‘limited scrutiny’ with multiple issues or under ‘complete scrutiny’, the issue of valuation, this issue will not be pursued and inquiry on other issues will be carried out by the tax officer only after obtaining approval of the supervisory officer.
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- Start-up not been recognised by the DPIIT and the case has been selected for scrutiny either on applicability of section 56(2) (viib) of the Act or any other issue , the inquiry in such cases also will be carried out by the tax officer only after obtaining approval of the supervisory officer.
For ease of doing business, the Finance Minister has also in her Budget Speech announced that for start-ups there shall be no requirement of filing requisite declarations or providing information in the returns of start-ups and their investors. Also, the e-verification shall resolve the issue of establishing identity of the investor and source of his funds; and special administrative arrangements shall be made by the CBDT for redressal of the grievances of the eligible start-ups.
Conclusion
With growing impetus to promote entrepreneurial spirit amongst start-ups, the government has yet again provided a major boost by incentivising and relaxing the norms for start-ups. With the announcement of redressal of the grievances of the start-ups and new dedicated start-up channel to be operated by Doordarshan, the government has provided a major relief for start-ups by increasing the potential of fund raising and ease of doing business. These are welcome moves for start-ups which will be the growth engines for our economy. This would also facilitate in enabling entrepreneurs to help realise the government’s vision of becoming a $3 trillion economy this year.
(Author Deepa Bakhru is Senior Manager with Deloitte Haskins and Sells LLP, Smriti Gangwal is Deputy Manager with Deloitte Haskins and Sells LLP and Disha Mehta is Assistant Manager with Deloitte Haskins and Sells LLP)
[1] As per status report of 2018 available on www.startupindia.gov.in, a ‘fund of funds’ of INR 10,000 Cr is being managed by SIDBI. INR 1611 Cr have been committed to 32 AIFs. 170 Startups have been funded
[2] Source: status report of 2018 available on www.startupindia.gov.in
[3] Source: status report of 2018 available on www.startupindia.gov.in
[4] Section 80-IAC of the Act
[5] Section 80-IAC of the Act
[6] Under the Act as amended by Finance (No. 2) Act, 2019
[7] Section 79 of the Act
[8] Section 54GB of the Act
[9] Section 56(2) (viib) of the Act
[10] F.No 173/149/2019-ITA-1 dated 8 August 2019
