Start-ups: Registration, benefits & lower income tax rate of 15%

(a) Incorporated on or after 1 April 2016 but before 1 April 2021

(b) total turnover of its business does not exceed Rs.100 crores in any year

(c) it holds a “certificate of eligible business” from the Inter-Ministerial Board (IMB) of Certification

(d) considered as start-up for 10 years from incorporation

(e) 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

(f) It is not formed by splitting up or reconstruction of an existing business

(g) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose

The process of recognition of an entity as eligible start-up shall be as under:

(i) A Start-up shall make an online application over the mobile app or portal set up by the Department for Promotion of Industry and Internal Trade (‘DPIIT’) – startupindia.gov.in [https://www.startupindia.gov.in/content/sih/en/recognition-page.html]

Inter-alia, application should contain following information:

(a) No. of employees

(b) Industry to which the project is related to

(c) Stage of project

– Ideation (working on prototype)

– Validation (prototype tested)

– Early traction (have some customers)

– Scaling (exploring new market to grow further)

(ii) The application shall be accompanied by—

(a) Copy of Certificate of Incorporation or Registration (MOA, AOA, PAN card) and details of partners/directors, as the case may be.

(b) Write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation. It should contain the following information:

– Brief of project

– Details of any award, recognition etc. granted to project with evidence thereof

– What is the problem the product is addressing and how it is solving said problem

– Uniqueness of the product

– Scalability of the business

– How the start-up will generate revenue (i.e. how your product is different from other similar existing products).

(c) Additional documents providing website link, pitch deck, patents, etc., shall also be attached to support the application.

(d) Information on any award received by the entity.

(e) Document and proof of funding received by the entity, if any.

(iii) The DPIIT may, after calling for such documents or information and making such enquires, as it may deem fit, —

(a) recognise the eligible entity as Startup; or

(b) reject the application by providing reasons.

(i) Log in with the startup credentials at www.startupindia.gov.in;

(ii) Select ‘Recognition and Tax exemption’ button on the right panel;

(iii) Select the ‘Edit Application’ button and proceed with completing the application by providing the additional details required by the Department.

If application has been marked as ‘incomplete’ thrice, it is rejected. A rejected application cannot be edited.

A new application can be filed by the applicant after 3 months from the date of communication of rejection.

To avail 80-IAC and other tax benefits, applicant shall file an application in Form-1 to the IMB along with

• MOA/LLP deed
• Latest audited financials (3 yrs)
• Pitch deck
• Video containing

– Brief about start-up

– Working of prototype / proof of concept developed

– Scalability of business

– Market traction generated till now

IMB may, after calling for such documents or information and making such enquires, as it may deem fit —

(i) grant the certificate of eligible business; or

(ii) reject the application by providing reasons.

As per current SOPs the process of obtaining “Certificate of Eligible Business” may take 3 to 5 months

As per statistics, very less number of DPIIT recognised start-ups gets “Certificate of Eligible Business” from IMB.

A Start-up shall be eligible for exemption from sec. 56(2)(viiib), if it filesa signed declaration in Form 2 to DPIIT that it fulfils following conditions:

(i) it has been recognised by DPIIT

(ii) aggregate amount of paid up share capital and share premium of the start-up after issue or proposed issue of share, if any, does not exceed, 25 crore rupees:

While calculating limit of Rs.25 crores, issue of shares to following persons shall not be included:

1. Non-residents;

2. Venture Capital Company or Venture Capital Fund registered as Category-I AIF

3. Listed company whose shares are frequently traded and net worth (as on last date of preceding FY) exceeds Rs.100 crore or turnover exceeds Rs.250 crore for the financial year preceding the year in which shares are issued

Note: DPIIT will forward the application to CBDT

(iii) It does not invest in any of the following assets for a period of 7 years from the end of the latest financial year in which the shares are issued at premium:

1. Land or building, being a residential house, other than that used for the purposes of renting or held as stock-in-trade in the ordinary course of business

2. Land or building, not being a residential house, other than that occupied by start-up for its business or renting purposes or held as stock-in-trade in the ordinary course of business

3. Loans and advances, if start-up is not engaged in ordinary business of lending of money

4. Capital contributions to any other entity

5. Shares and securities

6. Motor vehicle, aircraft, yacht or any other mode of transport, if the cost of such an asset exceeds Rs. 10 lakhs other than that held by the Start-up for the purpose of plying, hiring, leasing or as stock-in-trade in ordinary course of business

7. Jewellery held otherwise than as stock-in-trade

8. Archaeological collections, drawings, paintings, sculptures, any work of art or bullion

√ Where the gross total income of an assessee,

√ being an eligible start- up,

√ includes

√ any profits and gains derived from

√ eligible business,

√ there shall, in accordance with and subject to the provisions of this section, be allowed,

√ in computing the total income of the assessee,

√ a deduction of an amount equal to 100% of the profits and gains derived from such business

√ for 3 consecutive assessment years.

√ The provisions of sub-section (5) and sub-sections (7) to (11) of section 80-IA

√ shall apply to the start-ups

√ for the purpose of allowing deductions under sub-section (1).

√ Notwithstanding anything contained in any other provision of this Act,

√ the profits and gains of an eligible business

√ to which the provisions of sub-section (1) apply shall,

√ for the purposes of determining the quantum of deduction under that sub-section

√ for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year,

√ be computed

√ as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.

√ The deduction specified in sub-section (1)

√ may, at the option of the assessee,

√ be claimed by him

√ for any 3 consecutive assessment years

√ out of 10 years

√ beginning from the year in which the eligible start-up is incorporated.

Conditions to be fulfilled

(i) it is not formed by splitting up, or the reconstruction, of a business already in existence;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose

Explanation 1.—For the purposes of this clause, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if all the following conditions are fulfilled, namely:—

(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;

(b) such machinery or plant is imported into India;

(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.

Explanation 2.—Where in the case of a start-up, any machinery or plant or any part thereofpreviously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed20% of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with

Note: Demerger may be considered as splitting up or reconstruction of an existing business, therefore a new Pvt. Ltd. Company or LLP is to be incorporated with new P&M

The deduction from profits and gains derived from an undertaking shall not be admissible unless the accounts of the undertaking for the previous year relevant to the AY for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below section 288(2), and the assessee furnishes, along with his ROI, the report of such audit in the prescribed form duly signed and verified by such accountant.

80-IA(8) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date:

Provided that where, in the opinion of the AO, the computation of the profits and gains of the eligible business in the manner herein before specified presents exceptional difficulties, the AO may compute such profits and gains on such reasonable basis as he may deem fit.

Explanation.—For the purposes of this sub-section, “market value”, in relation to any goods or services, means—

(i) the price that such goods or services would ordinarily fetch in the open market; or

(ii) the arm’s length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA.

80-IA(9) Where any amount of profits and gains of an undertaking or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading “C.—Deductions in respect of certain incomes”, and shall in no case exceed the profits and gains of such eligible business of undertaking or enterprise, as the case may be.

80-IA(10)

√ Where it appears to the AO that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason,

√ the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business,

√ the AO shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section,

√ take the amount of profits as may be reasonably deemed to have been derived therefrom:

√ Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA,

√ the amount of profits from such transaction shall be determined

√ having regard to ALP as defined in section 92F(ii).

80-IA(11)

√ The Central Government may,

√ after making such inquiry as it may think fit,

√ direct, by notification in the Official Gazette,

√ that the exemption conferred by this section shall not apply

√ to any class of industrial undertaking or enterprise

√ with effect from such date as it may specify in the notification.

(Definition as per section 80-IAC)

With effect from Assessment Year 2020-21, an eligible startup is required to fulfil any of the following conditions to carry forward and set off the losses:

• Continuity of 51% shareholding; or
• Continuity of 100% of original shareholders.

While computing the aforesaid percentage, i.e., 51% or 100%, as the case may be, no effect shall be given to the following:

(a) Any change due to the death of the shareholder;

(b) Any change due to transfer of shares by way of gift to any relative of the shareholder making such gift. For an individual, the term relative, as per section 2(41), shall mean husband, wife, brother or sister or any lineal ascendant or descendant of that individual.

(c) Any change in shareholding of an Indian company, being a subsidiary of a foreign company, as a result of amalgamation or demerger of foreign company subject to the condition that at least 51% of shareholders of the amalgamated or demerged company continue to be the shareholders of the amalgamated or the resulting company.

(d) Any change pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional PCIT or CIT;

(e) A change in case of companies, and their subsidiary and the subsidiary of such subsidiary, where:

(i) When NCLT, on a petition moved by the Central Govt., has suspended the board of directors and has appointed new directors nominated by the Central Govt.

(ii) When change in shareholding has taken place in a previous year pursuant to a resolution plan approved by the Tribunal.

(Definition as per section 80-IAC)

√ Exemption may claimed u/s section 54GB

√ On LTCG on sale of residential property by Individual / HUF

√ If transfer made upto 31 March 2021

√ On investment of net consideration, before the due date of filing of ITR, in equity shares of a start-up incorporated in India

√ Such a start-up should be incorporated on or after April 1 of the previous year, in which capital gains arises, and upto the due date of filing of ITR

√ Exemption u/s 54GB will be given to the shareholder (i.e. the seller of property who has invested in start-up)

√ After said investment, such individual/ HUF should have more than 25% share capital or voting right of such start-up company

√ In 1 year from such investment, start-up should utilizes said amount to purchase any plant and machinery except following

♦ Any P&M used by any other person

♦ Any P&M installed in any office premises or any residential accommodation or guest house

♦ Any office appliance including computer or computer software. However, in case of technology driven start-up which is certified as such by the Inter-Ministerial Board of Certification notified by the Central Government, investment can be made in computer or computer software

♦ Any vehicle

♦ Any P&M, the whole cost of which is allowed as deduction in computing PGBP

√ Start-up should deposit the amount of net consideration, to the extent not utilised for purchase of new asset, in capital gain account scheme by the due date of filing of ITR by the shareholder

√ Forfeiture/Withdrawal of Exemption – Proportionate exemption given earlier will become LTCG of such Individual/HUF in the year of

♦ Transfer of shares by the shareholder within 5 years

♦ Sale of new asset by the company in 5 years (3 years for computer or computer software)

♦ Expiry of one year 1 year from the date of subscription of equity shares in case of non-utilisation of bank deposit and the company shall be entitled to withdraw such amount in accordance with the scheme.

ESOPs are taxed as perquisites u/s 17(2)(vi) read with Rule 3(8)(iii). Taxation of ESOPs is split into two components:

i. Tax on perquisite as income from salary at the time of exercise.

ii. Tax on income from capital gain at the time of sale.

The tax on perquisite is required to be paid at the time of exercising of option which may lead to cash flow problem as this benefit of ESOP is in kind.

In order to ease the burden of payment of taxes by the employees of the eligible start-ups or TDS by the start-up employer, TDS on such income to be deducted within 14 days of earliest of following events:

(i) after expiry of 48 months from the end of the relevant AY; or

(ii) from the date of the sale of such ESOP; or

(iii) from the date on which the assessee ceases to be the employee of such start-up;

TDS to be deducted on the basis of rates in force in the FY in which the said specified security or sweat equity share is allotted or transferred.

(a) Exemption from levy of angel tax u/s 56(2)(viib)

(b) Deductions u/s 80-IAC

(c) Liberalized regime of section 79 to carry forward & set-off the losses

(d) Exemption u/s 54GB to the shareholder for making investment in a start-up

(e) Access to the dedicated cell created by the CBDT to address the problems of start-ups

(f) 90 days fast track exit scheme in Insolvency and Bankruptcy Code

(g) In Govt. tenders relaxation in requirement of prior experience, prior turnover & earnest money deposit

(h) Patent related benefits

– fast track examination of patent application

– 80% rebate in filing fees for patent examination [50% rebate for Trademark]

– Patent facilitator fees to be paid by Govt.

(i) Self-certification based compliance regime in 6 labour laws and 3 environment laws

(j) No inspection for 5 years under labour laws except in case of receipt of verifiable and credible complaint

[Letter no. CAIU/011/(34)2016/3806 dated 16 May 2017 by EPFO, Ministry of Labour]

(k) Deferred TDS or tax payment in respect of income pertaining to ESOP of start-ups

(l) Incentives from state Govt. –  http://www.startupindia.gov.in/content/sih/en/startup-scheme/state-startup-policies.html

(m) Preferential treatment in land allotment, rebate in stamp duty etc.

(n) MSME benefits (if fall under MSME criteria)

In order to redress grievances and address various tax related issues, the CBDT has formed a cell specially dedicated to the start-ups. This cell will work under the member of CBDT and will help in resolving the problems faced by the start-ups.

Grievances by the start-ups can be filed:

(a) Physically with the O/o Under Secretary, ITA-I, Room No. 245A, North Block, New Delhi – 110001;

(b) Electronically by sending an email at [email protected]; or

(c) Telephonically on 011-23095479/23093070 (F)

Start-up entities can approach the cell for speedy resolution of their grievances for ease in the compliance issues pertaining to start-ups.

Tax rate of 15%

Any activity which brings a commercially new product into existence constitutes production

After exhausting the 80-IAC benefit an entity may opt for lower rate u/s 115BAB provided following conditions are complied with

• It should be a domestic company
• It should be engaged only in the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it
• It should be set up & registered on or after 1 October 2019 and commences manufacturing of an article or thing on or before 31 March 2023
• It is not formed by splitting up, or the reconstruction, of a business already in existence
• It does not use any machinery or plant previously used for any purpose
• It does not use any building previously used as a hotel or a convention centre, in respect of which deduction u/s 80-ID has been claimed and allowed
• It’s total Income has been computed without claiming any deduction u/s 10AA, 32(1)(iia), 32AD, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii), 35(2AA), 35(2AB), 35AD, 35CCC, 35CCD or under Chapter VI-A heading “C.—Deductions in respect of certain incomes” other than 80JJAA
• It’s total Income has been computed without set-off of any loss or allowance for unabsorbed depreciation deemed so u/s 72A where such loss or depreciation is attributable to any of the aforesaid deductions
• Once the option u/s 115BAB has been exercised, it cannot be subsequently withdrawn for the same or any other yearunless domestic companies fail to satisfy conditions prescribed in Section 115BAB(2)
• Following businesses are excluded from benefit of lower rate u/s 115BAB

1. Development of computer software in any form or in any media;

2. Mining;

3. Conversion of marble blocks or similar items into slabs;

4. Bottling of gas into cylinder;

5. Printing of books or production of cinematograph film; or

6. Any other notified business.

• The word ‘production’ has a wider connotation in comparison to ‘manufacture’, and any activity which brings a commercially new product into existence constitutes production. (SC – CIT vs. M/s. Hindustan Petroleum Corporation Ltd. – 3 August 2017, Para 17 & 18).

Note: Section 115BAB covers both manufacture and production.

• It should electronically file under DSC Form No. 10-ID on or before due date of filing of ITR

As Turnover of start-up should always be less than Rs.100 crores, therefore, if investment in P&M or Equipment is less than Rs.50 crores then start-up can avail benefits of MSME as well

A person who buys from a MSME is liable to pay compound interest with the monthly rests to the supplier on the amount payable at 3 times of the bank rate notified by RBI in case buyer does not make payment to the MSME supplier for his supplies of goods or services within 45 days of the acceptance of the goods/service rendered.

Few other benefits to MSME:

1. Collateral free bank loan

2. Reduced electricity bills

3. ISO Certification Charges reimbursement

4. Subsidy upto 50% on patent registration fees

5. Capital subsidy for new technology or machinery

6. Credit linked guarantee scheme benefit

7. Trade receivable discounting system benefit as bank will pay receivable to MSME on reasonable discount

8. Preference in Government tenders

9. There is a One Time Settlement Fee for unpaid amounts of MSME