Ever since the Government of India launched the Startup India program, there has been an incredible surge in the number of startups coming up.
The Startup India campaign was launched in 2016 in order to increase entrepreneurship and build a strong and inclusive ecosystem for innovation in India. Through this campaign, various aspects of running a startup, such as bank financing, tax exemptions, simplifying the process of registering the business and other benefits were targeted, in order to make running a business more appealing to India’s youth.
In this article, we will discuss the Eligibility & various tax exemptions that are applicable for the startups in India. Let’s try to summarise the article by looking at various provision of Income Tax Act, 1961
Eligibility Criteria for Startup Recognition:
I. The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership
II. An entity shall be considered as a startup up to 10 years from the date of its incorporation
III. Turnover should be less than INR 100 Crores in any of the previous financial years
IV. The company remains a startup if the turnover per year does not cross the Rs 100 crore mark in any of the 10 years. Once the company crosses the mark, it no longer remains eligible to be called a startup. The mark of Rs 100 crore too has been improved by the Indian government in the recent past from Rs 25 crore
V. The firm should have approval from the Department of Industrial Policy and Promotion (DIPP)
VI. The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth.
VII. An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Startup”
Benefits available to an eligible Start-up
Following benefits shall be available to an eligible start-up or its shareholders:
- Exemption from levy of angel tax under section 56(2)(viib)
- Deductions under section 80-IAC of the income tax Act,
- Liberalized regime of section 79 to carry forward and set-off the losses
- Exemption under section 54GB to the shareholder for making investment in a startup
- Access to the dedicated cell created by the CBDT to address the problems of startups
Tax Exemption under Section 80 IAC of the income Tax Act, 1961 for Startup
Post getting recognition a Startup may apply for Tax exemption under section 80 IAC of the Income Tax Act. Post getting clearance for Tax exemption, the Startup can avail tax holiday for 3 consecutive financial years out of its first 10 years since incorporation.
Eligibility Criteria for applying to Income Tax exemption (80IAC):
- The entity should be a recognized Startup
- Only Private limited or a Limited Liability Partnership is eligible for Tax exemption under Section 80IAC
- The Startup should have been incorporated after 1st April, 2016 but before April 1, 2021
Profit Exemption to eligible Startup entities under Section 80-IAC:
Deduction at the rate of 100% of its profits and gains is allowed to an eligible startup for 3 consecutive assessment years out of the 7 years (10 years from 01.04.2020) beginning from the year of incorporation. As per Section 80-IAC, an entity shall be considered as an eligible startup if it fulfils following conditions:
- It is incorporated as a company (Private Ltd. Co. or Public Ltd. Co.) or an LLP.
- It is incorporated on or after April 1, 2016 but before April 1, 2021.
- Its turnover does not exceed Rs.25 Cr (Rs.100 Cr from 01.04.2020) in the previous year relevant to assessment year for which such deduction is claimed.
- It is not formed by splitting up or reconstruction of a business already in existence.
- It holds a certificate of eligible business from the Inter-Ministerial Board of Certification.
- It is 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.
Note: For Claiming under section 80-IAC , A recognized startup is required to file Form 1 along with the specified documents to the Inter-Ministerial Board of Certification. The board may call for certain documents or information and may make such enquiries, as it deems fit, to recognize the entity as an eligible startup and grant a certificate for claiming exemption under section 80-IAC. The board may reject the application by providing the reasons thereof.
Angel tax under section 56(2)(viib) of the income tax Act
Angel tax is the tax charged on the closely held company when it issues shares to a resident person at a price which is more than its fair market value. When this provision is triggered, the aggregate consideration received from issue of shares as exceeds its fair market value is charged to tax under the head ‘Income from other sources’ under section 56(2)(viib).
Tax Exemption under Section 56 of the Income Tax Act (Angel Tax)
Post getting recognition a Startup may apply for Angel Tax Exemption.
A start-up shall be eligible for claiming exemption from levy of angel tax under section 56(2)(viib) if following conditions are satisfied:
- The entity should be a 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
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