Tax Exemption for Startups Entity under section 80-IAC & Angel Tax Exemption (After Union Budget 2020)
Startup India is a flagship initiative of the Government of India, intended to catalyse startup culture and build a strong and inclusive ecosystem for innovation and entrepreneurship in India. Since the launch of the initiative on 16th January, 2016, Startup India has rolled out several programs with the objective of supporting entrepreneurs, and transforming India into a country of job creators instead of job seekers. Vide the various campaign, various benefits and facilities were provided to the Startups.Let’s decode this in greater detail. I have tried to summarise the article by looking at various provision of Income Tax Act, 1961.
There are certain benefits that flow to an entity if it is an ‘Eligible Start-up’. To become an eligible startup an entity has to satisfy various conditions. These conditions are not same for all the provisions of the Income-tax Act under which these benefits are allowed. The different set of conditions and their applicability for different provisions have been discussed below.
♠ Conditions prescribed by DPIIT – As per Notification issued on 19.02.2019 which states that an entity shall be considered as a start-up up to a period of 10 years from the date of its incorporation/registration if the following conditions are satisfied:
♠ Following benefits shall be available to an eligible start-up or its shareholders:
♠ Yes, Startup Entities are eligible to claim deduction under section 80-IAC of Income Tax Act, 1961 subject to fulfillment of certain prescribed condition.
♠ Deduction at the rate of 100% of its profits and gains is allowed to an eligible start-up for three consecutive assessment years out of the seven years (ten years from 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:
A recognized startup is required to file Form 1 along with the specified documents to the Inter-Ministerial Board of 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 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).
♠ A start-up shall be eligible for claiming exemption from levy of angel tax under section 56(2)(viib) if following conditions are satisfied:
(a) Start-up is registered with DPIIT;
(b) Its aggregate amount of paid-up share capital and share premium after issue or proposed issue of shares, does not exceed Rs.25 crore. While calculating this threshold limit, issue of shares to following persons shall not be included:
(c) 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:
In case the Startup files a declaration in Form-2 and subsequently invests in any of the assets specified above before the end of seven years from the end of the latest financial year in which the shares are issued at premium, the exemption provided under section 56(2)(viib) of the Act shall be revoked with retrospective effect.
The exemption from applicability of angel tax shall be available in respect of all shares issued by the start-up from the date of its To claim this exemption, the start-up has to make self-declaration in Form 2 with the DPIIT. The DPIIT shall forward the self-declaration form to the CBDT for approval.
a) 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:—
i) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India
ii) such machinery or plant is imported into India;
iii) 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.
b) Where in the case of a start-up, any machinery or plant or any part thereof previously 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 exceed twenty per cent of the total value of the machinery or plant used in the business.
BY CA Ashwin Jain