In continuation of the previous article where the eligibility of Startup was discussed, in this article we shall discuss the Taxation & other benefits available to start-ups.

Under the taxation benefits, following benefits shall be available to start-ups:

I. Deduction Under Section 80-IAC of The Income Tax Act, 1961 (‘Act)

II. Angel tax Incentive

III. Tax exemption on Capital gain

IV. Relaxation in change of shareholding for capital loss.

Taxation & Other Benefits Available to Startups

The above benefits are explained in detail as follows:

I. Deduction Under Section 80-IAC of The Income Tax Act, 1961 (‘Act)

A. ELIGIBILTY CRITERIA TO CONSIDER AS A STARTUP UNDER SECTION 80-IAC OF THE ACT.

1. Types of entities

Incorporated as a

2. Incorporation criteria

      • Not older than 10 years from the date of incorporation/registration.

3. Defination of ‘Eligible Business’

      • Working towards
        • Innovation, development or improvement of a product, process or service and/or
        • Scalable business model with high potential of employment generation or wealth creation

4. No Splitting/ Reconstructing

      • Entity should not have been formed by splitting up or reconstructing an already existing business

5. Entity should not be formed by the transfer to a new business of machinery or plant previously used for any purpose.(except only 20% of the total value of the machinery or plant previously used can be utilised in Startups).

B. INFORMATION REQUIRED FOR REGISTRATION U/S 80IAC

      • Application can be made online in Form 1 on startupindia.gov.in
      • Details of Startup
        • Name of the startup
        • Date of incorporation
        • Incorporation no.
        • Address
        • Nature of business
        • DIPP no.
      • Contact details of Start-up

C. DOCUMENTS REQUIRED FOR REGISTRATION U/S 80IAC

      • MOA/LLP deed
      • Annual accounts & ITR for last 3 financial years
      • Startup Video link
      • Pitchdeck

D. HOW TO AVAIL DEDUCTION

      • Amount of Deduction
        • 100% of Profits and gain derived from Start-up business.
      • Turnover Criteria
        • Total turnover of its business does not exceed 100 crore rupees in the previous year for which deduction is claimed.
      • Period of Deduction
        • Deduction available, at the option of assessee for any 3 consecutive assessment years out of 10 years beginning from the year in which the eligible start-up is incorporated.

II. ANGEL TAX INCENTIVE

A. Section 56(2)(viib)

      • Angel Tax is a term used for tax proposed to be levied on consideration received by privately held companies towards issue of shares for a value that exceeds the face value of such shares.
      • Where such value i.e. essentially the premium on the shares cannot be justified. Valuation Report from Merchant Banker for valuation carried out under Discounted Cash Flow Method.

B. EASED CONDITIONS FOR START-UP

Notification No. G.S.R 127 (E) dated 19.02.2019

      • Declaration in Form 2 must be filed with DPIIT.
      • Exemption from the provisions of Section 56(2)(viib), if it fulfils the following conditions:
        • it has been recognised by DPIIT ;
        • aggregate amount of paid up share capital and share premium of the startup( after issue or proposed issue of share)<= INR 25Cr.

C. EXCLUSIONS IN THE LIMIT OF INR 25 CR

      • Investment from non-resident
      • Venture capital company or venture capital fund
      • Specified Company-
        • A company whose shares are frequently traded and
        • whose net worth on the last date of financial year preceding the year in which shares are issued exceeds INR 100 Crores or
        • turnover for the financial year preceding the year in which shares are issued exceeds INR 250 Crores.

D. RESTRICTIONS ON INVESTMENTS RAISED FOR ANGEL TAX EXEMPTION

No investment shall be made in the following assets for a period of 7 years from the end of latest financial year in which shares are issued at premium:

      • building or land appurtenant thereto, being a residential house*
      • land or building, or both, not being a residential house*
      • loans and advances*
      • 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.*
      • Jewellery*
      • any other asset, whether in the nature of 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.

Exemption will be available if invested in the ordinary course of business

III. TAX EXEMPTION ON CAPITAL GAIN

Section 54GB

    • Nature

Long term capital gain arising from transfer of residential Property.

    • Available to

Individual/HUF.

    • How to claim exemption

Utilization of the net consideration for subscription in the equity shares of an eligible company.

    • Eligible Company

It is a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 (27 of 2006) or is an eligible start-up.

    • Incorporation criteria

It is a company incorporated in India during the period from the 1st day of April of the previous year relevant to the assessment year in which the capital gain arises and ending on the due date of furnishing of return of income under sub-section (1) of section 139 by the assessee;

    • Share Capital

It is a company in which the assessee has more than 25% of share capital or more than 25% of voting rights after the subscription in shares by the assessee.

    • What Eligible Company has to do

> Investment in purchase of new asset within one year from the date of subscription in equity shares by the assessee,

> Block period of 5 years from the date of their acquisition of equity shares or asset by company.

Company must be holding certification from Inter-Ministerial Board.

    • Restrictions on end use of Investment
      • New plant & machinery does not include:
        • Any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;
        • any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house;
        • any office appliances including computers or computer software(except for technology- driven start-up, the holding period shall be three years);
        • any vehicle; or
        • any machinery or plant, the whole of the actual cost of which is must not be allowed as a deduction (whether by way of depreciation or otherwise) in any previous year.

IV. RELAXATION IN CHANGE OF SHAREHOLDING FOR CARRY FORWARD OF LOSSES.

Section 79

    • Carry Forward Loss even if there is change in 51% shareholding, provided all shareholders as on year of losses continue to be shareholder in current year (i.e. year of set-off).
    • Available for 80IAC Recognised Startups.

The above provisions can be summarized as follows on the applicability of Startup recognition whether Inter-Ministerial board is required:

Tax Incentives Recognition from DPITT Inter-Ministerial Board Certification
Tax Exemption
(Section 80-IAC)
Carry forward of Loss (Section 79)
Angel tax exemption (Section 56(2)(viib) X
Capital gain Exemption
( Section 54GB)

OTHER BENEFITS AVAILABLE TO STARTUPS

I. Self Certification

a. Startups shall be allowed to self-certify compliance with 9 labour laws and 3 environment laws.

II. Relaxed norms for public procurement –

a. Start-ups shall be exempt from the criteria of “prior experience/ turnover” without any relaxation in quality standards or technical parameters

III. Faster Exits –

a. Start-ups can be wound up within a period of 90 days from making of an application on a fast track basis under Insolvency and Bankruptcy Code, 2016 (‘IBC’).

b. However, in case of other companies, it takes a period of 180 days to wind up.

IV. Fast tracking of Patent & Trademark applications

a. Panel of facilitators to assist in filing of applications.

b. Government to bear facilitation cost

c. 80% rebate in filing of patents vis-a-vis other companies and 50% rebate in filing of trademark cost.

V. Funding incentives

VI. Credit guarantees

VII. Programmes

a. Various programmes like challenges, workshops events are organised by corporates & government departments to boost startups.

VIII. State Government incentives – Various State governments have provided incentives to Startups.

Some of the examples are as follows:

a. Andaman & Nicobar Islands

i. Monthly allowance of INR 15,000 shall be provided for one year. In case of women entrepreneurs, monthly allowance of INR 20,000 shall be provided.

ii. One time grant of up to INR 3 Lakhs will be granted to startups.

iii. Marketing assistance of INR 3 lakhs.

iv. Reimbursement of cost of patent filing.

b. Uttar Pradesh

i. Sustenance allowance of INR 15,000 per month for a period of 1 year.

ii. Marketing/publicity assistance of up to Rs. 10 lakhs will be provided for the introduction of innovated product in the market.

iii. Support shall be provided for office space and services such as High speed internet access

IX. Other Facilities

a. Connect with Incubators

i. Find incubators in your region that can support your startup’s growth.

b. Connect with Corporates/Accelerators

i. Reach out to Corporate and Accelerators in your sector or business function

c. Connect with Mentors

    • Seek guidance from experienced professionals from the Indian business landscape.

*****

About the Author

Author is CA Vidhu Duggal helping in advisory on domestic & International taxation issues. She is also founder of Vidhu Duggal & Company. Chartered Accountants, a Chartered Accountancy firm with its head office at New Delhi and can be reached at [email protected] or +91-9268747482.

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