The startup culture has taken the world business by storm. Since the rise in population is directly proportional to the job requirement as it is the only means to survive, the startups are the way out that can actually create net new jobs rather than relying on big enterprises.
Startup India Initiative was launched in India by PM Shri Narendra Modi on 16th January 2016 to eradicate unemployment so that there is wealth creation which can ultimately provide the much-needed boost to the economy. Globally, India has the 3rd largest startup ecosystem and aims to accelerate the startup ecosystem significantly by the year 2025. According to the Startup India Portal, till date, there are 31,123 DPIIT recognized startups in India. The scheme has various advantages and few of them are, by providing ample resources that can be utilized for simplifying work for the new entrants to motivate them, income tax benefits, financial support from the government, etc.
There are various income tax exemption and incentives available to startups. However, these benefits can only be availed by eligible startups. So let’s see what is considered as an ‘eligible startup.
A startup has to hold a certificate of “eligible business” from the Inter-Ministerial Board of Certification to induce various tax benefits.
To be eligible as a startup an entity has to satisfy the following four condition:
- The age of the entity i.e., the period of existence and operation should not exceed 10years since incorporation.
- To be incorporated as a Private Limited Company under the Companies Act 2013 or registered as a Partnership Firm under Section 59 of Partnership Act 1932 or as a Limited Liability Partnership under the Limited Liability Partnership Act 2008.
- The entity’s turnover should not exceed 100 crore rupees (earlier 25 crores)
- The entity should be engaged in innovation, development or improvement of products or services.
- Lastly, the entity should be an original entity i.e., it should not have been formed by splitting up or reconstruction of an already existing business.
Inter Ministerial Board (IMB)
The Inter Ministerial Board (IMB) was set up by the Department of Promotion and Internal Trade (DPIIT). The Board was constituted reviews the applications of startups claiming tax benefits and grant tax exemptions under section 80 IAC and section 56(2)(viib). A startup needs to be certified by IMB to avail tax benefits.
Funds of Fund
Funds of Fund was set up by the Union Government in line with the Startup India scheme under Small Industries and Development Bank of India (SIDBI) with an objective to support development and growth of startups in India and facilitate their funding needs. With an approved corpus of Rs 10,000 crores, it contributes to the various Alternative Investment Funds (AIF)registered with SEBI.
An eligible Startup can avail all these exemptions from income tax:
Three year tax holiday-Section 80 IAC
Since the day of its incorporation or registration a startup can avail exemption from paying income tax for 3 consecutive financial years out of the first 10 years. In order to avail this benefit a startup has to get an eligibility certificate from the Inter Ministerial Board. For this one has to ensure that:
- the entity is a Private limited Company or Limited Liability Partnership and
- it should have been incorporated after 1st April 2016 but before 1 April 2021.
So far, 254 startups have been granted exemption under section 80IAC
No Angel Tax
Originally aimed to tackle money laundering, angel tax is levied on startups where the investment is in excess of the fair market value. Currently, it is levied at 28.5%.
Only those startups are exempted from angel tax as per Section 56(2)(viib) of the Income Tax Act that are:
- Recognized by the Department of Promotion of Industry and Internal Trade (DPIIT), and;
- the aggregate of the paid up share capital and share premium of the start up after issue or proposed issue of share does not exceed 25 Crore Rupees.
Set off and Carry forward of losses.
As per Section 79, an eligible start up can carry forward losses from previous years in either of the conditions:
- Continuity of fifty one percent of shareholding or voting power;
- Continuity of hundred percent of original shareholding.
Exemptions from long term capital gain- Section 54 EE.
Section 54 EE was introduced in 2016 to promote investment which provided exemption on capital gains arising out of long term capital assets invested in a fund that will be notified by the Central government. The investment made during any financial year should not exceed fifty lakh rupees. Further one has to invest in a specific fund for a period of atleast three years. In case the fund is withdrawn before such period then the exemption will be revoked.
However, this section is yet to be notified.
HUF/Individual exemption from long term capital gains.
The existing provisions u/s 54GB allows the exemption from tax on long-term capital gains on the sale of a residential property if such gains are invested in the small or medium enterprises as defined under the Micro, Small and Medium Enterprises Act, 2006. But now this section has been amended to incorporate exemption on capital gains invested in eligible start-ups also.
Thus, if an individual or HUF sells a residential property and invests the capital gains to subscribe the five hundred or more equity shares of the eligible startups, then tax on long term capital are going to be exempt as long as such shares aren’t sold or transferred within 5 years from the date of its acquisition.The startups shall also use the quantity invested to get assets and will not transfer asset purchased within 5 years from the date of its purchase.
Hence, if a startup wants to claim the above exemptions it has to:
- Have a separate account book
- File its income tax returns
- Get the books audited by a CA
- File the Tax Audit Report
GST Exemption for Startups and Small Businesses
Under GST Regime, organizations with a turnover of under Rs.40 lakhs per annum would not need not to take registration under GST. Accordingly, many startups and small business having an annual turnover of Rs.5 lakh – Rs.40 lakh would be out of the assessment. This will help them to grow as they need not file GST Returns.
Applicability of Minimum Alternative Tax
1.Startup Company engaged in manufacturing/ production and set-up and registered on or after 1 March 2016:
- Pay tax at interest rate of 25% after availing exemptions or deductions laid out in the above section. MAT at interest rate of 15% will be applicable
- Pay tax at interest rate of 22, without availing any exemptions or deductions. MAT won’t be applicable
2.Startup Manufacturing Firm incorporated after October 1, 2019 and beginning operations before March 31, 2023:
- That doesn’t avail exemption or incentive, to pay tax at interest rate of 15%, MAT won’t be applicable
- That avails exemption or incentive, to pay tax at interest rate of 25%, MAT at interest rate of 15% is going to be made applicable
3.Startup Companies, aside from the above, have two options:
- Pay tax at interest rate of 22, without availing any exemptions or deductions, MAT won’t be applicable
- Pay tax at interest rate of 25% after availing exemptions or deductions laid out in the above section. MAT at interest rate of 15% is going to be made applicable
Challenges to startups due to covid19 and reliefs by Government.
India was already facing an economic slowdown since 2008 and the breakdown in the supply chain by not able to communicate with the vendors in the red zone area has turned out to be a big challenge for not only for startups but also for big companies, which has raised serious concerns about their survival during this pandemic.
Startups are under a high financial stress due to the COVID19 crisis. Hotel, Food, Transport and Aviation industry are having a hard time during this pandemic. However, online educational companies and video conferencing companies, online food delivery companies as well as medicine delivery startups are booming.
The new rules announced by the Finance Minister in the Union Budget Speech 2020 came in as a relief to many startups and organizations stressed over the compliance issue.
Relaxation in tax payments for start ups
Finance Minister Nirmala Sitharaman announced certain regulatory changes on COVID19 relief. They are:
- Tax on Employee Stock Action Plan (ESoP) for the employees has been Deferred for five years or when the employees sell their shares or they leave the entity, whichever is earlier.
- Turnover limit of an entity extended to 100 crore than the earlier 25 crore.
- Period of eligibility of a company has been raised to 10 years from the existing 7 years.
- The finance minister proposed the setting up of an Investment Clearance Cell for entrepreneurs in order to provide end to end facilitation and support and create opportunity for the youth. The cell would also act as a Pre- investment advisory.
- Formulation of National Seed Fund Scheme.
- Moratorium has been issued for MCA registration from 1st of April 2020 till 31st September 2020.
- No additional fees for late filings.
- The mandatory requirement of holding Board meetings have been relaxed for 60 days period which will be applicable for the next 2 quarters.
DPIIT and Startup India also launched a competition ‘United Against COVID-19 Innovation Challenge’ to seek innovative technologies and solutions to tackle the Covid19 crisis.
To wrap it up, today’s Indian youth are all geared up to break the glass ceiling to achieve real powerful leadership roles. If a startup, notwithstanding where it’s based, wants to succeed, it must let its employees express themselves freely. Because people give their best only they’re allowed to speak and act freely. Over the concept, it’s the culture of a workplace that decides whether or not a startup succeeds.
India has come a long way in terms enhancing the startup culture as the Indian entrepreneurs never lacked imagination but it was only the insufficiency of opportunities and now the gap is being bridged. Like Rome was not built in a day, the rise of startups in India has also not taken place overnight but slowly and gradually.
The tax exemption and benefits provided by the government to Indian startups have further encouraged budding companies and entrepreneurs which is a positive sign for the startup ecosystem. Likewise, expanding the meaning of a startup would guarantee that an organization can be under the startup umbrella for a more extended timeframe which will in turn help the new companies grow.
About the author
Sachi Bhiwgade, penultimate year law student at Hidayatullah National Law University, Raipur. She has keen interest in general corporate law. In her spare time she likes baking and gardening.
Riya Chakravorty, is a 4th year student from Hidayatullah National Law University, Raipur. She has opted for Corporate law and Constitutional law as my honours subjects and has a keen interest in General Corporate Law and IBC. Her hobbies include travelling and listening to music.