Registration under the start-up India scheme is a very common point of discussion and every newly incorporated company or entity always have multiple questions related to the startup India scheme such as who is eligible to recognize under the Startup India Scheme, what tax benefits are available, whether government provides any grant or subsidy or funding to such entities, whether any loans are provided at a discounted rate to such entities etc.
India has emerged as one of the fastest-growing startup ecosystems in the world, with a growing number of successful startups in areas such as e-commerce, fintech, health tech, and edtech. Some of the well-known Indian startups include Flipkart, Paytm, Ola, Zomato, and Byju’
Income tax forms a considerable part of costing as 25% of 30% of profits is given to the government as taxes. To promote entities to opt for the startup India Scheme, Various amendments are made in Income Tax Act to provide different tax exemptions to startup entities such as tax holidays for 3 years, exemption on the issuance of shares, exemption from capital gain, etc.
In this article a detailed discussion is made about what tax benefits are available to entities recognized under the Startup India Scheme:
1. A brief about startup India
- Startup India is a flagship program initiated by the government of India on 16th January 2016 to support entrepreneurs, building a robust startup ecosystem, and making India a job creator instead of job seekers.
- This program is managed and supported by DPIIT (Department for Industrial Policy and Promotion).
- An entity recognized by DPIIT as a startup entity, it shall have various benefits such as tax holidays, lower patent fee, relaxation in compliance of labour law and environment laws, fast-track services, Tax exemptions, funds/Loans, Credit guarantees etc.
- Startups scheme is backed by following pillars:
- Simplification & handholding: Easier compliance, easier exit process for failed startups, legal support, fast tracking of patent applications and a website to reduce information asymmetry.
- Funding & Incentives: Exemptions on Income Tax and Capital Gains Tax for eligible startups; a fund of funds to infuse more capital into the startup ecosystem and a credit guarantee scheme
- Incubation & Industry-Academia Partnerships: Creation of numerous incubators and innovation labs, events, competitions and grants.
2. Eligibility Criteria for Startup Recognition
Entities meeting the following criteria will be eligible to apply for recognition as Start-ups:
- Entities means:
- Private Limited Company (Under Companies Act, 2013),
- Limited Liability Partnership (LLP) (Under LLP Act, 2008).
- A registered Partnership firm (Under Indian Partnership Act).
- Period: The entity should not be more than 10 years old from the date of incorporation/registration.
- Annual turnover: The annual turnover of the entity should not exceed Rs 100 crore in any of the financial years since its incorporation.
- Area of Business:
- The company should be working towards innovation, development, or improvement of products or processes or services; or
- it is a scalable business model with a high potential of employment generation or wealth creation.
- Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
3. Process of obtaining recognition on DPIIT (Department for Promotion of Industry and Internal Trade)
Startups are required to obtain recognition of Startups from DPIIT. For this purpose, the following process is required to be followed:
- Recognition can be obtained on www.startupindia.gov.in.
- New users can register using any of his social media accounts.
- Post login, Entity is required to provide various details such as Type of user, name, stage of startup, etc.
- After entering all the details, a message will pop up of profile creation.
- On the portal, both existing or new users can check the tab of “DPIIT Recognition”.
- The entity is required to provide the following information while filing form for DPIIT recognition:
- Incorporation/Registration Certiﬁcate
- Director details
- Patent and trademark details (Optional)
- PAN Number
- A proof of concept (website link/video/pitch deck) for startups in the Validation stage. For the early Traction and Scaling stage, it is necessary to provide a video or pitch deck in addition to a company website. Ideation-stage startups are not mandated to submit a proof of concept.
- The entity is not required to have any of the following documents:
- Letter of Recommendation
- Sanction Letters
- Udyog Aadhar
- MSME Certificate
- GST Registration
- After entering all the details, a user is required to click on the “Submit” button. The submitted application will get processed within 48-72 hours.
4. Benefits for recognized startups under Income Tax Act
Doors to many incentives get opened for entities recognized as startups by DPIIT. Startup entities are eligible for the following exemptions or benefits under Income Tax Act:
4.1 Income tax exemption for 3 consecutive years out of 10 years
- Section 80-IAC of the Income tax act provides for exemption to eligible startups wherein 100% of profits derived from eligible businesses is exempted for 3 consecutive years.
- Such exemption can be claimed for any 3 consecutive assessment years out of 10 years beginning from the year in which the startup is incorporated.
- Exemption under this section is available only to Companies or Limited Liability Partnerships.
- The entity must be incorporated between 1st April 2016 to 1st April 2023.
- For the purpose of obtaining this exemption, startups are required to obtain a certificate from an inter-ministerial Board which validates the innovative nature of the business for granting Income Tax Benefits.
- The application shall be filed in Form-1 along with documents specified therein and the Board may, after calling for such documents or information and making such enquires, as it may deem fit:
- grant the certificate for claiming exemption under section 80- IAC of the Act; or
- reject the application by providing reasons.
- Inter-Ministerial Board is constituted by representatives from DPIIT, DBT, and DST
- So far, 448 startups are granted income tax exemption under Section 80-IAC of the Income Tax Act.
4.2 Exemption under Section 56(2)(viib) of Income Tax Act
- As per Section 56(2)(viib) of the Income Tax Act, where a private company receives from a resident, any consideration for the issue of shares where consideration exceeds the face value of such shares, the aggregate consideration received in case of fare market value shall be taxed as income from other sources.
- However, a startup shall be eligible to an exemption from Section 56(2)(viib) subject to the following conditions:
- it has been recognised by DPIIT under para 2(iii)(a) or as per any earlier notification on the subject
- the aggregate amount of paid-up share capital and share premium of the startup after the issue or proposed issue of shares, if any, does not exceed INR 25 Crores.
Provided that in computing the aggregate amount of paid-up share capital of INR 25 Crores, shares issued to any of the following persons shall not be included─
(a) a non-resident; or
(b) a venture capital company or a venture capital fund;
Provided further that considerations received by such a startup for shares issued or proposed to be issued to a specified company shall also be exempt and shall not be included in computing the threshold of INR 25 crores.
- Startups can’t invest such funds in:
- building or land appurtenant, other than that used by the Startup for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
- loans and advances, other than loans or advances extended in the ordinary course of business by the Startup where the lending of money is a substantial part of its business;
- the 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 INR 10 Lacs, other than when the such asset is held by the Startup for the purpose of plying, hiring, leasing, or as stock-in-trade, in the ordinary course of business;
- jewelry, other than jewelry held by the Startup as stock-in-trade in the ordinary course of business;
- Startups can’t make the above-mentioned restricted investments upto 7 years from the end of the latest financial year in which shares are issued at a premium.
- “Specified Company” means a company whose shares are frequently traded as per SEBI rules and whose net worth on the last date of the 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.
- A startup fulfilling conditions shall file a duly signed a declaration in Form 2 to DIPP that it fulfills the conditions. On receipt of such declaration, the DPIIT shall forward the same to the CBDT.
4.3 Capital gain on transfer of residential property (Section 54GB)
- Section 54GB exempts capital gain arising on the transfer of residential property (a house or plot of land) provided consideration from the transfer of property is invested in equity shares of the Eligible Company.
- Eligible Company shall use such funds for the purchase of new assets within one year from the date of subscription of equity shares.
- Eligible Company means a company which fulfils following condition:
- it is a company incorporated in India during the period in which capital gain arises from 1st day of April till the due date of furnishing of return of income under sub-section (1) of section 139 by the assessee
- it is engaged in the business of manufacture of an article or a thing or in an eligible business;
- Assessee has more than 25% of share capital or more than 25% of voting rights after the subscription in shares; and
- The company is a qualified MSME or an eligible start-up;
- Eligible Startup Means a company or LLP engaged in eligible business and which fulfills following conditions:
- It is incorporated on or after 01.04.2016 but before 01.04.2023;
- The total turnover of the business does not exceed INR 100 Crores in the relevant previous year; and
- it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government;
- Provisions of Section 54GB shall not apply to residential property transferred after 31st March 2022.
- If the Amount is not used by the company to acquire a new asset within one year of subscription then it will be charged as income of the assessee in the year in which the period of one year expires.