Startup

Availing of Notable Taxation & Other Benefits for Start-ups

A start-up is a young company which is formed with an objective to develop a unique product or service and introduce it to the market. Initially, the start-up gets fund by its founders or their friends and families. Although start-ups may be risky propositions, but potential investors have various approaches to determine its value. Start-ups enjoy various benefits, including taxation benefits. This article points out some of the remarkable benefits for start-ups.

Start-ups in India: A Brief Overview

The Indian start-up ecosystem has been hailed as the third largest in the world. It has seen tremendous growth with close to 54k DPIIT recognized start-ups and more than 50 unicorns.

With growing valuations and enhanced digital adoption, Indian start-ups made huge developments like recently Byjus bought a 30 year old company Akash Edu. Services for 1billion dollars to enhance its business. After that, we saw health tech start-up Pharmeasy acquire 66% stake in public listed healthcare company.

Being the innovation drivers, start-ups have helped the country in solving decade old issues and discover more efficient ways of operation.

Entrepreneurs across fields such as e-commerce, software, AI, biotechnology etc., has taken the responsibility to create better solutions for real world problems. Services such as ride-hailing, food delivery, digital wallets have been made possible today, which was not available a few years ago.

Considering the potential of start-ups, various relaxations, exemptions etc have been provided for start-ups to stimulate entrepreneurs to execute their ideas through start-up. Today, start-ups in India enjoy a plethora of benefits apart from taxation benefits. In the next segment, we have discussed the taxation benefits for start-ups. 

Taxation Benefits for Start-ups

Let’s start with the taxation benefits. Under taxation, start-ups enjoy the following benefits:

• Deduction under Section 80-IAC of the Income Tax Act 1961

Start-ups can enjoy deductions under Section 80-IAC of the Income Tax Act 1961, however, the eligibility criteria should be met. There are different eligibility requirements that should be met to consider as a start-up under Section 80-IAC of the Income Tax Act 1961. Firstly, the entity must be incorporated as a Private Limited Company, Registered Partnership Firm or Limited Liability Partnership (LLP). Further such entity should not be older than 10 years from the incorporation date.

The business should be working towards innovation, development or for the improvement of a product or service and/or scalable business model with huge potential of employment generation. Further, the entity must not have been formed by splitting up or reconstructing an extant business.

Further various information and details will have to be submitted for registration under Section 80-IAC of the Income Tax Act 1961. The details of the start-up, such as the name, date of incorporation, address, nature of business, contact details of the start-up, should be furnished.

As far as the deduction amount is concerned, 100% of profits and gain made from the start-up business. Further, the total turnover of the business should not be more than 100 crore rupees in the previous year for which the deduction is claimed. The deduction available, on assessee’s option for any 3 consecutive assessment years from 10 years starting from the year when the eligible start-up is incorporated, shall be the period of deduction.

• Exemption from Angel Tax

Angel tax refers to a tax that is levied on consideration obtained by privately held companies towards issue of shares for value that is more than the face value of such shares.

Relaxation for start-ups-

1. Declaration should be filed in Form 2 with DPIIT;
2. Exemption can be enjoyed from angel tax if the start-up is recognized by the DPIIT, aggregate amount of the paid up share capital and share premium of start-up <= 25 crore rupees.

Restrictions on Investment raised for Exemption of Angel Tax-

It should be noted that no investment should be made in the assets mentioned below for 7 years from the end of last financial year when shares are issued at premium:

1. Building or land, being a residential house;
2. Land or building or both not being a residential house;
3. Loans and advances;
4. Shares and securities;
5. Capital contribution made to other entity;
6. Motor vehicle, aircraft, yacht, any other mode of transport, with actual cost of more than 10 lakh rupees;
7. Jewellery;
8. Any other asset, in the nature of capital asset or otherwise, of the nature provided in sub clauses (iv) to (ix) of clause (d) of explanation to clause (vii) of sub-section (2) of Section 56.

• Tax exemption on capital gain

1. Exemption can be sought on long term capital gain from transfer of residential property;
2. It is available to individual/HUF;
3. For claiming the exemption, it should be a company falling under the ambit of SME under the MSME Act^[1] or is an eligible start-up;
4. Further, the company should be incorporated in India from 1^st April of the previous year relevant to  the AY wherein the capital gain arises and ending on the deadline of the furnishing of the return of income under sub-section (1) of section 139;
5. It should be a company wherein the assessee has more than 25% share capital or has more than 25% voting rights after the subscription in shares by assessee;
6. The eligible company should invest in purchase of new asset within an year from the date of subscription in equity shares by assessee;
7. Further, the company should have certification from the Inter-ministerial board.

• Ease in change of shareholding for carry forward of losses

1. Carry forward loss in case of change in 51% shareholding, in case where all shareholders as on year of losses continues to be shareholder in the current year;
2. Available for 80-IAC recognized start-ups.

From the above, it can be summed up that tax incentives are available for start-ups such as tax exemption under Section 80-IAC (Income Tax Act), Carry forward of losses, Angel tax exemption and capital gain exemption.

TAX BENEFITS	REQUIREMENT OF RECOGNITION FROM DPIIT	REQUIREMENT OF INTER-MINISTERIAL BOARD CERTIFICATION
Tax exemption under Section 80-IAC	Yes	Yes
Carry forward of losses	Yes	Yes
Angel tax exemption	Yes	No
Capital gain exemption	Yes	Yes

Other Benefits for Start-ups

Apart from the taxation benefits, there are some other benefits also that are discussed below:

• Self-certification

Start-ups would be permitted to self-certify compliance with 9 labor laws and 3 environmental laws.

• Exemption from prior experience/turnover criteria

Start-ups will be exempt from prior experience/turnover criteria without any compromise with quality standards or technical parameters.

• Quicker exits

Start-ups also enjoy the benefit of faster exits as they can be wound up within 90 days period from the date of making an application on fast track basis under the IBC, 2016. In case of other companies, it can take a period of 180 days for exiting.

• Fast tracking of patent applications and trademark applications

Start-ups also have the benefit of fast tracking of patent applications and trademark applications where a panel of facilitators helps in application filing. Further, the government bears the facilitation cost, and there is 80% rebate in filing patents vis-à-vis other companies and 50% rebate in filing the trademark cost. 

• Funding incentives, credit guarantees and various programmes

Different programs such as workshop events are organized by corporate and government to bolster start-ups which brings benefits for start-ups. The government has proposed for start-up fests on an annual basis, nationally and internationally, which will allow different stakeholders to come together and meet. It will provide huge networking opportunity. 

• Incentives from state government

Different incentives have been provided to start-ups by various state governments. Some of them are as follows:

• Andaman and Nicobar Islands
  1. A monthly allowance of 15000 rupees will be provided for a year, and a monthly allowance of 20000 rupees will be provided, in case of women entrepreneurs;
  2. One time grant of maximum 3 lakh rupees shall be provided to start-ups;
  3. Marketing assistance of 3 lakh rupees shall be provided;
  4. Reimbursement of the cost of patent filing.

• Uttar Pradesh
  1. Sustenance allowance of 15000 rupees per month for 1 year;
  2. Marketing help of maximum 10 lakh rupees shall be provided for introduction of innovated product in the market;
  3. Support will be extended for office space and services.

How can entrepreneurs realize more benefits for start-ups?

Start-ups can use the following method to excel in the business:

• A start-up should strive to connect with incubators. Hence, you may find incubators in your region that would support the growth of the start-up.
• Connecting with corporate and reaching out to the accelerators in your sector or business type can help.
• Never hesitate to connect with mentors and get their guidance as they are rich in experience and are professionals in their field of business.

Why should more incentives be made available for start-ups?

Start-ups have excellent growth potential and are also the future of business. More tax incentives and other benefits should be made available to them due to the following reasons:

• Start-up create job opportunities

Start-ups have addressed the issue of unemployment as they have improved the scope for employment in different fields. They have contributed significantly to the change of mind sets in business.

• Creativity

Start-ups are all about innovating and manifesting inventiveness to solve the problem in a unique way. This authenticity helps in generating other ideas and gain more profit.

• Economic growth

Start-ups have impacted the economy with the gained profit. It has breathed life into different sectors. Even though start-ups are small entities, they have impacted the Indian economy significantly. With increasing competition, start-ups have provided better services and shown enhanced productivity.

• Ability to transform

Entrepreneurs dream big therefore, their ideas has the ability to bring about fantastic transformation for the better. They may create new product that provides solution to a great problem or take on a challenge to explore the terrain which is not tread before by anyone. They have in them to improve the world with the products, ideas or businesses. Hence, start-ups are the way going forward.

• Promote research innovation system

High tech and knowledge based start-up companies are connected to the knowledge institutions. They promote research and development and innovation approach of knowledge institutions, companies and contribute to the applicative orientation of research work.

• Value addition

Start-ups can transform the values of the society and usher in a new mind set, in line with the society based upon knowledge and creativeness. The population has also realized that they have got a responsibility for their carrier and work development.

Conclusion

More Start-ups in India can witness a golden chapter in the Indian entrepreneurship history. Firstly, they should be aware of the different forms of benefits for start-ups which will stimulate them to get started with their idea. The benefits enjoyed by start-ups are immense hence if more people are aware of this, they would want to set up start-ups. We may see more new incentives for start-ups in the coming years as start-ups are essential drivers of growth and employment generation.

Read our article:Registration of Start-ups under DPIIT: Eligibility and Benefits