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What are the Income Tax Laws for Startups in India

Narendra Kumar

| Updated: Feb 15, 2019 | Category: Startup

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In order to encourage sustainable economic development in India Government of India came up with flagship initiative with the Union Budget of 2016-17 called “Startup India”. The vision behind this flagship mission was to generate extensive employment opportunities and to promote foreign direct investment by enabling startups to promote business. This initiative enabled eligible startups to avail numerous concessions and exemptions in the form of regulatory and other tax benefits. In this article, we will discuss Income Tax Laws for Startups.

Here in this article, we will highlight various income tax regulations for startups:

What do you mean by ‘Eligible Startup’?

The government of India came up with a term called as an “Eligible Startup” which are qualified for availing regulatory and tax incentives. There are certain requirements that need to be fulfilled in order to make an entity qualified as ‘Startup’.

  • An entity needs to be incorporated as a Private Limited company under the Companies Act, 2013 or registered as a Partnership Firm under the Partnership Act or a Limited Liability Partnership under the Limited Liability Partnership Act.
  • However, an entity constituted by reconstruction of an existing organization or business is not considered a ‘Startup’.
  • Entities incorporated or registered for more than seven years are not eligible.
  • Turnover of the entity in any financial year since its incorporation need not surpass Rupees 25 Crores.
  • An entity which works towards innovation, development or refinement of any product or process or service driven by technology. And which helps in economic growth and to generate a high level of employment opportunities.
  • An entity needs to have obtained certification from the Inter-Ministerial Board for its set up.

What are Various Exemptions allowed for Eligible Startups under the Government Program?

The various exemptions allowed for eligible startups under government are:

  • 100% exemption on tax for the initial three (3) years: In order to promote and boost the growth of start-ups, the government exempted taxes on profits made by qualified startups for initial 3 years. So startups which deal in expansion, development, innovation, or commercialization of new products, processes or services connected with technology or intellectual property comes under the category of qualified startups.
  • Exclusion from Angel Tax: In order to encourage startups growth in India, the government excluded startups from the ambit of Angel Taxation which was introduced in 2012 under by Union Government in order to arrest money laundering.
Angel tax refers to the income tax payable on capital raised by unlisted companies via the issue of shares where the share price is seen in excess of the fair market value of the shares sold. Here Angel investors include family, friends and domestic funds which are not registered as VC funds.
  • Relief from Capital Gains: Further government has given exemption of 20% in capital gains tax by introducing Section 53 to 54H of Income Tax Act, 1961. Capital gain tax is imposed on profit get from the sale of capital assets which includes bonds, stocks, etc. As per Section 53, the exemption is provided if the capital gain is arising out of a sale of residential property and the same is reinvested in buying or constructing the residential property. Similarly, the exemption provided if capital gain arising out of the sale of bonds and shares.

What are Various taxes that Startups need to Register with?

There are a few important taxes that startups are subjected to but not known by most of them. Here are some important taxes that startups need to register with:

  1. Service Tax: Service tax is an indirect tax which levied on by the government on certain services which are borne by customers.
  2. Value Added Tax (VAT): Value-added tax is an indirect tax, which is imposed on goods and services at every stage of its production from starting of raw material until its final production. It is levied by different states.
  3. Central Sales tax: Central Sales Tax(CST) is levied by the Central government on sales of goods in case of interstate sales i.e. movement of goods for sale between various states. This tax is not levied on sales made within the state or on export or import of product.
  4. Tax Deducted at Source (TDS): Tax Deducted at Source is a tax which is regulated by Income-tax Act, 1961. TDS is an amount which is deducted as a small percentage from the regular income. TDS is deducted from an employees’ income on a regular monthly basis by the employer before making full payment to an employee.
  5. Income tax Return Filing: Income Tax return is a document which every company has to file with government irrespective of whether the company is operative and carrying on business or not. This document reflects income, profits, losses or other deductions of the company.

Read More: Are Startups in India Eligible for Tax Benefits?.

What are the Various Compliances that Startups have to make?

The various compliances that startups need to follow are:

  1. Maintenance of account: It is pertinent for a company to maintain its entire business transactions and accounts details in a proper way. The income and deduction of a company must be clearly mentioned in the books of accounts in order to avoid any difficulty to understand in the future. As this may act as supporting evidence ever in the future to defend the company in case of any frivolous claim or transaction. Basically, companies reserve balance sheet and bank statement of company transitions for a particular period of time.
  2. Audit of statutory documents: if the gross turnover of a company exceeds Rs. 40 lakhs then it is mandatory for a company to undergo periodic audits. The audit is important to ensure that the records of the company and the books of accounts are properly maintained and recorded.
  3. Filing of Statutory documents with Registrar of Companies: As per provisions of the Companies Act, if the company fails to file statutory documents with Registrar of Companies for preceding 3 years or more then it has authority to strike up the company for non-filing of financial statements etc.
  4. Income tax returns filing: it is always advisable to file returns on a timely basis to avoid any encumbrances in the future. If the returns are not filed on a timely basis they are liable to pay the penalty amount.
  5. Proper record of cash transaction: As India is a developing country, most of the incomes and wages in the unorganized sector are paid in cash. Not keeping the record of cash transactions property may lead to encumbrances in the future. So it is advisable to keep a proper record for cash transactions by maintaining cash receipts.
  6. Payment of Minimum Alternative Tax (MAT): Government made this provision for companies who don’t come under tax liability and comes under the category of ‘Zero tax companies’.

What are tax implications on Limited Liability Partnership (LLP)?

Limited Liability Partnership (LLP) is governed by the Limited Liability Partnership Act, 2008. LLP has a separate legal entity in which one partner is not liable for the unauthorized actions of another partner. The taxation policy in case of LLP is similar as in partnership firm which is taxable at the rate of 30%.

Conclusion:

In order to give impetus to the growth of startups, the government took major steps by proposing new policies. This step not only helped to generate extensive employment opportunities but also helped to promote economic growth in India.

Hope this article helped to enrich your knowledge. Feel free to contact us in case of any query.

Also, Read: 541 Startups Get Angel Tax Exemption: DPIIT Secretary.

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Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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