Recognition and benefits for Startups including Tax benefits

A startup is a newly business setup that is small in nature and initiated by single or a group of individuals. What makes the startup different from other businesses is that a startup presents a new product or service that is not in present at some other place in the same manner. The base of startup is modernisation and innovation. The enterprise which indulge in developing the new product or service or redevelop the current into something better is signifies as startup. The government of India with the primary objective of promoting the startups in India, has introduced the Startup India Scheme, an initiative taken by the Prime Minister Narendra Modi. The primary objective of the Startup India Scheme is –

• Promoting Bank financing;
• To simply the Incorporation process of startup;
• Granting various benefits and tax exemption.

What are the Eligible Startups in India?

Eligible startups are allowed to avail all the benefits and exemption in taxation. To be qualified as Eligible startups, it must fulfill the following conditions-

• Startups must be incorporated as a private company or limited liability partnership.
• It must be incorporated or registered in India for less than 7 years from the date of its incorporation.
• The annual turnover in any of the preceding financial year shall not exceed Rs 100 crore.
• The objective of the startups is to work towards development, innovation and, commercialization of new products/services.
• DIPP (Department of Policy and promotion) and Inter-Ministerial Board Approval is required.
• For funding through Incubation, Angel and private equity fund, it must have obtained a recommendation letter by an incubation.

Benefits under Startup India Scheme

• Single Window Clearance via the mobile application
• Corpus fund of Rs 10,000 crore to triggers the development of the startup.
• The patent registration fee would be 80% less than the original fee.
• Liberalized Bankruptcy Code for the seamless exit.
• Three years of relief from mystifying inspections
• Three years of relief from the Capital Gain Tax
• No tax on profit for 3 years
• The non-existence of red tape
• Self-certification compliance
• Innovation hub for business enthusiast under Atal Innovation Mission
• New schemes having provisions for IPR protection to start-ups and new firms
• Encourage innovation and entrepreneurship.

Registration with DPIIT

The benefits available to startups are provided only to DPIIT recognized startups. Here is the brief on how a startup can be registered with DPIIT.

An application can be made by any incorporated entity fulfilling the above conditions. This online application can be filed from the website https://www.startupindia.gov.in/  or from the mobile app along with:

• Copy of certificate of registration or incorporation
• Write-up on the nature of business highlights incorporating how an entity is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation. This forms the very basis of rejection/ approval of the application and has to be well put.
• Additional documents providing website link, pitch deck, details of patents, etc., shall also be attached to support the application.
• Information on any award received by the entity.
• Document a proof of funding received by the entity, if any.

Once an application is submitted, DPIIT may call for such other documents or information and make such enquiries, as it may deem fit. DPIIT also has the authority to reject the application only after furnishing the reasons for the same.

Tax exemptions allowed to Eligible Startups under Startup India Program

Following  tax exemptions have been allowed to eligible startups :

1. 3 year tax holiday in a block of seven years

The Startup incorporated after April 1, 2016, is eligible for getting 100% tax rebate on profit for a period of three years in a block of seven years provided that annual turnover does not exceed Rs 25 crores in any financial year.This will help the startups to meet their working capital requirements during their initial years of operation.

2. Exemption from tax on Long-term capital gains:

A new section 54 EE has been inserted in the Income Tax Act for the eligible startups to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by Central Government within a period of six months from the date of transfer of the asset. The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Such amount shall be remain invested in the specified fund for a period of 3 years.If withdrawn before 3 years, then exemption will be revoked in the year in which money is withdrawn.

3. Tax exemption on investments above the fair market value

The government has exempted the tax being levied on investments above the fair market value in eligible startups. Such investments include investments made by resident angel investors, family or funds which are not registered as venture capital funds. Also, the investments made by incubators above fair market value is exempt.

4. Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups u/s 54GB.

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 include 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 50% or more equity shares of the eligible startups, then tax on long term capital will be exempt provided that such shares are not sold or transferred within 5 years from the date of its acquisition.The startups shall also use the amount invested to purchase assets and should not transfer asset purchased within 5 years from the date of its purchase.

This exemption will boost the investment in eligible startups and will promote their growth and expansion.

5. Set off of carry forward losses and capital gains allowed in case of a change in Shareholding pattern.

The carry forward of losses in respect of eligible start-ups is allowed if  all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of previous year in which such loss is to be carry forward.The restriction of  holding of 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in case of eligible startups.

Conclusion

Government of India has taken an initiative by announcing the action plan that represents and addresses all the aspects of the Startups with the purpose to accelerate the growth of startups in a very simplified way. This initiative helps in funding and innovations. With the help of start-up India, it provides a platform to the stakeholders to interact amongst each other to form a successful partnership in a dynamic environment.