Tax Exemptions Available For Startups in India

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Tax Exemptions Available For Startups in India

In 2016, the Prime Minister of India Shri Narendra Modi proclaimed the Startup India campaign to foster entrepreneurship in our country. The Start-up India action plan focused on boosting bank financing for startups, streamlining the incorporation of the startup process, and grant of various tax exemptions and other benefits to startups. A condition to avail all the exemptions and benefits to the startups is only if they fall under the criteria of an ‘Eligible Startup’. This article helps to understand tax exemptions available for startups in India.

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Start-up India Program

Start-up is a business venture, often for the entrepreneurs who are inexperienced and young, with new ideas that can grow into valuable business opportunities.

The Startup India program aims to improve areas such as funding assistance, handholding, and grants, in addition to providing government start-up funding in India. The program also provides industrial and educational cooperation and incubation. To date, the Startup India program has seen 26,619 startups. In this case, the top implementation fell under the umbrella of IT services followed by health science and education.

Eligibility for the startups India action plan

  • Has not yet reached the ten-year mark of incorporation/registration
  • Is a private limited company, a partnership firm, or a limited liability partnership registered.
  • It is not established by demolishing or rebuilding an existing business firm.
  • Has not exceeded Rs 100 crore in annual revenue in any financial years since incorporation/registration
  • Is engaged in the innovation, development, or enhancement of products, processes, or services, or a scalable business model with a high potential for job creation or wealth creation

Tax Exemptions Available For Startups in India

The following tax exemptions are approved for Indian Startups:

  • 3 year tax holiday for a period of up to seven years (Section 80IAC Tax Exemption): Start-ups incorporated between April 1, 2016, and 31 March 2021 were eligible for the program. The 2021 budget has expanded to 31 March 2022. These startups will be eligible for a 100% tax deduction for three years on a seven-year block as long as the annual profit does not exceed Rs.25 crores in any financial year. This will help beginners to meet their operating needs during their first years of operation.
  • Tax exemptions from long-term capital benefits: A new section 54 EE is inserted in the Income Tax Act, 1961 so that eligible startups can deduct their tax on long-term interest if that long-term benefit or part of it is invested in a fund announced by the Central Government within six months from the date of transfer of the assets.
    The utmost amount that can be financed in a designated long-term asset is Rs 50 lakh. That amount will always be invested in a stated fund for 3 years. If withdrawn before 3 years, the release will be canceled the year on which the money is withdrawn.
  • Tax exemptions from investments fair market value (Section 56 of the Income Tax Act, 1961): The tax levied by the government on investments in excess of fair market value for eligible startups has been exempted. Such investments include investments made by local angelic investors, family, or funds which are unregistered as venture capital funds. Also, investments made by incubators above fair market value have been exempted.
  • Tax exemptions- Individuals/HUF on long-term capital investment in shares of equity of Eligible Startups: Existing provisions u/s 54GB allow for tax exemption on long-term gains through the sale of real estate if such benefits are invested in small or medium enterprises as defined under the Micro, Small, and Medium Enterprise Act, 2006.
    Therefore, if a person or HUF sells residential property and invests interest to register 50% or more of the qualifying shares, then the long-term income tax will be waived as long as those shares are not sold or transferred within 5 years from the date of its acquisition. The startups will also utilize the amount invested for purchasing the assets and should not convey the purchased asset within 5 years from the date of it is purchased. This exemption will promote investment in the right initiatives and will enhance their growth and expansion.
  • The suspension of further losses and capital gains allowed in the event of a change in the Shareholding pattern: Further losses in respect of eligible start-ups are allowed if all shareholders of that company who held shares having voting powers held on the last day of the year in which the losses continued to hold shares on the last day of the preceding year when such losses will be continued further. In the case of an eligible startup, the 51% hold withholding of voting rights to stand unaltered under Section 79 has been exempted.

Start-up Registration in India

Final words

Tax benefits help new businesses save valuable money and use it to expand their operations. Indian companies have the potential to reap a plethora of start-up tax benefits by the 2020 budget. However, keep in mind that a preferred type of sole proprietorship, corporate company, or LLP (limited liability partnership) is the way to get started for exemptions. According to the Companies Act of 2013 or the LLP Act of 2008, startups must be integrated as private companies to qualify as a suitable starting point.

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CS Urvashi Jain is an associate member of the Institute of Company Secretaries of India. Her expertise, inter-alia, is in regulatory approvals, licenses, registrations for any organization set up in India. She posse’s good exposure to compliance management system, legal due diligence, drafting and vetting of various legal agreements. She has good command in drafting manuals, blogs, guides, interpretations and providing opinions on the different core areas of companies act, intellectual properties and taxation.

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