The article explains in detail various tax benefits and exemptions available to eligible startups under the Government of India’s flagship program “Startup India”.
Any new business in its infancy is a start-up and generally founded by one or more entrepreneurs with an innovative idea to scale up and grow significantly. The Government of India encouraged startups under its flagship program “Startup India” where it introduced the concept of an “Eligible Startup”. Under the Startup India initiative, an entity is considered a start-up:
- Up to ten years from the date of incorporation/registration, if it is incorporated as a private limited company, or a registered partnership firm, or a limited liability partnership.
- Annual turnover should not exceed Rs. 100 crores for any of the financial years since incorporation/registration.
- The entity is working towards innovation, development, or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
- Should not be a result of any business already in existence, i.e., a company incorporated as a result of the scheme of rearrangement.
As of 13th September 2021, 55,396 startups across India have been recognized by Department for Promotion of Industry and Internal Trade (DPIIT) and out of that 396 startups have received a certificate from Inter-Ministerial Board (IMB). The sectors having the maximum registered startups include food processing, IT consulting, and business support services.
The Government of India has allowed various tax exemptions/ benefits to eligible startups who have received a certificate from the IMB. Following are the tax benefits available to eligible startups:
Tax Holiday for Three Years:
The startups which are incorporated between 1st April 2016 to 31st March 2022 are eligible for 100% tax deduction of their profit for any three consecutive years out of ten years beginning from the year of incorporation. The other conditions for deduction under section 80IAC are – (a) total turnover from business does not exceed Rs. 100 crore in the year of deduction, (b) holds a certificate issued by IMB, and (c) does not form by splitting up, or reconstruction, of a business already in use.
Relaxation from Angel Tax:
Section 56(2)(viib) of the Income Tax Act provides that the issue of shares by a closely held company to a resident shareholder at an issue price higher than the fair market value (‘FMV’) will be considered as deemed income of the issuer company. Since the startups are raising capital from angel investors, hence it is known as angel tax. In order to provide relief to the startup from angel tax and to ensure the flow of investment, the government has made changes in section 56(2)(viib) of the Income Tax Act. A start-up should satisfy the following conditions to claim exemption from applicability of section 56(2)(viib):
As of 13th September 2021, 55,396 startups across India have been recognized as startups by Department for Promotion of Industry and Internal Trade (DPIIT) and out of that 396 startups have received a certificate from Inter-Ministerial Board (IMB). The sectors having the maximum registered startups include food processing, IT consulting, and business support services.
- It is registered with DPIIT
- The aggregate amount of paid-up share capital and share premium after issue or proposed issue of shares does not exceed Rs.25 crore. Further, for the purpose of computing the threshold limit of Rs. 25 crores, shares issued to the following persons shall not be considered:
‒ A non-resident person
‒ A venture capital company or venture capital fund or other fund registered as Category-I and II Alternate Investment Fund
‒ A listed company whose shares are frequently traded and whose net worth exceeds Rs.100 crore on the last day of the preceding financial year or turnover exceeds Rs.250 crore for the financial year preceding the year in which shares are issued at a premium
- Start-up does not invest in any of the following assets for a period of 7 years from the end of the year in which the shares are issued at a premium:
‒ Land or building (residential or other), other than that occupied by the startup for its business, used for the purposes of renting or held as stock-in-trade in the ordinary course of business
‒ Loans and advances, if not engaged in money lending business ‒ Capital contributions to any other entity
‒ Shares and securities ‒ Motor vehicle, aircraft, yacht, or any other mode of transport, if the cost of such an asset exceeds Rs. 10 lakhs other than that held by the startup for the purpose of plying, hiring, leasing, or as stock-in-trade in the ordinary course of business
‒ Jewellery held otherwise than as stock-in-trade ‒ Archaeological collections, drawings, paintings, sculptures, any work of art or bullion
Under the provision of section 17(2)(vi), ESOP given to employees is taxable as perquisite on the date of exercise of ESOP, and the employer is required to deduct applicable TDS. In order to allow the startups to employ highly talented employees by giving initially low salary, compensating by granting ESOP and ease the burden of immediate tax in the hands of employees at the time of exercise, has provided deferment of TDS or tax payment on ESOP and now it has to be deducted or paid within 14 days from the earliest of the following events –
• After expiry of 4 years from the end of the relevant assessment year; or
• From the date of sale of the ESOPs by the employee; or
• From the date of cessation of the employment
Tax Saving on Sale of Residential Property by Investing into Eligible Startups:
Section 54GB of the Income Tax Act provides long-term capital gain exemption arising from the sale of residential property by an individual or HUF if net consideration is invested in eligible startups. The benefit under this section is available for transfer of residential property on or before 31st March 2022. The taxpayer is required to utilize the net consideration arising from the transfer of residential property for subscription in the equity shares of an eligible startup on or before the due date of furnishing of return of income. There are other conditions that are required to be satisfied by the eligible startup and the taxpayer who wishes to avail of the benefit under this section.
Relaxation in Carry Forward of Losses:
Under the provision of Section 79 of the Income Tax Act, a closely held company is not allowed to carry forward losses (other than unabsorbed depreciation) and set off such losses in the year in which the shareholders holding more than 51% voting power have changed. However, in the case of an eligible startup, such losses will be allowed to be carried forward and set off in subsequent years even if the total voting power of original shareholders reduced below 51% provided all shareholders as on the last day of the year of losses continue to hold those shares in the year in which loss is sought to be set off.
The Government of India has provided various tax benefits to the startups and their founders/ investors and employees. It is up to the stakeholders to avail such benefits by complying with the relevant provisions.