Tax Exemptions For “start Ups”

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1 Tax Exemptions1.1 What is a Startup?

1.1.1 The benefits available to startups are only given if they have been registered with the DPIIT, which can be done as follows:3

1.1.2 5 Tax exemptions allowed for “Start-ups”

1.1.2.1 1. Tax holiday for three years:

1.1.2.2 2. 20% exemption on Capital Gains:

1.1.2.3 3. Exemption from tax on Long Term Capital Gains:

1.1.2.4 4. Exemption from Angel Tax :

1.1.2.5 5. Tax exemptions to individual/HUF on Long-term Capital Gains:

1.1.3 CONCLUSION

1.1.4 Refernce

1.1.5 Related

Tax Exemptions

Tax-Startup India scheme is an initiative started in 2016, undertaken by the Government of India under the leadership of Prime Minister, Narendra Modi in order to achieve the goal of employment generation and wealth creation. Its aim is to develop and innovate products and services that make the lives of people better and efficient as well as increase the employment rate in India.¹

What is a Startup?

The Department for Promotion of Industry and Internal Trade (DPIIT) considers a business as a Startup only if the following fulfillments have been done:

• The company should be less than 10 years old since its incorporation.
• It should be incorporate or register in India as a private limited company, partnership firm or an LLP.
• Annual turnover for any of the financial years, since incorporation should not exceed Rs. 100 crores.
• The company cannot be create by splitting up an existing company to make a new one.
• The company should aim towards development, commercialization, innovation, or deployment of new products or services that are driven by technology or intellectual property². 

The benefits available to startups are only given if they have been registered with the DPIIT, which can be done as follows:³

An online application can be made by any incorporate entity that come under the ambit of a “startup” on https://www.startupindia.gov.in/or from the mobile app along with:

1. Copy of certificate of registration or incorporation.

2. Write-up on the nature of business highlighting how the 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).

3. Additional documents providing website link, pitch deck, details of patents, etc., shall also be attach to support the application.

4. Information on any award received by the entity.

5. Document a proof of funding received by the entity, if any.

5 Tax exemptions allowed for “Start-ups”

1. Tax holiday for three years:

The startups incorporate after 1^st April 2016 are eligible for getting 100% tax rebate on profit for a period of three years provide that the annual turnover does not exceed Rs. 25 crores in any financial year. In order to give entrepreneurial ventures a much-needed boost, these steps have been taken and such benefits can only be availed provided that the company has been register with the DPIIT. “This benefit has been given so that the Start-ups can meet their working capital requirements during the initial years of operation.”⁴

2. 20% exemption on Capital Gains:

Capital gains are the taxes charge on profits that are gain from sale on capital assets such as bonds and stocks. A 20% exemption on this by the government goes a long way in helping the startups as it was long pending demand by the startups.

3. Exemption from tax on Long Term Capital Gains:

The Income Tax Act has seen the insertion of a new section, that is s. 54 EE, for the eligible start-ups to exempt their tax on a long-term capital gain. The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. This can be done only if such a long-term capital gain is invest in a fund notify by the Central Government within a period of six months from the date of transfer of the asset.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.

4. Exemption from Angel Tax :

“Section 56(2)(viib) of the Income Tax Act was introduce in the Finance Act 2012 under the Measures to Prevent Generation and Circulation of Unaccounted Money. If a closely held company raises funds through the issuance of its shares to an Indian resident at a price more than its Fair Market Value amount receive in excess of fair market value of shares will be charge to tax as an income from other sources in the hands of the issuer. It is popularly known as Angel Tax.”⁵

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

5. Tax exemptions to individual/HUF on Long-term Capital Gains:

There already exists a provision known as Section 54GB which allows the exemption from tax on Long-Term Capital Gains on the sale of a residential property only if such gains are further invest in small or medium enterprises as defined under the Micro, Small and Medium Enterprises Act, 2006. But now this section has been amend to include exemption on capital gains invested in eligible start-ups also.

Therefore, if an individual or a HUF decides to sell their property and then goes on to invest the money received from the sale to subscribe to a minimum of 50% or more of an existing start-up, then

they are exempt from tax on these long-term capital gains. This happens provide the shares are not sell again within 5 years or even transfer to someone else. Additionally, the start-ups have to use the amount that has been invest in order to purchase assets. They should not transfer the purchased asset to someone else for at least 5 years. 

“The advantage of these tax incentives and exemptions is that they will boost the general investments made in start-ups, which will then promote their expansion and growth.”⁶

CONCLUSION

Hence, for a start-up to receive tax exemptions, it had to go through a process of registering with the concerned authority, here with DPIIT. Even after the registration and incorporation have been done, due processes and conditions have to be follow so as to be able to avail the benefits

under the scheme started by the Prime Minister, Narendra Modi.

Refernce

1. Recognition and benefits for start-ups including tax benefits, Neeraj Bhagat & Co. (Accessed 10^th Jan 2021)https://neerajbhagat.com/blog/index.php/recognition-and-benefits-for-startups-including-tax-benefits/
2. Tax Incentives & Exemptions to Startups in India [2019], Razorpay (Accessed 12^th Jan 2021)  https://razorpay.com/learn/tax-incentives-exemptions-startup-india-2019/
3. Recognition and benefits for start-ups including tax benefits, Neeraj Bhagat & Co. (Accessed 11^th Jan 2021)https://neerajbhagat.com/blog/index.php/recognition-and-benefits-for-startups-including-tax-benefits/

4. Startup India: Eligibility, Tax Exemptions and Incentives, Cleartax (Accessed 11^th Jan 2021) https://cleartax.in/s/startup-india-tax-exemptions-eligibility#:~:text=Tax%20exemptions%20allowed%20to%20Eligible%20Startups%20under%20Startup%20India%20Program,-Following%20tax%20exemptions&text=The%20Startup%20incorporated%20after%20April,crores%20in%20any%20financial%20year

5. Benefits to Start-ups Under Income Tax Act, Tax Guru (Accessed 11^th Jan 2021) https://taxguru.in/income-tax/benefits-startups-income-tax-act.html

6. Tax Incentives & Exemptions to Startups in India[2019], Razorpay (Accessed 12^th Jan 2021)  https://razorpay.com/learn/tax-incentives-exemptions-startup-india-2019/