Taxation Benefits for Startup

With the expanding markets, Government of India is encouraging more and more people of start their business with new ideas and to generate more employment. Many people resist themselves to start a new business because of lack of resources or hard taxation policies which looks more like a burden in initial stage of business when company is hardly earning hand to mouth. However, in order to help them, Indian Government is proving many reliefs to startup businesses.

Thus, if a startup wants to avail the benefits and exemptions provided to them, first it has to come under the criteria of an ‘Eligible Startup’.

An entity shall be considered as ‘Eligible Startup’ if satisfied following conditions: –

• 1. Entity should be registered as LLP or Company.
• 2. Entity should be incorporated between 1^st April,2016 and 1^st April,2024.
• 3. Entity has not completed 10 years from the date of incorporation/registration.
• 4. Entity should not be form from splitting up or reconstruction of existing business.
• 5. Annual turnover of the entity should not exceed Rs. 100crore in any financial year from the date of incorporation.
• 6. Entity should be working towards innovation, development or improvement of processes or products or services; or it is a scalable business model with high potential of employment generation or wealth creation.
• 7. A certificate of eligible business is held from Inter-Ministerial Board of Certification (IMB).

Tax Benefits to Eligible Startups

1. 1. Deduction under section 80IAC under the Income Tax Act, 1961
2. a) Deduction of 100% profit id allowed. Such deduction is allowed for any 3consecutive assessment years out of 10years from the year in which startup is incorporated.
3. b) Conditions to be fulfilled by startup for the benefit: –
4. b.1 It should not be formed splitting up or reconstruction of existing business
5. b.2 Plant and machinery to be used should be new. However, some exceptions are there.
6. c) The said deduction shall be availed only when the accounts for the relevant year has been audit by CA.
7. 2. Exemption from Long Term Capital Gain under section 80EE
8. Tax on long term capital gain or part thereof uptoRs. 50lakhs shall be exempted assesse if the assesse invested the same in fund notified by Central Government within the period of 6months from the date of transfer of asset. The amount invested should remain invested for 3years, if withdrawn before the exemption shall be revoked in the year money withdrawn.
9. 3. Exemption under section 56(2)(viib)(ii)
10. a) Entity should be a DPIIT recognized entity
11. b) Entity can issue shares at higher rate than the value noted in the books of accounts. The excess consideration which is taxable in normal cases shall be exempted in this case.
12. c) The value of paid up share capital plus share premium after issue of prospectus should not exceed Rs. 25crores this shall not include share to be issued to non- resident and venture capital company or venture capital fund; or issued or proposed to be issued to specified company.
13. d) Such startup shall not invest in certain specified asset for period of 7years from issue of shares at premium.
14. 4. Set off of carry forward of losses in case of change in share holding pattern
15. When there is a change in shareholding pattern, the eligible startup is allowed to carry forward the losses when the all the shareholder of the company who held the shares on the last day of the year in which loss incurred continued to hold the shares in the previous year loss been carry forward.

The startup is availing deduction under section 80IAC, 100% exemption from tax does not apply on Minimum Alternative Tax (MAT), that means startups has to pay MAT @ 18.5% on the profits stated in the books along with applicable surcharge and cess on the earning of the years in which deduction under section 80IAC has been availed.

Government of India has also taken steps to encourage people for making investment in eligible startups. Section 54GB of the Income Tax Act, 1961, provides capital gain arising to Individual / HUF from transfer of residential property (long term capital asset) shall be exempted proportionate to the net consideration so invested in subscription of equity shares of the eligible startup before the date of filing of income tax return under section 139(1). However, the subscription amount should be utilized by startup in purchase of new assets (eligible plant and machinery) within the period of one year from the date of subscription in equity shares. The equity shares subscribed by individual / HUF or the new asset acquired by the company cannot be transferred or sold before the expiry of 5years from the date of acquisition.