Startup India: Eligibility, Tax Exemptions and Incentives Prime Minister Narendra Modi proclaimed the Startup India campaign in 2016 to boost entrepreneurship in India. The action plan aimed at promoting bank financing for startups, simplifying the incorporation of the startup process and grant of various tax exemptions and other benefits to startups. But all the benefits and exemptions are available to the startups only if they come under the criteria of an ‘Eligible Startup’. So first let’s understand the conditions to be met to qualify as an “Eligible Startup”. Budget 2021 update: The tax holiday for startups has been extended by one more year up to 31st March 2022.
Eligibility for Startup India As per the Startup India Action plan, the followings conditions must be fulfilled in order to be eligible as Startup :
Has not yet completed a period of ten years from the date of incorporation/registration. Is a private limited company or registered as a partnership firm or a limited liability partnership. Has an annual turnover not exceeding Rs. 100 crore for any of the financial years since incorporation/registration. 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. It is not formed by splitting up or reconstructing a business already in existence.
Tax exemptions allowed to Eligible Startups under Startup India Program Following tax exemptions have been allowed to eligible startups : 3 year tax holiday in a block of seven years
The Startup incorporated between April 1, 2016, till 31st March 2021 were eligible for this scheme. Budget 2021 has extended the eligibility to 31st March 2022. Such startups will be 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. 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 the 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 the exemption will be revoked in the year in which money is withdrawn. 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. 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.
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 the previous year in which such loss is to be carried forward. The restriction of holding of 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in the case of eligible startups.
Benefits of the Startup India Program The Economic Survey of India 2015-16 states that there are more than 19,000 startups in the country; with a total of eight startups belonging in the fabled ‘Unicorn’ club (valued at $1 million and upwards). The government’s ‘Startup India’ program was launched in the year 2016 to ensure that the growing number of such startups in the country have the right resources to grow. If you are a startup; or are thinking of starting up on your own, this initiative can help you immensely in furthering your business.
What are startups? Loosely put, a startup is a young venture that is just beginning to develop. Now, any new business could fall into this category. There are, however, stark differences between a startup and a small business. A startup is primarily designed to grow and develop at a rapid pace. The term Startup goes beyond referring to a venture that is just getting off the ground, and it usually refers to a technology-oriented company with a high growth potential. You could start a small nail salon with the money you have saved, or buy a franchise of a famous bakery if you please; but would that be a startup? No! The Department of Industrial Policy & Promotion defines a startup as any entity, incorporated or registered in India. An entity is treated as a Startup which: a. Has not yet completed incorporation/registration
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b. Is a private limited company or registered as a partnership firm or a limited liability partnership c. Has an annual turnover not exceeding Rs. 100 crore for any of the financial years since incorporation/registration d. 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
It is important to note that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’. Also, an entity will not be called a startup after: a. Completion of ten years from the date of its incorporation/registration, or b. Achieving turnover in any previous year more than Rs. 100 crore Now, if your venture falls into any of the above categories and can be considered a ‘startup’ then you can avail many privileges under the scheme. The benefits can be described as follows:
Financial benefits Startups will get an 80% rebate on patent costs. This means, that if and when a startup applies for a patent, the government will come to its aid by funding the defence of the patent. The company will thus get a rebate of 80% in the fees. Moreover, the government will also pay the fees of the facilitator and help obtain the patent. Patent registration and protection of Intellectual Property Rights (IPRs) will be faster and the process, simple.
Registration benefits The government launched a mobile app on 1 April 2016 along with a portal to allow companies to register in a day. A single point of contact has been set up for all registration-based queries at the Start-up India hub. In addition, there is a single window clearance for all clearances, approvals, and registrations, which will make the process easier for all.
Income Tax benefits Income Tax exemption is available for the first three years post registration under the scheme. However, any startup will be eligible to claim these tax benefits only after obtaining a certificate from the Inter-Ministerial Board which has been set up specifically for this purpose. Also, if the money is invested in a fund of funds, the startups can also avail tax benefits on the capital gains.
Special benefits
Startups in the manufacturing sector are exempted from adhering to the criteria of ‘prior experience’ or ‘turnover’. This is done without any relaxation in quality standards or technical parameters with regards to public procurement (by government). Guaranteed funds through National Credit Guarantee Trust Company or SIDBI over 4 years No inspection will be for the first three years regarding labor laws. Self-compliance and Self-certify under 3 Environment Laws Closure/Winding up will be a quicker process – Just in 90 days!
Benefits to Startups by Indian Government Startups are becoming very popular in India. The government under the leadership of PM Narendra Modi has started and promoted Startup India. Startup India initiative intends to build a strong ecosystem that is conducive for the growth of startups. It aims to empower startups to achieve growth through innovation and technology. To promote growth and help Indian economy, many benefits are being given to Entrepreneurs establishing startups. The startups recognised through the Startup India initiative are provided ample benefits for starting their own business in India.
Eligibility for Registration under Startup India As per the Startup India Action plan, the followings conditions must be fulfilled in order to be eligible as Startup : Being incorporated or registered in India up to 10 years from its date of incorporation. Is a private limited company or registered as a partnership firm or a limited liability Partnership. Has an annual turnover not exceeding Rs. 100 crore for any of the financial years since incorporation/registration. 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. It is important to note that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’. Also, an entity will not be called a startup after: Completion of ten years from the date of its incorporation/registration, or Achieving turnover in any previous year more than Rs. 100 crore.
Simple process The government of India has launched a mobile app and a website for easy registration for startups. Anyone interested in setting up a startup can fill up a simple form on the website and upload certain documents. The entire process is completely online.
Reduction in cost The government also provides lists of facilitators of patents and trademarks. They will provide high-quality Intellectual Property Right Services including fast examination of patents at lower fees. The government will bear all facilitator fees and the startup will bear only the statutory fees. They will enjoy 80% reduction in the cost of filing patents.
Easy access to Funds A 10,000 crore rupees fund is set-up by government to provide funds to the startups as venture capital. The government is also giving guarantee to the lenders to encourage banks and other financial institutions for providing venture capital.
Tax holiday for 3 Years Startups will be exempted from income tax for 3 years provided they get a certification from Inter-Ministerial Board (IMB).
Apply for tenders Startups can apply for government tenders. They are exempted from the “prior experience/turnover” criteria applicable for normal companies answering to government tenders.
R & D facilities Seven new Research Parks will be set up to provide facilities to startups in the R&D Sector
No time-consuming compliances Various compliances have been simplified for startups to save time and money. Startups shall be allowed to self-certify compliance (through the Startup mobile app) with 9 labour and 3 environment laws.
Tax saving for investors People investing their capital gains in the venture funds setup by the government will get exemption from capital gains. This will help startups to attract more investors.
Choose your investor After this plan, the startups will have an option to choose between the VCs, giving them the liberty to choose their investors.
Easy exit In case of exit – A startup can close its business within 90 days from the date of application of winding up
Meet other entrepreneurs The government has proposed to hold 2 startup fests annually both nationally and internationally to enable the various stakeholders of a startup to meet. This will provide huge networking opportunities. Startups are being highly encouraged by the government. The benefits enjoyed by them are immense, which is why more people are setting up startups.
Compiled by: CA. Vennety Kalyan Chakravarthy Visakhapatnam kalyan@vrjraoandco.com
