Requirements For Claiming Startup India Tax Benefits
The Indian government has unveiled the “Startup India” project, which aims to create a favorable climate for businesses in the country. Startups that are recognized by the DPIIT enjoy a spread of tax incentives and support from the govt.. per the most recent Startup notification, an entity shall be considered as a “Startup” for the aim of the Startup India scheme if it satisfies the subsequent conditions:
- Founded as a private limited company or registered as a partnership business or an LLP.
- It has not yet reached the ten-year mark since its establishment or registration.
- Since its inception, it has never had revenue exceeding Rs.100 crores in any of the financial years.
- It is working towards innovation, development, or improvement of products or processes or services, or if it’s a scalable business model with a high potential of employment generation or wealth creation.
- It mustn’t be an entity formed by splitting up or reconstruction of a business already existing.
Important Tax Benefits For Startup
Under the Startup India initiative, a startup can benefit from the following three significant tax benefits:
Tax Holiday Under Section 80 IAC
Section 80IAC of the revenue enhancement Act provides a 3-year tax holiday in respect of profits and gains of a startup. The startup would be allowed a deduction from gross total income an amount adequate to 100% of the profits and gains – effectively making the income tax-free. An eligible startup can claim the deduction for any 3 consecutive assessment years out of seven years beginning from the year within which the startup is incorporated.
Section 54GB Capital Gains Exemption
Section 54GB was amended by the Finance Act, 2016 to produce an exemption of capital gains arising out of the sale of residential property on investing the identical shares of startup companies. This exemption was given the objective of providing relief to a person or HUF who would like to set up or start a corporation by selling a residential property. This exemption is subject to the condition that the individual or HUF holds quite 25% of shares of the corporate and also the company uses the number invested to get new assets before the date of filing of return by the investor.
Angel Tax Relief
The Finance Bill incorporates a provision that any consideration received by a closely held company in more than the fair market price of its shares would be taxable. This provision for taxation will be avoided by companies that enjoy relief from angel tax.
Approvals For Tax Incentive
The following are a number of the foremost points to be kept in mind before applying for Startup India tax benefits:
Partnership Firms Not Eligible
It must first be noted that partnership firms aren’t eligible for any tax holiday under Section 80IAC. Further, investor promoter wouldn’t be eligible for capital gains exemption for money invested in an exceedingly partnership firm from sales of residential house/land under Section 54GB. Finally, the concept of relief of Angel Tax only applies to non-public limited companies. Hence, only LLP and the company can enjoy relief under Section 80 IAC and Section 54GB.
Inter-Ministerial Board Approval
A startup that merely satisfies the definition of a startup won’t entitle it to a tax holiday under Section 80IAC of the Act or Section 54GB or angel tax. To avail of the tax holiday for a startup entity under Section 80 IAC and capital gains exemption for investor-promoter investment in an exceeding startup, the startup must be certified by the Inter-Ministerial Board for that purpose. Further, angel tax applies only to personal limited companies, and to avail exemption, the corporate must are recognized by DPIIT.
A Startup must be recognised by the DPIIT to be eligible for angel tax exemption. The procedure for creating an application for DPIIT recognition is fairly simple and uncomplicated as follows:
- The application should be made through the web portal set up by DPIIT
- The application should be sent using the Startup promoters’ phone number and email address.
- The application should contain
- Copy of certificate of incorporation
- Write up about the character of the business and the way it’s working towards innovation, development, improvement of products or processes or services, or scalability in terms of employment generation or wealth creation.
After reviewing the above details, the DPIIT may imply additional documents or recognize the startup or reject the application. On recognition of the startup by DPIIT, the startup would be eligible for claiming exemption from the levy of angel tax under Section 56(2)(viib) of the taxation Act. additionally, to the angel tax relief, Startups recognised by DPIIT would also enjoy the subsequent benefits:
- Self-certification of compliance under certain Environment & Labour Laws;
- Startup application & IPR Protection;
- Fast-track application with 80% rebate in filing patents;
- Easier public procurement norms – Exemption from requirement of EMD, prior turnover, and knowledge.