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Start-up India initiative is one of the pertinent initiatives that every budding entrepreneur should be aware of. It enables the start-up to gain various benefits under Income-tax Act, 1961. The requirement is nothing but registration on the Start-up India portal. However, there are some pre-requisites for being eligible to get registered as a Start-up.

Vide Notification dated 19th February 2019, a new notification [G.S.R 127(E)] superseding the notification dated 11th April 2018 [G.S.R 364(E)] was issued which laid down certain conditions.

Thus for an entity to be considered as an eligible start-up, the following conditions must be satisfied:

1. The entity shall be recognized as a start-up only 10 years from the date of incorporation or registration. However, it must be incorporated only as a

1. private limited company

2. registered partnership firm

3. limited liability partnership

2. Further, the turnover of the entity for any financial year must not exceed INR 100 crores

3. The pertinent condition is that the entity must work towards

1. Innovation

2. development or improvement of products or processor services

3. Or if it is a scalable business model with a high potential of employment generation or wealth creation


However, if there is any entity that has been formed by splitting up or reconstruction of an existing business, it shall not be eligible to get registered as a start-up.

Further, if an entity completes 10 years from its incorporation or registration or its turnover exceeds INR 100 crores during any financial year, it shall cease to be recognized as a start-up since happening of any one of the aforementioned events is earlier.

The process for applying is as under:

The application has to be made over the mobile app or portal set-up by DPIIT and the application must consist of:

1. Copy of Certificate of Incorporation or registration

2. A write-up also has to be submitted which shall highlight the nature of the business is working towards any of the aspect mentioned above i.e.

1. Innovation

2. development or improvement of products or processor services

3. Or if it is a scalable business model with a high potential of employment generation or wealth creation

After getting the same registered, such start-up can avail the benefits as provided in the Income-tax Act but for which a few conditions must be satisfied.

Deduction under Section 80-IAC

For a start-up to claim deduction under section 80-IAC, it has to apply for the same with the Central Board of Direct Taxes (CBDT). The eligibility criteria are similar to the aforementioned conditions with one additional condition that it has to get registered as a Start-up as aforementioned.

Section 80-IAC provides for 100% deduction of business profits for 3 consecutive assessment years of any 7 assessment years beginning from the year in which the start-up is incorporated.

The section reiterates that start-ups which are formed by splitting up or reconstruction of any existing business shall not be eligible for deduction. However, for any undertaking referred to in section 33AB, the abovementioned condition shall not apply.

Further, even if the start-up is formed by transfer of machinery or plant previously used for any purpose, deduction under section 80-IAC cannot be availed.

However, if such machinery was used outside India by any person other than the start-up, shall not be regarded as used for any purpose i.e. won’t affect the eligibility of deduction under section 80-IAB if:

1. The plant and machinery was not used in India at any time previous to the date of installation

2. And such plant and machinery is imported into India

3. And no deduction on account of depreciation has been allowed or allowable to any person before the date of installation in India

However, 20% of the total assets which were used for any purpose in India can be a part of the total asset of the start-up without getting concerned about the aforementioned conditions.

Further, the start-up has to get its books of accounts must be audited under section 44AB within the specified due date by a Chartered Accountant or any other person as provided in section 288.

No Angel-Tax for eligible start-ups

Angel tax meant tax to be payable by unlisted companies on capital raised by them when the share price at which the investment is being made in the companies is higher than the fair market value of the share.

It is a natural phenomenon for start-ups to attract high-value investments by leveraging their business model and vision even though the company is running at negligible or no profits or is at the pre-revenue or ideation stage. At this stage, the FMV of the share is negligible or quite low but the funding it receives by selling its shares is quite high.’

And the same attract section 56(2)(vii)(b) which states that if any company receives from any person considered for the issue of shares exceeding face value as well as FMV, the difference between the amount received and the FMV is liable to be taxed.

However, this is a huge hardship for start-ups. But, the start-ups registered as an eligible start-up as mentioned above for which due relief has been provided as under:

It has to primarily fulfill the following 2 conditions before making the declaration to the effect with DIPP which shall forward the same to CBDT.

1. Be an eligible start-up i.e. get registered with DPIIT as mentioned procedure of which is stared in the initial paragraphs of the article.

2. The aggregate amount of paid-up share capital and share premium of the start-up after the issue or proposed issue does not exceed INR 25 crore.

However, the aforementioned limit of INR 25 crores shall not include the consideration for shares received from:

A non-resident
A venture capital company or a venture capital fund
A company whose shares are frequently traded within the meaning of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and whose net worth on the last date of the financial year preceding the year in which the shares are issued exceeds INR 100 crores or turnover of such financial year exceeds INR 250 crore.
Further, the start-up shall not invest in the following assets up to 7 years from the end of the financial year in which the shares are issued at a premium.

a building or land appurtenant thereto, being a residential house, other than that used by the Startup to rent or held by it as stock-in-trade, in the ordinary course of business;
land or building, or both, not being a residential house, other than that occupied by the Startup for its business or used by it for purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
loans and advances, other than loans or advances extended in the ordinary course of business by the Startup where the lending of money is a substantial part of its business;
the capital contribution made to any other entity;
shares and securities;
a motor vehicle, aircraft, yacht, or any other mode of transport, the actual cost of which exceeds ten lakh rupees, other than that held by the Start-up to ply, hire, leasing or as stock-in-trade, in the ordinary course of business;
jewelry other than that held by the Start-up as stock-in-trade in the ordinary course of business;
any other asset, whether like a capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act.

Income Tax on Start-ups

After computing the Income as per any of the above mentioned 2 methods, the next step is to compute the Tax liability. Income Tax is levied on the Income as per the below mentioned schedule of Taxes

Schedule of Income Tax Rates
Type of Business Entity Income Tax applicable
Proprietorship/ Individual As per Income Tax Slab Rates
Partnership/ LLP Firm 30% of Income
Indian Company 25% of Income

The last date for filing of Income Tax Return is 31st July/ 30th Sept and the ITR is to be filed in the below mentioned forms

Manner of Computation of Income ITR Form applicable
Income computed under Presumptive Taxation ITR 4
Income computed as Revenue – Expense – Depreciation ITR 3/ ITR 5/ ITR 6/ ITR 7

Tax Incentives for Start-ups

The Govt has announced 100% Tax Deduction under Section 80-IAC for eligible Start-ups from payment of Income Tax. Eligible start-ups formed on or after 1st April 2016 and before 1st April 2019 can claim 100% Tax Exemption from payment of any Income Tax for any 3 consecutive years.

These 3 consecutive years for which 100% tax exemption is allowed can be chosen by the start-up at its own discretion from any of the first 10 years. (Amendment introduced vide Finance Act 2020).

 

This deduction would be available to the eligible start-up if the total turnover of its business does not exceed Rs. 100 Crores in any of the years beginning from the year of its incorporation.

All eligible start-ups who intent to claim the benefits of such tax incentives would be required to:-

  1. Maintain Separate Books of Accounts for Eligible Business
  2. Get their Accounts audited by a Chartered Accountant
  3. Furnish Audit Report in Form 10CCB along with ITR

 

Meaning of eligible Start-ups

The benefits of 100% Tax Deduction are not allowed to all start-ups but are only allowed to eligible start-ups. Only the start-ups which satisfy all the following mentioned criteria’s are considered as eligible start-up.

  1. Incorporated as a Company or LLP
  2. Incorporated between 1st April 2016 and 1st April 2021 (Increased from 2019 to 2021 in Finance Act 2018)
  3. Total turnover of the business does not exceed Rs. 100 Crores
  4. Certified by the Inter-Ministerial Board of Certification in respect of Eligible Business i.e. it is a business which involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.
  5. Should not be formed by splitting up or Reconstruction of a business already in existence.