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Startup Tax Benefits and Exemptions
In 2016, the Indian government initiated the Startup India initiative with the aim of promoting entrepreneurship inside the nation. The government of India has implemented many incentives and tax breaks for entrepreneurs as part of this program.
What is a Startup?
A startup is a brand-new company founded with the intention of marketing a single item or service that the founders feel there is a market for. However, a startup has to meet the following requirements in order to be eligible for tax advantages and other government programs: The age of the firm need to be under ten years. In other words, the company’s incorporation/registration date must have been more than ten years ago. To be eligible for startup-related advantages, the company must be registered as a partnership firm, limited liability partnership, or private limited company. Any year following incorporation, its yearly turnover cannot surpass ₹100 crores. The startup should be actively trying to innovate and develop new goods and services.
The Tax Exemption for Startups and Associated Tax Reliefs
The Indian government has offered a number of startup tax concessions and start up tax benefits for entrepreneurs in India in an effort to boost the Made in India and Startup India programmes. These are the several exclusions that startups can apply for:
Three Years of Tax Holidays
This incentive is available to any company that registers or incorporates between April 1, 2016, and March 31, 2022. These startups are eligible for a three-year, seven-year block of 100% tax exemption on their profits. In a fiscal year, the company’s total revenue cannot surpass 25 crores. One of the hardest things about starting a business is having little money. A three-year tax vacation makes it easier for new businesses to get established. Section 80 IAC was created in order to support and assist firms throughout their early phases of development, which is why the Startup Tax Holiday was instituted. A startup approved by the Department of Industry Policy & Promotion may request tax exemption for three consecutive fiscal years under Section 80 IAC of the Income Tax Act of 1961. On February 1st, 2023, the budget for 2023 was unveiled in Parliament. whereby several choices on diverse subjects were reached. The Income Tax Act of 1961’s Section 80 IAC was one of the concerns brought up by Finance Minister Smt. Nirmala Sitaraman. The government suggested modifying the provisions of Section 80 IAC in order to promote the formation of start-ups in India. According to Smt. Nirmala Sitaraman, eligible companies will have until April 1, 2024, to incorporate. This change will take effect on April 1, 2023, and it will be applicable to the assessment years 2023–2024 as well as the years that follow. The Income Tax Act of 1961’s Section 80 IAC is a benefit that the central government offers to startups. Under this clause, startups are eligible to get a tax deduction equal to 100% of their qualifying company profits and gains.
The startup ought to be acknowledged by the Department for Promotion of Industry and Internal Trade (DPIIT).
The startup’s whole paid-up capital must be less than or equivalent to 25 crores. Nevertheless, the consideration for shares granted to a venture capital fund, a venture capital company, or a non-resident should not be included in the computation of the paid-up capital.
A new section 54EE was created by the government that exempts long-term capital gains from taxation. According to this clause, all qualified startups can claim an exemption from long-term capital gains tax as long as they invest their earnings within 6 months after the transfer date in a fund designated by the federal government. A maximum of 50 lakhs can be invested, and the money must be held in the fund for three years. If the funds are taken out before the three years have passed, the exemption will be lost.
To avail this Start up company tax exemption one must apply via the startup India website in order to be approved for this tax exemption. Following approval, the startup can start receiving vacation pay for three out of the ten fiscal years that follow the company’s establishment.
Angel Tax
Angel tax is the tax that unlisted businesses must pay after issuing shares to raise capital from angel investors. Businesses with strong operational performance leverage their brand value to raise capital and sell shares above fair market value. Excess profits for the business are regarded as revenue from other sources. Long-term Capital Gains Exemption. Prior until this, section 56(2)(vii b) under the heading “Income From Other Sources” applied to the consideration received in the form of angel investment. To promote ease of doing business, the Indian government did, however, introduce exemptions from the Angel Tax for startups in 2019.
Angel tax is no longer applicable to startups, provided that they meet the following requirements:
• The startup has to be valued and its fair market worth determined by a licensed merchant valuer.
• Angel funding for the business must come from foreigners rather than locals.
• Within seven years of the shares being issued, the startup shall not make any of the following investments:
• Structure or property
• Loan advancement
• Capital donation to any other organisation
• Any form of transportation that exceeds 10 lakhs in price
• Jewellery collections from archaeology and Securities and shares.
Income Tax Under Section 80 IAC
Eligibility criteria for income tax exemptions under section 80 IAC?
Startups should be recognised as such by DIPP. A limited liability partnership (LLP) or private limited company must be established for startups. Only the first ten years of their business can be used by startups to request tax breaks. Less than 100 crore rupees must be the company’s entire yearly income. The company has to be established after April 1st, 2016. Eligible start-up to get deduction of 100% of profits and gains for 3 consecutive years out of 10 years beginning from year of incorporation / registration. To obtain a deduction under Section 80-IAC, the eligible start-up will have to obtain a certificate by making an application to the DPIIT in Form-1 along with specified documents to the Inter-Ministerial Board of Certification.
These are the following eligibility criteria to avail DPIIT Tax Exemption.
Investments Above FMV Are Exempt
For entrepreneurs, there is no tax on investments beyond fair market value. These contributions come from people and funds that aren’t officially recognised as venture capital (VC) funds, as well as from angel investors and incubators. To put it plainly, tax exemptions apply to contributions made by angel investors that exceed the company’s fair worth. This makes it easier for companies to raise more money to operate.
Exemption from Taxes Under Section 54GB
According to Section 54GB of the Income Tax Act, a person or HUF is not required to pay long-term capital gains if they sell a residential property and utilize the proceeds to invest in SMEs or buy 50% or more of shares in startups that meet the eligibility requirements. The exemption, nevertheless, will only be granted if the shares are held for five years from the date of acquisition. In addition, the startups are required to use the invested funds to buy assets and refrain from selling or transferring them until a period of five years has passed.
Discharge from Allowance to Carry Forward Losses
A business may carry over its losses in accordance with section 79 of the Income Tax Act if – The loss has been incurred over the course of seven years since the company’s inception, and the shareholders who possessed voting power in the year the loss was incurred are in possession of their shares on March 31 of the year in which it is to be carried forward.
Application Process for IT Exemptions
Information / document required:
1.MOA* (For Company) or LLP Deed (For LLP)
2.Audited Balance Sheet and P&L for last 3 financial years
3.Income Tax Returns and Acknowledgement for last 3 financial years
4.Pitch deck of the Company as per the guidelines of DPIIT
5.A video describing the vision, mission prototype and business of the startup as per the guidelines of DPIIT
6.Name and Designation of authorized signatory on behalf of the Company
7.Board Resolution passed for availing tax holiday (if any – this is optional document)
*In case of spice MOA a printout of the same will have to be taken and a scan of the printout should be uploaded or the spice MOA should be converted into a print-able PDF before uploading
How to file Form for Section 80-IAC?
Note :
•The entity should not be formed by splitting up or reconstruction of an existing business
•In case of an asset heavy startup which has plant & machinery, value of second hand plant & machinery should be less than 20% of total plant & machinery
GST Exemptions for Startups in India?
The Indian startup ecosystem enjoys a unique advantage: a supportive tax environment fueled by the GST registration exemption for businesses with an annual turnover below Rs. 40 lakhs. This Goods and Services Tax exemption for startups eliminates the complexity of GST registration for countless fledgling ventures, allowing them to focus on their core mission – developing innovative solutions and carving their niche in the market.
Conclusion
As the year 2024 unfolds, India’s startup ecosystem hums with potential. While talent and innovation drive its core, strategic policy measures like tax exemptions and benefits act as vital catalysts. Take the extended Section 80 IAC, offering a three-year tax holiday for eligible startups. This isn’t just a number on paper; it’s a crucial runway extension, allowing young businesses to experiment, attract funding, and solidify their foundation.
The impact is tangible. These initiatives provide fledgling ventures with precious breathing room, freeing up resources for crucial activities like product development, market research, and talent acquisition. This translates to faster growth, increased job creation, and a dynamic contribution to the national economy.
Frequently Asked Questions (FAQs) on Tax Exemptions for Startups
Q. What startup tax exemptions are available in India?
- Income Tax Exemption (Section 80 IAC): 3 consecutive years of tax exemption on profits within the first 10 years, for DPIIT-recognized startups.
- Capital Gains Exemption (Section 54G): Exemption on long-term capital gains from sale of specified shares held for at least 1 year.
- Angel Investor Exemption (Section 56 2(viiB)): Exemption on investments above fair market value received from angels/VCs.
Q. What are the eligibility criteria for DPIIT tax exemption?
- Be a private limited company or LLP incorporated after April 1, 2016.
- Obtain DPIIT recognition as a startup.
- Be engaged in innovation/improvement of products/services or have a scalable business model with high job creation/wealth creation potential.
Q. How to apply for DPIIT tax exemption?
Get DPIIT recognition through Startup India portal.
Apply to Inter-Ministerial Board (IMB) for tax exemption after receiving recognition.
Q. Is there any GST exemption for startups?
No direct GST exemption, but startups with turnover less than Rs. 40 lakh can opt for composition scheme with simplified compliance and lower tax rates.
Q. What are the benefits of angel tax exemption?
Encourages angel investments in startups by exempting them from capital gains tax on qualified investments.
Q. How long does the startup tax exemption period last?
Income tax exemption under Section 80 IAC is for 3 consecutive years within the first 10 years of incorporation.
Q. What are the limitations of startup tax benefits?
Exemptions have specific eligibility criteria and may not apply to all startups.
Capital gains exemption applies only to specific types of shares and investment timelines.
Q. Where can I find more information about startup tax exemptions?
Startup India website: https://www.startupindia.gov.in/: https://www.startupindia.gov.in/
DPIIT website: https://www.dpiit.gov.in/: https://www.dpiit.gov.in/
Income Tax Department website: https://www.incometaxindia.gov.in/: https://www.incometaxindia.gov.in/
