24 Feb Tax Benefits for Start-Ups in India
India is recognized as the world’s third-largest incubator, nurturing around 55,000 start-ups, among which 59 achieved unicorn status. These start-ups burgeoned in response to the digital revolution, facilitated by government support through various programs, notably including tax incentives and the resolution of issues such as the angel tax. Start-ups, distinct from traditional businesses, prioritize innovation, technology, and rapid scalability, thus facing unique tax challenges.
In 2016, Prime Minister Narendra Modi had launched the “Startup India Programme” to foster entrepreneurship in the country. The initiative aimed at enhancing bank funding for start-ups, streamlining incorporation processes, and offering several tax breaks and incentives.
However, accessing these perks and exemptions was contingent upon meeting the criteria of being an “Eligible Startup.”
What Constituted an Eligible Startup?
Tax incentives were reserved for qualifying start-ups as defined by the Income-tax Act. Section 80IAC outlined the criteria for a “start-up,” which included the following prerequisites:
- Organization as a corporation or LLP.
- Establishment between April 1, 2016, and April 1, 2022.
- Introduction of innovative products or services capable of generating employment and revenue.
- Annual turnover not exceeding Rs. 100 crores in the claiming year.
- Certification by the Central Government's Inter-Ministerial Board.
Requirements for Eligibility:
The start-up must be registered as a partnership firm, LLP, or private limited company. Turnover in any prior fiscal year since incorporation should be below INR 100 Crores. The entity retains start-up status for the first ten years post-establishment. The focus should be on product innovation or enhancement of existing goods, services, and processes, with the potential for employment and income generation. A “Startup” excludes entities formed by the division or reconstruction of existing firms.
Benefits for Start-Ups:
Tax Relief under Section 80 IAC: Eligible start-ups (established between April 1, 2016, and March 31, 2022) could avail a 100% profit deduction for three years within their first seven years of operation. This deduction applied if the start-up filed a request with DPIIT and maintained annual turnover below Rs. 25 crores in any fiscal year.
Exemption from “Angel Tax”:
Start-ups meeting specific criteria and filing necessary declarations with DPIIT were exempted from the “Angel tax,” which taxed any funds collected from Indian residents exceeding the fair market value.
Relaxed Loss Set-Off Conditions:
For qualifying start-ups, the restrictions under Section 79 of the Income-tax Act regarding setting off carried forward losses were eased from the fiscal year 2019-20. Losses could be set off if certain conditions were met, including continuity of 51% voting power shareholding and presence of original shareholders.
Exemption on Long-term Capital Gains:
A new provision, Section 54 EE, exempted qualifying start-ups from paying tax on long-term capital gains if reinvested in an approved fund within six months of asset transfer. The investment had to be held for three years to retain the exemption.
No MAT and Concessional Tax Rate:
Start-ups could opt to pay a reduced tax rate of 22% from the assessment year 2020-21 onwards, without being subject to minimum alternative tax (MAT). However, this choice forfeited additional deductions and exemptions.
Conclusion:
The “Startup India” campaign aimed to enhance bank funding for start-ups and promote entrepreneurship, as announced by Prime Minister Narendra Modi in his address from the Red Fort on August 15, 2015. The initiative sought to create a conducive environment for entrepreneurs through various government programs and exemptions.
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