To encourage entrepreneurship and to accelerate Economic growth through “Start-Up India” Scheme, Govt. of India is offering Tax Holiday for 3 years under section 80IAC of Income Tax Act, 1961 to Eligible Startups running Eligible Business. A Start-Up has to obtain 2 certificates, one for Eligible Startup and another certificate for tax benefits i.e. for Eligible Business. Certificate of eligible business is granted by the Inter-Ministerial Board of Certification. Also, a startup needs to keep in mind that only those will get tax benefit which is incorporated after April 01, 2016.
Startup formed as Private Limited companies, Limited Liability Partnership (LLP), One Person Company (OPC) and registered partnership firms are eligible for Tax/other benefits.
The main activity should be of Innovation, Development, Deployment or Commercialization of new products, processes or services driven by technology or intellectual property;
A Startup entity shall cease to be a Startup on completion of five years from the date of its incorporation/registration or if its turnover for any previous year exceeds Rupees 25 crore.
A simple online application along with recommendation from any Incubator or a letter of support by any incubator or a letter of funding of not less than 20 per cent in equity by any Incubation Fund/Angel Fund/Private Equity Fund/Accelerator/Angel Network duly registered with Securities and Exchange Board of India that endorses innovative nature of the business etc., will make new business earn a Startup Certificate.
Government has further granted exemptions from Capital Gain Tax if the funds are invested in the shares of a Startup Company (Minimum 50% Shareholding) or Invest in Start-up funds up to Rs.50 lacs per annum. “Startup Funds” would be similar to Mutual funds.
Section 54GB of Income Tax Act, 1961, provides an exemption from Long term Capital Gain Tax to an Individual/HUF on the transfer of residential property on or before 31st March 2017 upon reinvestment of sale consideration before the due date of furnishing the return of income in the Equity of Eligible Business.
Section 54EE of Income Tax Act, 1961, provides that where the capital gain arises from the transfer of a long-term capital asset and the taxpayer has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall not be charged to tax. The investment made on or after the 1st day of April 2016, in the long-term specified asset should not exceed fifty lakh rupees.
Section 56(2)(viib) of Income Tax Act levies Tax on Investments done by Residents above Fair Market Value(FMV) in any company as the excess amount above FMV is considered as Income of the Investee company. In June 2016, Tax department issued another notification that even if Investment in a startup is above FMV, Tax Exemption on Investments will continue to be available and also it won’t be taxable for startups.
Though the Profits of eligible Start-ups are eligible for tax holiday these profits will be subject to Minimum Alternate Tax (MAT) applicable @ 18.5% plus surcharge and cess (effectively 20.4%). Hence, the MAT could impact the Cash Flow of startups in the initial years. However, the credit of the MAT Tax is available in later years.
Once the Tax Holiday period expires, the Start-ups(Even Existing business) can consider claiming deduction under a provision of section 80JJAA which has now been extended to all taxpayers who have Tax Audit Requirements. Under Section 80JJAA Deduction in respect of employment of new workmen is granted @ 30% of additional wages paid to the new regular workmen employed. The wage of workmen should not exceed Rs.25,000 per month.
Further, Start-Ups anticipating less business turnover may opt for Presumptive Tax Provisions u/s 44AD, wherein tax @ 8% of gross receipts have to be paid if the total gross receipts do not exceed Rupees Two Crore Per Annum. A startup selecting the presumptive taxation scheme has to setup business either as Sole Proprietor Ship or HUF or Registered Partnership Firms. Under this scheme, Start-ups are relieved from maintaining books of account also.