Prime Minister Narendra Modi proclaimed the Startup India campaign in 2016 to boost the entrepreneurship spirit in India. This aims at promoting bank financing for startups, simplifying the incorporation of the startup process and grant of various tax exemptions and other benefits to startups. The start up India tax benefits and exemptions are available to the startups only if they come under the criteria of an ‘Eligible Startup’.
As per the Startup India Action plan, the followings conditions must be fulfilled in order to be eligible as a Startup :
Being incorporated or registered in India for less than 7 years and for biotechnology startups up to 10 years from its date of incorporation.
Annual turnover not exceeding Rs 25 crores in any of the preceding financial years.
Aims to work towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
It is not formed by splitting up or reconstruction of a business already in existence.
It must obtain certification from the Inter-Ministerial Board set up for such a purpose.
It can be incorporated as a private limited company, registered partnership firm or a limited liability partnership.
Following tax exemptions have been allowed to eligible startups :
1. 3 year Tax holiday for startups in a block of seven years
The Startup incorporated after April 1, 2016, is eligible for getting 100% tax rebate on profit for a period of three years in a block of seven years provided that annual turnover does not exceed Rs 25 crores in any financial year.This will help the startups to meet their working capital requirements during their initial years of operation.
2. Exemption from tax on Long-term capital gains:
A new section 54 EE has been inserted in the Income Tax Act for startups who are eligible to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by the Central Government within a period of six months from the date of transfer of the asset. The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Such amount shall be remain invested in the specified fund for a period of 3 years. If withdrawn before 3 years, then the exemption will be revoked in the year in which money is withdrawn.
3. Tax exemption on investments above the fair market value
The government has exempted the tax on startups that are eligible. The tax is levied on investments above the fair market value. Such investments include investments made by resident angel investors, families or funds which are not registered as venture capital funds. Also, the investments made by incubators above fair market value are exempt.
4. Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups u/s 54GB.
The existing provisions u/s 54GB allows the exemption from tax on long-term capital gains on the sale of a residential property if such gains are invested in the small or medium enterprises as defined under the Micro, Small and Medium Enterprises Act, 2006. But now this section has been amended to include exemption on capital gains invested in eligible start-ups also.
Thus, if an individual or HUF sells a residential property and invests the capital gains to subscribe the 50% or more equity shares of the eligible startups, then tax on long term capital will be exempt provided that such shares are not sold or transferred within 5 years from the date of its acquisition. The startups shall also use the amount invested to purchase assets and should not transfer the asset purchased within 5 years from the date of its purchase.
The start up tax exemption will boost the investment in eligible startups and will promote their growth and expansion.
5. Set off of carrying forward losses and capital gains allowed in case of a change in Shareholding pattern.
The carryforward of losses in respect of eligible start-ups is allowed if all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of the previous year in which such loss is to be carried forward. The restriction of holding of 51 percent of voting rights to be remaining unchanged u/s 79 has been relaxed in case of eligible startups.