The Startup India initiative of the Indian government in 2016 was to develop entrepreneurship across India. This ambitious plan aims to encourage bank financing for startups, ease the process of incorporating startup companies, and provide different tax reliefs and many incentives to these new companies.
This piece searches through the terrain of tax immunities granted to start-ups and the advantages that can substantially alleviate their financial burden, clearing the way for growth and innovation.
Qualifying Factors For Startups
In order to meet the condition of being a Startup and avail all the said advantages and tax benefits, the following conditions must be fulfilled:
- The company has not completed ten years from the date of its formation or incorporation.
- Registered as a private limited company, a partnership firm, or a limited liability partnership
- An annual turnover not surpassing Rs 100 crores in any fiscal or accounting year since its formation or registration.
- The company’s fundamental activities should include product, process, and service enhancement, innovation, and progression. It can have a scaling business model with immense scope for employment generation and accumulating assets or resources.
- A company formed by dividing or reorganizing a present business will not be regarded as a “Startup.”
Tax Exemptions for Startups in India
With a view to supporting the Make in India program and the Startup India program, the Indian government has declared multiple tax exemptions for startups in India. Here are the different exemptions present for startups:
1. Tax Exemption for the First 3 Years
The Government of India provides 100 percent tax exemption to startups for the initial 3 years, provided that the annual turnover does not surpass Rs 25 crores in any financial year. This offers new entrepreneurs time to grow a business with an extra budget, which they would otherwise have to dispense as taxes. Nonetheless, only firms registered with the Department of Industrial Policy and Promotion (DIPP) can avail of this benefit. Nevertheless, the Startup needs to be a company that operates in the sphere of intellectual property and drives the invention and development of services and products connected to the same. The sole tax the startup needs to pay is the Minimum Alternate Tax (MAT), which is computed on the revenue shown on the ‘book profit’ of the company.
Startups launched between April 1, 2016, and March 31, 2021, were qualified for this scheme. Budget 2021 has extended the validity to March 31, 2022. This will assist startups in meeting their working capital requirements in their early years of operation.
2. Presumptive Tax Benefit
A startup with a turnover of less than Rs 2 crore is eligible to take advantage of the ‘Presumptive Tax Scheme.’ The scheme exempts the company from maintaining a book of account, which will ease the burden on entrepreneurs.
These tax benefits make tax planning for companies easier. The government deposits more funds in startup accounts to create and develop new ideas. The objective of the government is to assist startups in developing self-sustaining businesses.
3. Section 54GB
Section 54GB, amended by the Finance Act of 2016, excludes capital gains from vending residential property if funded in startup company shares. This incentive was launched to aid HUFs or individuals desiring to set up or invest in startups via residential property sales. The exemption is dependent on the individual of HUF owning over 25% of the company’s shares and the company using the invested amount to buy new assets before the investor’s outstanding tax return filing date.
The available provisions u/s 54GB permit immunity from tax on long-term capital gains on the sale of a residential property if such profits are invested in small or medium enterprises as described under the Micro, Small and Medium Enterprises Act, 2006. This section has been amended to include immunity on capital gains invested in eligible startups, too.
4. 20 Percent Tax Exemption on Capital Gain
If you are an entrepreneur thinking about how to lower taxes in India, you will be comforted to know that the government provides benefits on capital gains tax. The capital gain tax is the income tax firms pay on the profits accrued from company stocks. Although the earnings from shares, stocks, and bonds are taxable, startups receive a tax advantage of 20% on the capital gain.
A new section 54 EE has been added in the Income Tax Act for eligible startups to exclude their tax on a long-term capital gain if such a long-term capital gain or a portion thereof is invested in a fund approved by the Central Government within 6 months from the date of transmission of the asset.
The maximum sum that can be invested in the long-term specified asset is Rs 50 lakh. Such a sum shall stay invested in the fixed fund for 3 years. If taken out before 3 years, then the exemption will be annulled in the year in which the money is withdrawn.
5. Carry Forward of Losses
Startups identified by the Department of Promotion of Industries and Internal Trade (DPIIT) can shift forward losses incurred in any of their initial 10 years of Introduction for 10 subsequent years. This significantly prolongs the typical seven-year window for firms not regarded as startups. The advantage applies even if there’s an alteration in shareholding within the 10 years, so long as the original shareholders own a minimum of 51% of the voting power on the final day of the year in which the loss happened and the final day of the year in which the deficit is set off.
6. Tax-Free Angel Investment
A start-up often faces difficulties in building the confidence of first-time investors as they have no past performance history or credentials, thereby making it more challenging to secure funding. Gathering no high-impact investments makes the new entrepreneurs unable to scale their businesses. Angel investors play a significant role in such a situation and work out the terms and the accrued interest payable by the business founders. The Indian Government declared angel investments as untaxable. Therefore, start-ups can now carry out the fund collection necessary from angel investors without any bother about additional taxation.
You must consider this option if you want to effectively reduce your tax liability in a partnership firm and deploy the investment toward company growth and expansion. To request angel Tax Exemption under Section 56 of the Income Tax, a Startup should be DPIIT recognized, and the cumulative amount of paid-up share capital, along with the share premium after the prospective offering of shares, if any, is not above INR 25 Crore.
7. Immunity From Tax on Investments Over the Fair Market Value
The government has excluded the tax on investments above the fair market value in qualified startups. Such investments comprise investments undertaken by resident angel investors, families, or individuals that are not registered as venture capital funds. Additionally, investments made by incubators over fair market value are exempt.
Summing Up
The government’s assistance for innovation programs and economic growth is evident in the many tax incentives tailored for startups. Startups can take advantage of the opportunities available, which can help alleviate business risk and challenges, and can also provide major support to the country’s potential growth path.
The tax benefits and grants to the startups guarantee government support and easy availability of funds as venture capital raises their growth prospects. As India brands itself as an accelerator of innovation and emerging startups, the combination of the government-private sector collaboration, together with tax exemptions and risk capital, provide a solid foundation for the long-term sustainability of startups.
