The Government of India with an objective to create a conducive atmosphere for promoting entrepreneurship which can further help in creating employment opportunities besides helping in economic growth of the country, launched the Startup India initiative in 2016. This plan provides numerous benefits to eligible entities which can be helpful in not only starting a venture and running it but also in efficient corporate tax planning. Basic information about some of the most important tax benefits that eligible startups can enjoy under this programme are being presented here.
It will be pertinent to learn about which entity can be classified as an eligible startup before listing the benefits that will be helpful for such organizations in devising a framework for corporate tax planning in India.
Any organization that fulfills the following condition can be classified as a startup entitled to enjoy the benefits of the programme:
1. The entity must be registered as a private limited company or a partnership firm or a limited liability partnership in India.
2. A period of not more than seven years must have elapsed starting from the date of the registration of the entity. For entities located in the biotechnology sector, the specified period is 10 years from the date of registration.
3. The turnover of the organization has not been in excess of Rs 25 crores in any financial year since its registration.
4. The organization is involved in development, innovation or improvement of products, processes or services or has a scalable business model that can be helpful in creation of wealth or employment generation.
5. The entity must not have been formed by splitting up or reconstitution of an existing business organization.
Following is a list of main tax benefits that any organization that fulfills all the above mentioned criteria enjoys :
Any eligible startup formed on or after April 1, 2016 enjoys an exemption of 100% on all profit gains for a period of three years. Moreover, the entity can choose any three years from the period of the first seven years in order to avail the tax exemption. As specified in the conditions listed above, biotechnology startups can select block of any three years from the period of 10 years. It must be noted that the annual turnover in any of the chosen three years must not exceed the amount of Rs 25 crores.
In case the entity sells any capital asset, the gains made from such transaction will be exempt from tax under Section 54EE of the Income Tax Act. it must be noted though that in order to avail the exemption, the capital gains earned from the sale must be invested in funds notified by central government within a period of six months from the date of the transaction. Further, the maximum amount earned as capital gain and which can be invested cannot be more than Rs 50 lakhs with a specified lock- in period of 3 years. If the investor withdraws from the scheme before the completion of the lock- in period, the exemption will stand revoked.
Another important provision that can be helpful in corporate tax planning for startups is that in the event of an eligible entity failing to earn any profits during the first five years of operation, it will be exempted from paying the Minimum Alternate Tax or MAT.
All other such entities though, have to pay the MAT at a rate of 18.5% in addition to all applicable surcharges and cess.
Angel investors are individuals who provide capital to startups in exchange for ownership equity and convertible debt and a long standing demand of entrepreneurs as well as experts was that taxing such funding for startups was a counter- productive move. Now, whenever an eligible startup issues shares to an angel investor after receiving funds from the individual, they will be exempt from any taxation under the section 56(2) (viib) of the Income Tax Act.
The losses incurred by a startup during any of the first seven years of operations can be carried forward to a subsequent financial year, provided the shareholders in the year which the loss occurred continue to be the shareholders of the entity during the carry- forward and set- off year.
In addition to the above mentioned tax advantages, there are some other notable benefits that eligible startups enjoy. They are :
i. In case an individual is the owner of more than 50% of the equity capital, then the amount of funds invested can be utilized for the purpose of purchasing the assets of the company before the due date for filing corporate tax returns in India.
ii. Many compliance requirements have been relaxed and any entity fulfilling the stipulated conditions for startups can self- certify compliance for some specified labour laws.
iii. The process of closing an enterprise has also been simplified with the company being allowed to be winded up within 90 days under Insolvency & Bankruptcy Code, 2016.
iv. The concerned agencies have been directed to fast track application for patents and intellectual property protection by startups and upto 80% rebate is being granted on patent fees.
v. A SIDBI Fund Of Funds with a starting corpus of Rs 2500 crores and total corpus of Rs 10,000 crores has been set up for funding startups.
The government has began the initiative of Startup India for providing an impetus to economic growth in the country by nurturing the spirit of entrepreneurship. People must learn about all the important features of the policy in order to understand whether their organization is eligible for the programme or not and enjoy the benefits for corporate tax planning.
Seema Mehra is a Chartered Accountant at Ashok Maheshwary & Associates, best CA Firms In India that provides tax consultancy services in a convenient manner. She is a professional writer and loves to share Financial related topics.