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Start-up India Tax Exemptions

Start-up India Program is an initiative by the Government of India which aims to encourage more and more people to come forward with start-ups, thereby helping to generate more employment in the country. Prime Minister Narendra Modi launched this program on the 16th of January 2016 in New Delhi with the vision of wealth and employment creation for the growth and progress of the country.

Eligibility for Start-up India

The Start-up India Program is devised in the larger interest of the country as it works towards generating large scale employment and empowering innovative ideas for new ventures. Hence, all entities desirable of gaining benefits under the program need to fulfil the eligibility criteria as mentioned below:

  • The applying company should either be a private limited company or a limited liability partnership company.

  • The program is looking for fresh entrants in the field and therefore, only new firms or companies or firms in existence for not more than 7 years and for biotechnology start-ups up to 10 years are eligible. The company should be having a turnover of not more than Rs.25 Crores to be considered for the Start-up India Program.

  • An approval from the Department of Industrial Policy and Promotion (DIPP) is mandatory in order to apply for the Start-up India Program. An Incubation Fund, Angel Fund or Private Equity Fund funding the applying firm is eligible for approval from the DIPP.

  • The company applying for the Start-up India Program should have already received a patron guarantee from the Indian Patent and Trademark Office.

  • A recommendation letter from an authorized incubator should be duly obtained before applying.

Income Tax on Start-ups

The financial year 2016-17 budget was the first time when tax incentives for start-up companies were considered and rules were laid down for them. With subsequent changes in the tax exemption rules in the following budget year of 2017-18, start-ups now enjoy many tax benefits under the Income Tax Act, 1961.

The most important point of consideration is that tax on start-ups is levied on the profits earned and not on the total sales, which in itself is a huge plus as they are to meet the initial operational costs of setting up the company. To calculate the profit or earning of the start-up the expenses incurred and the depreciation value is deducted from the total sales revenue earned. This enables to cover any cost in the form of reduction of value of assets and the cost of purchases and other expenses incurred. The amount thus derived comprises the total profit and is the amount on which tax can be levied.

Another very encouraging plan initiated by the government is the Presumptive Scheme of Taxation which is categorically applicable to individual proprietorship firms or HUFs. This scheme entitles the firm to calculate income on a percentage basis in either of the following two ways:

50% of the aggregate value of services provided

OR

8% value of the total sales done by the business.

Using the above mentioned ways, the income to be taxed can be calculated. The table given below helps to understand the tax levied on the various business entities:

Business EntitiesTax Applicable
Proprietorship FirmIncome Tax levied as per the slabs specified
Partnership or Limited Liability Partnership Firms30% Tax on Income
Indian origin Company25% Tax on Income

Business entities which have computed their Income under the Presumptive Scheme of Taxation, are entitled to file their Income Tax Returns using the respective ITR forms before the due date in order to complete the taxation process.

List of Tax Benefits for Start-ups in India

The Start-up India Program, as initiated by the Government in 2016, had the primary motive of encouraging new innovative ventures creating economic growth with increased job opportunities. In accordance with the same, certain tax exemptions have been an integral part of this program to make it appealing to upcoming entrepreneurs and businessmen.

Tax Rebate for 3 Years

All Start-up companies set up after the 1st of April 2016 are entitled to a 100% tax redemption under Section 80 IAC for a period of 3 consecutive years, limited to a maximum block within the first 7 years. This however, is subject to condition that the per annum profits of the company does not exceed Rs.25 Crores in one financial year. The objective of this redemption is to assist the start-ups cover their capital requirements.

Tax Redemption on Long Term Capital Gains

Section 54 EE of the Income Tax Act entitles all eligible start-ups to an exemption of tax on long term capital gains or any part of it provided it is invested in a Government notified fund. Another important point of consideration is that this investment must be made within six months of the asset transfer, subject to a maximum of Rs. 50 Lakhs. The section further emphasizes that the invested amount should be intact for a minimum period of 3 years failing which the exempted amount shall be revoked.

Tax Exemption on Investments above Fair Market Value

As per the Income Tax Act, 1961, companies receiving considerations on issue of shares exceeding the Fair Market Value are taxable under Income from Other Sources. The Start-up India Program entitles start-ups to an exemption for any such excess consideration by venture capital funds. The same also applies to investments made by Incubators above Fair Market Value

Frequently Asked Questions

What are the relevant documents required by an entity to be recognized as a Start-up venture under the Start-up India Program initiative?

The Start-up India Program is a completely online registration program which can be easily accessed through the online portal at www.startupindia.gov.in.

The most vital document required is the Registration or the Incorporation Certificate of the entity. The application should clearly explain the innovation, development and improvisation prospects of the products or the services or the processes which it aims to bring about, along with how it generates more employment and wealth creation at the same time.

What is the application procedure to enrol for the Start-up India Program?

Start-up India is an online registration programme. Follow the steps mentioned below to successfully enrol yourself for one of the most innovative and progressive business programs in recent times.

  • Log on to the Start-up India Portal at startupindia.gov.in/registration.php.
  • Fill in your Legal Entity details as asked for on the page.
  • Enter the Registration Number of your entity.
  • Enter the date of Registration as mentioned in the document.
  • Enter the PAN Number for all banking purposes. However, it is optional to do so.
  • Enter your postal address with the pin code and state.
  • Enter complete details of the Authorized Representative of the business entity for all future communications.
  • Enter the complete details of the working Directors and Partners of the firm.
  • Upload all important documents as asked for with authentication and validity.
  • Upload the Registration certificate of the company.

Which firms or business entities are eligible to apply for the Start-up India Program?

  • The firms and business entities which are eligible to file in an application for the Start-up India Program are:
  • Partnership Firm
  • Limited Liability Partnership Firm
  • Private Limited Company

What are the registration charges for a Start-up?

For a Start-up Entity, the online registration fees is Rs. 4,500 and for physical filing the charges are Rs. 5,000.

What are the available options for Start-up funding in India?

There are four major funding options for Start-up ventures in India:

  • Crowdfunding: Getting together a number of investors who believe in the prospects of a business idea and are ready to invest in it. This kind of investment is largely brought in through family and friends.
  • Self-funding: This enables a financially equipped entity to prove its worth as a Start-up and then attract investors to invest in the profitable venture.
  • Venture Capital: Venture Capitalists help high investment start-ups showing great potential by investing in equity. They also provide their expertise and mentoring to the newbies.
  • Angel Investment: Angel Investors are individuals on the lookout for innovative and profitable start-ups where they can invest their funds and earn profits through them in the form of interests earned on the money invested.

What is the time period during which a company or business entity can be termed as a Start-up?

Any business entity which has surpassed a period of 10 years from the date of its registration or incorporation ceases to be termed a start-up. Also, if the turnover of the enterprise exceeds the set limit of Rs. 100 crore for any previous financial year, it can no more be considered as a start-up.

Is it permissible to alter a response earlier marked as negative to positive related to availing tax and IPR benefits at the time of registration?

It is permissible to change your response in this regard at a later time also. The benefits thereafter can be availed once the Inter-Ministerial Board has evaluated and certified the updated application.

What is the Inter-Ministerial Board and who forms this Board?

The Inter-Ministerial Board of Certification comprises of the following members:

  • Joint Secretary of the Department of Promotion of Industry and Internal Trade who is the Convener.
  • Representative of the Department of Biotechnology as a member of the Board.
  • Representative of the Department of Science & Technology as a member of the Board.

Can a business entity register as a Start-up under the Start-up India Program even if it does not have a valid PAN?

Having a PAN is not a pre-requisite for registration under the Start-up India Program. However, it is advisable to acquire a PAN for smooth and easy taxation purposes.

Does the Start-up India Program entitle an individual of foreign nationality to be a partner in a Limited Liability Partnership Firm?

Yes, the Start-up India Program permits a foreign national to enter into a LLP registered under it.

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