Tax Exemptions for Startups in India

22/06/2021

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India ranks as the second-largest internet market in the world. Widespread, easy access to the internet as well as several government initiatives have encouraged the growth of online and offline sales in India. This has encouraged many small and medium business owners to set up their own stores. India now houses about 51,300 start-ups and is presently ranked as the third largest start-up ecosystem in the world.

The DIPP’s New Definition of Startups

The DIPP (Department of Industrial Policy and Promotion) under the Ministry of Commerce and Industry has recently amended the definition of start-ups. As per the latest government declaration on startups, the following are the deciding parameters that must be met for any entity to be considered as a startup in India:

The entity must be registered as a Private Limited Company (as defined in the Companies Act of 2013), as a Registered Partnership Firm (registered as per section 59 of the Partnership Act of 1932) or as a Limited Liability Partnership (in accordance with the Limited Liability Partnership Act of 2008) business organization in India.
The business organization must be in existence for a period of less than ten years and not have generated an annual turnover of more than INR 100 crores during this period.
The business organization must be an original entity and should not have come into existence by modifying any other pre-existing organization.
The services and business ideas of the business entity must be innovative and should aim at development, empowerment and solving existing and future problems. If it is a scalable business model, it should be able to help in employment generation and wealth creation.

Entities can be qualified as bona fide startups only after proper registration on the portal set up by DIPP for official recognition. The registration to be recognized as a startup is an online process and requires the following documents:

a) A copy of the Certificate of Business Registration or Incorporation.

b) A detailed account about the company’s nature, services and the benefits that it can provide to society.

Tax Exemptions for Startups under Section 80 IAC

Once the criteria listed above are met and the registration application is accepted, the benefits of the Startup India Program for Tax exemption for startups may be availed. For this, the startup entity has to apply for tax exemption under the section 80 IAC of the Income Tax Act.

The tax exemption eligibility criteria for the same are tabulated below:

The entity should be recognized as a startup as per the latest guidelines of the Government of India.
The company structure should be either that of a Private Limited Company or that of a Limited Liability Partnership.
The startup should have come into existence between April 1, 2016 and April 1, 2021.
The total amount of paid-up share capital and share premium should not exceed INR 10 crore.
The investor who has proposed the subscription of shares must have the average return income of at least INR 25 lakh in the last three financial years.
The net worth of the company in the previous financial year should not be less than INR 2 crore.
The share value of the startup must be testified by a merchant banker in accordance with Rule 11 UA of the Income Tax Rules (1962).

Tax exemptions for startups under sec 80 IAC

Have a look at the list of documents required for 80 IAC tax exemption eligibility:

The annual accounts of the startup from the date of its incorporation
Name, PAN and address of the existing shareholders along with their shareholding and the amount at which the shares are issued to them
Copy of the income tax returns of the investor for the last three financial years
Copy of balance sheet of the investor as on the last day of the preceding financial year
Merchant banker’s report.

Here are the benefits of 80 IAC Tax exemption for startups:

The startup can enjoy a tax holiday for three consecutive years out of the first ten years after its launch.

Other Tax Exemptions for Startups:

In the 2016 proclamation made by Prime Minister Narendra Modi for boosting the growth of startups, the following tax exemptions were announced:

Exemptions from paying taxes for three financial years in a block of seven years provided the startup was incorporated after April 1, 2016 and has not produced an annual turnover of more than INR 25 crores since then, in any financial year.
As per the section 54 EE, if a startup invests in a fund notified by the Central Government for a period of three years, it is eligible for tax exemptions. However, if the invested long-term capital gain figure is withdrawn before three years, the tax exemption is revoked.
Tax exemptions are also applicable on any investments above the fair market value made by angel investors (individuals who provide capital for your business), family members and incubators. The exemptions are, however, not valid for investments made by venture capitalists (firms that invest in startups).
As per provisions under section 54 GB, if any residential property is sold and the gains so obtained are used to fund an eligible startup, the sum qualifies as a tax exemption investment. The new amendments also declare that if an individual or HUF sells a residential property and utilizes the gains to subscribe to 50% or more of the equity shares of any eligible startup, that sum would be eligible for tax exemptions. However, the exemption is only valid if the shares so purchased are not sold or transferred for five years from the date of investment.
If the annual turnover is less than INR 40 lakh, a startup is eligible for Goods and Services Tax (GST) exemption.

Conclusion

As is evident, the government has taken numerous steps to encourage the growth of upcoming and existing startups in India. Tax exemptions and considerations can be seen as a positive step towards growth and in promoting entrepreneurship in India. If you own a startup and have big dreams for your organization, register with Amazon today to know more about various tax benefits that you can avail in your journey as a budding entrepreneur.

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