Tax Benefit for Indian Startups
In recent year, India has seen a boom in startup culture. It is not just a trend anymore but becomes a revolution. The way thing used to be in past is changing day by day. The traditional way of running a business is entirely changed.
The number of successful startups in India are increasing day by day and is motivating new budding entrepreneurs to start on their own. Ventures capitals, angel investors are showing more interests in investing, guiding, and mentoring potentially successful startups.
The budding entrepreneurs knows all the technical possibilities and potentials of a startup but are missing on one of the most important cash flow factors which is TAX that they will need to pay as they grow in their business.
Tax Benefit for Startups
We will talk about all the startups tax benefits that the government is offering to support the startup culture.
For this, first the startup needs to get a recognition as an official “Startup” as per the conditions prescribed under G.S.R. notification 127(E).
Below are the conditions prescribed under G.S.R. notification 127(E):
- Startup should be incorporated as a Private limited company, Registered Partnership firm or a Limited Liability Partnership.
- Their turnover should not exceed 100 crores in any of the previous financial years.
- Entity should not be 10 years older counting from the date of incorporation.
- It should be working towards innovation or improvement of existing product, services and processes and should have the potential to generate employment or wealth.
- Splitting of any existing business and incorporating the same and presenting as new won’t be counted as startup.
https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/198117.pdf is the link for official government notification.
Startups Tax benefit Under Section 80-IAC
Criteria to be fulfilled to get the benefit under section 80-IAC:
- All the criteria as per G.S.R. notification 127(E) which means it should be a DPIIT (Department for Promotion of Industry and Internal Trade) recognized startup.
- Should be a Private limited company or Limited liability partnership.
- Should have been incorporated after 1st April 2016.
Tax holiday for 3 consecutive financial years out of the first 10 financial years since its date of incorporation.
Means no need to pay even single penny of tax for your choice of 3 financial years out of the first 10 financial years.
How to get the Benefit:
1. Register on startup India portal and create a login ID.
2. Apply to exemption under section 80-IAC by submitting the required documents which are:
- Memorandum of association for private limited company or LLP Deed for LLP
- CA certified Annual Accounts and ITR for the last three financial years (for startups incorporated recently, ITR requirement is not applicable)
- Short video explaining your Startup Idea, products prototypes, software demonstration, market traction, customer reviews, client testimonials.
- Detailed Pitch deck of your product or services.
Startup Tax benefit under section 56 (2) (viib)
Criteria to be fulfilled to get the benefit under section 56 (2) (viib):
1. All the criteria as per G.S.R. notification 127(E) which means it should be a DPIIT (Department for Promotion of Industry and Internal Trade) recognized startup.
2. Sum of paid-up share capital and securities premium shall not exceed 25 crore rupees.
In above, share capital and securities premium for the share issued to Non-residents and venture capitals will not be included.
3. It should not have invested in the below assets:
- Residential house, other than that for the purpose of renting or holding it as a stock in trade in ordinary course of business.
- Land or building other than residential house not used for the business, other than that for the purpose of renting or holding it as a stock in trade in ordinary course of business.
- Loans & advances, when giving Loans & advances is not a substantial part of its business.
- Capital contribution in any other entity.
- Shares and securities
- motor vehicle, yacht, aircraft, or any other mode of transport where actual cost exceeds ten lakh rupees, other than that held for the purpose of renting or as a stock-in-trade in the ordinary course of business.
- Jewelry other than that held as a stock-in-trade in the ordinary course of business.
- Other asset of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act.
No tax on the premium received on the issue of shares.
It is generally taxed in case of company other than startup if such company is a company in which public is not substantially interested and shares are issued at value more than its fair market value.
CBDT has granted this exemption to startups through Notification no. 13/2019 with effect from 19th February 2019.
Few other Startups Benefits Given to by Indian Government:
- Reduction in cost of filing patents.
- Venture funds set up by government to ease funding requirements.
- No prior experience required for applying government tenders.
- Research and development infrastructure facilities to be provided by government.
Startup fests organized by government for networking opportunities.