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Benefits to Start-ups Registered with DPIIT under the Income-Tax Act

June 29, 2021
Benefits to Start-ups registered with DPIIT under the Income-Tax Act

Benefits to Start-ups registered with DPIIT under the Income-Tax Act

A Start-up is a young company/entity founded by one or more entrepreneurs to develop a unique product or service and bring it to market. By its nature, it is beginning to develop and grow, is in the first stages of operation, and is usually financed by an individual or small group of individuals.

Start-up India is a flagship initiative of the Government of India, intended to build a strong eco-system for nurturing innovation and Start-ups in the country that will drive sustainable economic growth and generate large scale employment opportunities. The Department for Promotion of Industry & Internal Trade (DPIIT) provides recognition to eligible companies to be recognized as start-ups.

Definition of Start-up as per DIPPT:

As per notification G.S.R. 127(E) dated 19th February, 2019, issued by the DIPPT, Ministry of Commerce & Industry an entity shall be considered as a Start-up:

  1. Up to a period of ten years from the date of incorporation/ registration as Private limited company or Partnership firm or as Limited Liability Partnership.
  2. Turnover of the entity for any of the financial years since incorporation / registration has not exceeded 100 crore rupees.
  3. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Start-up’.

 Start-ups can access a host of benefits as mentioned below:

  1. Income tax Benefits.
  2. Easier Compliance & simpler winding up
  3. Rebate on Intellectual Property Rights application, Facilitation support & fast tracking of applications
  4. Huge Networking Opportunities.
  5. Easier Public Procurement norms.

We will discuss in detail about the Income-tax benefits available to a start-up entity.

INCOME-TAX BENEFITS

  1. Section 80 IAC of Income Tax Act, 1961:

Start-up may apply for Tax exemption under Section 80IAC of the Income Tax Act, 1961. On getting approval for Tax exemption the Start-up can avail tax holiday for 3 consecutive financial years out of its first ten years since incorporation which means the Start-up gets deduction equal to one hundred percent on the profits and gains derived from such business for three consecutive assessment years.

  1. Section 56 (2) (vii) (b) of Income Tax Act, 1961: (Which deals with the taxability of share premium)

As per clause (vii) (b) of sub-Section (2) of Section 56, any consideration received by the issuing Company (in which the public are not substantially interested) on its shares in excess of the Fair Market Value (FMV), to the extent it exceeds the face value of such shares ( share premium) shall be liable to tax.

Start-up shall be eligible for exemption of tax on any investments received above fair market value under Section 56(2) (viib) of the Income Tax Act

*Exemption is given to recognized start-up by CBDT vide notification no. 13/2019. *

  1. Section 54 EE of Income Tax Act, 1961:

A new Section 54 EE has been inserted in the Income Tax Act for the eligible Start-ups to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by Central Government within a period of six months from the date of transfer of the asset. The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Such amount shall remain invested in the specified fund for a period of 3 years. If withdrawn before 3 years, then exemption will be revoked in the year in which money is withdrawn.

  1. Set-off carry forward losses and capital gains allowed in case of a change in Shareholding pattern under Section 79 of Income tax Act, 1961:

The carry forward losses in respect of eligible start-ups are allowed if all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of previous year in which such loss is to be carried forward. The restriction of holding of 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in case of eligible Start-ups.

Note:

  • An entity should be registered as Start-up with DPIIT (Department for Promotions of Industry and Internal Trade) in order to avail benefits given to Start-up entities.
  • Constitution of Start-up cell:In order to redress the grievances and to address various tax related issues in the case of Start-ups, a Start-up Cell at the level of CBDT has been constituted on 30th August, 2019. This Start-up cell has been given wide publicity and is placed at the public forum so that it remains easily accessible to all kinds of queries from the Start-ups.
  • Start-ups in order to avail exemptions under Section 80 IAC and Under Section 56 (2) (viib) of Income Tax Act, 1961 have to apply separately after fulfilling the requisite conditions. The same is discussed below.

APPLICATION TO AVAIL TAX EXEMPTIONS

  1. FOR AVAILING EXEMPTIONS UNDER SECTION 80IAC

 Eligibility Criteria:

  • The entity should be a recognized Start-up.
  • Only Private limited Company or a Limited Liability Partnership is eligible for Tax exemption.
  • The Start-up should have been incorporated after 1st April, 2016 but before the 1st day of April, 2022. (Amended by Finance Act, 2021).

 Application:

Once the eligibility criteria met, make an application in Form-1 along with documents specified therein to the CBDT (“Board”) through DPIIT portal i.e - https://www.startupindia.gov.in/ and the Board may, after calling for such documents or information and making such enquires, as it may deem fit grant the certificate.

Following documents needs to be attached along with the application:

  • Annual Accounts for the last three financial years
  • Copies of income-tax returns for the last three financial years
  1. FOR AVAILING EXEMPTIONS UNDER SECTION 56 (2) (vii) (b)

 Eligibility Criteria:

  • The entity should be a DPIIT recognized Start-up.
  • Aggregate amount of paid-up share capital and share premium of the Start-up after the proposed issue of share, if any, should not exceed INR 25 Crores.

Provided that in computing the aggregate amount of paid-up share capital, the amount of paid-up share capital and share premium of twenty-five crore rupees in respect of shares issued to any of the following persons shall not be included (a) a non-resident; or (b) a venture capital company or a venture capital fund.

  • It has not invested in any of the following assets:

(a) Building or land appurtenant thereto, being a residential house, other than that used by the Start-up for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;

(b) Land or building, or both, not being a residential house, other than that occupied by the Start-up for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business;

(c) Loans and advances, other than loans or advances extended in the ordinary course of business by the Start-up where the lending of money is substantial part of its business;

(d) Capital contribution made to any other entity;

(e) Shares and securities;

(f) a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds ten lakh rupees, other than that held by the Start-up for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;

(g) Jewellery other than that held by the Start-up as stock-in-trade in the ordinary course of business;

(h) Any other asset, whether in the nature of capital asset or otherwise, 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.

Provided the Start-up shall not invest in any of the assets specified in sub-clauses (a) to (h) for the period of seven years from the end of the latest financial year in which shares are issued at premium.

Application:

After fulfilling above conditions Start-up shall file duly signed declaration online in Form-2 to DIPP through - https://www.startupindia.gov.in/ that if it fulfills the conditions. On receipt of application DPIIT shall forward the same to the CBDT.

Thus, by providing the above benefits, the Govt. has taken a big step in encouraging young minds to become entrepreneurs and contribute towards growth of the economy.

Disclaimer:

The entire contents of this document have been developed based on relevant information and are purely for private circulation. Though the authors have made utmost efforts to provide authentic information, however, the authors expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and consequences of anything done or omitted to be done by any such person in reliance upon the contents of this document.

Please reach out to [email protected] or [email protected] for any support that you may need on Start-up registration.

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