Taxation for Startup Companies in India: Eligibility, Benefits and Exemptions
India aims to foster a startup ecosystem with the Startup India campaign, initiated by Prime Minister Narendra Modi in 2016. The program offers various incentives to startups, including simplified incorporation processes and tax exemptions. However, these benefits are available only to startups that meet the criteria of being an 'Eligible Startup'. In this article, we explore the eligibility criteria and the tax exemptions bestowed upon eligible startups through the Startup India Program.
Eligibility for Startup India
To qualify as an 'Eligible Startup' under the Startup India Action Plan, the following conditions must be met:
Being incorporated or registered in India for less than seven years, with a minimum of five years for biotechnology startups from the date of incorporation. An annual turnover not exceeding Rs 25 crores in any of the preceding financial years. Aims to work towards innovation, development, deployment, or commercialization of new products, processes, or services driven by technology or intellectual property. Not formed by splitting up or reconstruction of a business already in existence. Must obtain certification from the Inter-Ministerial Board set up for this purpose. Capable of incorporation as a private limited company, registered partnership firm, or a limited liability partnership.Tax Exemptions Allowed to Eligible Startups under Startup India Program
The following tax exemptions have been allowed to eligible startups:
1. 3 Year Tax Holiday in a Block of Seven Years
Started after April 1, 2016, startups are eligible for a 100% tax rebate on profit for a period of three years within a block of seven years, provided the annual turnover does not exceed Rs 25 crores in any financial year. This will help startups meet their working capital requirements during the initial years of operation.
2. Exemption from Tax on Long-term Capital Gains
A new section 54 EE has been added to the Income Tax Act, exempting eligible startups from tax on long-term capital gains if such gains are invested in a fund notified by the Central Government within six months of the date of transfer of the asset. The maximum amount that can be invested is Rs 50 lakh. The investment must remain in the fund for three years. If withdrawn before the three-year period, the exemption will be revoked in the year of withdrawal.
3. Tax Exemption on Investments Above Fair Market Value
The government has exempted tax on investments above the fair market value in eligible startups. Such investments include those made by resident angel investors, family, or funds not registered as venture capital funds. Investments made by incubators above the fair market value are also exempt.
4. Tax Exemption to Individual/HUF on Investment of Long-term Capital Gain in Eligible Startups u/s 54GB
The existing provisions under section 54GB allow exemptions on long-term capital gains from the sale of a residential property if such gains are invested in small or medium enterprises. This provision has been amended to include exemption on capital gains invested in eligible start-ups. An individual or HUF selling a residential property can invest the capital gain to subscribe to 50 or more equity shares of an eligible startup, provided that the shares are not sold or transferred within five years from the date of subscription.
This exemption is designed to encourage investment in eligible startups, thereby promoting their growth and expansion. The startup must use the amount invested to purchase assets and should not transfer the assets purchased within five years from the date of purchase.
5. Set Off of Carry Forward Losses and Capital Gains Allowed in Case of a Change in Shareholding Pattern
The carry forward of losses in eligible startups is allowed if all the shareholders 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 the previous year. In accordance with section 79, the restriction of holding of 51% of voting rights has been relaxed for eligible startups.
These tax exemptions make the financial climate more favorable for startups, enabling them to focus on innovation and growth. To ensure compliance with the conditions, startups must maintain transparency and adhere to the guidelines set forth by the government.
For startups aiming to benefit from these tax incentives, it is essential to meet the eligibility criteria and seek certification from the Inter-Ministerial Board. Consulting with experienced tax professionals can also help navigate the complexities and ensure maximum benefit from these provisions.