Startups in India may get more tax exemptions

Startups in India may get more tax exemptions

India is a developing country and it has become the 3rd largest start-up supporting the economy in the world. It is developing constantly and will very soon become the most prominent technology startup center in the business market worldwide. To support the startups in India, the government has declared a few projects through which they could profit benefits, one of them being the STARTUP INDIA program. The primary intent of this program is to make a setting that helps startups in the country and pushes for the advancement of entrepreneurs

Startup India

According to the revised announcement that was published on 23rd May 2017, an organization will be considered as a Startup: if it is incorporated in India as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership corporation (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008); and for seven years from the date of its incorporation/ registration; in any case, on account of Startups in the biotechnology division, the period will be as long as 10 years from the date of its incorporation/ registration; and if its annual turnover for any of the financial years since incorporation/ registration has not surpassed Rs. 100 crores; and if that it is working in the direction of innovation, development or improvement of items or procedures or services, or if that it is a scalable business model with a high capability of employment generation or wealth creation.  An organization created by splitting up or reconstruction of existing commerce will not be considered a 'Startup'

Also, a Startup should not more than 10 years old for startup recognition or not incorporated before April 2016 to claim Tax Exemption certificate.

Startup India Action Plan

A national policy framework for startups was established in February 2016, known as the Startup India Action Plan by Prime Minister Narendra Modi.

Benefits of Startup India Action Plan

Under this India Action Plan, new startups in India could avail of regulatory as well as tax benefits, capital gains tax exemption, and can have access to government funding if they could fulfill certain criteria. 

A self-certification compliance system is also in place regarding key labor and environment laws, where there would be no inspections conducted for the first three to five years of the launch of the venture.

The additional benefits consist of a reduction in patent registration fees by 80% and trademarks filing fees by 50% as well as free legal help; simpler entry and exit norms; protection of intellectual property rights (IPR); and facilities towards promoting entrepreneurship amongst women as well as SC/ST communities.

Tax Exemptions

Startup programs help entrepreneurs by furnishing them with several tax benefits and those which function as private limited companies, limited liability partnership or Partnership corporations might likewise be qualified for different benefits according to the schemes available towards them.

The Modi-led government after being re-elected for the second term, is presently intending to facilitate the tax norms to give benefits to startups under the income tax law which permit 100% tax deduction.

In 2016, the government had declared a 100% tax deduction for any three consecutive years. The startups which didn’t have a total turnover of Rs. 100 Cr and was associated with innovation and development of new items were qualified for this advantage. They were likewise permitted to choose the three-year term during the first seven years.

The government is set to ease the standards to enable more startups that would be benefitted from provisions under the income tax law that permits 100% deduction up to 100% of the profits and gains. The move follows encouraging signs from the government decision towards simplifying the rules for angel tax exemption, with 508 startups already benefiting.

Following repetitive criticism, the government eased the rules and allowed tax exemption for startups whose shares are subscribed at a hefty premium, which is in excess of the fair market value.

The income tax officials were raising various concerns and had issued notices, prompting the department for the promotion of industry and internal trade (DPIIT) and the finance ministry to remove obstacles by simplifying the regime. Accordingly, only 38 applications from startups were not given the advantage as their applications were incomplete.

Presently, the Department for Promotion of Industry and Internal Trade (DPIIT) has set its sights on section 80IAC of the income tax law as the advantages have been provided to only a few startups. The provision, drafted as part of the Startup India initiative, gives 100% tax exemption on profits earned through eligible organizations for three consecutive assessment years out of seven years starting from the year in which the startup was incorporated.

Initially, the plan was to give the exemption in a five-year block. However, the guidelines were simplified as investors complained that a significant number of organizations might not be earning a profit during this period.

A startup certified through an inter-ministerial board is treated as a business for tax breaks if the business includes innovation, deployment, development or commercialization of new goods, services or processes driven by technology or intellectual property.

The present provisions were interpreted in a very stringent way, bringing about less than 100 startups being certified by the board of officers from Department for Promotion of Industry and Internal Trade (DPIIT) and science and technology and biotech departments. The guidelines are currently being reviewed and a less difficult dispensation has been proposed.

Boosting Startup Ecosystem

Under the Startup India Action Plan, the startups could apply for income tax exemption under section 80 IAC of the Income Tax Act as well as angel tax exemption under Section 56 of the Income Tax Act.

In any case, the startup ecosystem was locking horns with the government over concerns identified with angel tax after the Ministry of Corporate Affairs (MCA) sent notices to more than 2,000 startups in November 2018, which have raised fund since 2013.

The DPIIT had stated that 541 startups granted angel tax exemption through CBDT. In any case, 36 applications were incomplete and are being worked upon by Startup India team to deal with the insufficiencies.

As indicated by the angel tax law, startups are commanded for paying around 30% of angel tax on investments made by external investors. This regulation turned into a point for discussion for both startup founders and investors who held that the tax can hamper the development of the Indian startup ecosystem.

The Central Board of Direct Taxes (CBDT) had stated that startups which got assessment notices under Section 56(2)(viib) of the Income Tax Act (I-T Act) shall be exempted from the tax in the event if they conform with the February 19 notification through DPIIT. The notification had stated that every startup is responsible to get angel tax exemption irrespective of their share premium values given that the total sum of paid-up share capital as well as share premium of the startup after issue or proposed issue of a share, if any, does not surpass, Rs. 100 Cr.


As the Indian government keeps on working towards exempting startups from angel tax as well as extending tax breaks for startups, the startup's ecosystem is probably going to get a major boost from the new guidelines.


eStartIndia Team

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