WHEN DOES A COMPANY CLASSIFY AS START-UP?
A Startup is a business enterprise that is undertaken by an entrepreneur to develop and validate into a scalable business model. To help the business grow, our union government provides tax exemptions to eligible startups.
Following are the criteria to become an eligible start-up according to the G.S.R. notification 127 (E):
- The startup has yet not completed tenure of ten years from the date of incorporation.
- The startup is a private company or registered as partnership firm or a limited liability partnership.
- The startup has an annual turnover not exceeding INR 100 Cr for any of the financial year since incorporation.
- The startup is working towards innovation or improvement of products or services or is a scalable business with a high potential of wealth creation and employment generation.
- It has not been formed by reconstructing or splitting up a business that was already in existence.
TAX EXEMPTION AVAILABLE TO STARTUPS UNDER SEC 80-IAC OF THE INCOME-TAX ACT
Section 80-IAC provides that, an eligible startup incorporated between 01-04-2016 and 31-03-2022 shall be allowed a deduction of an amount equal to 100% of the profits and gains. Before getting recognition, a startup may apply for tax exemption under this section and after getting clearance for tax exemption, the Startup can avail tax holiday for 3 consecutive financial years out of its first ten years since incorporation.
In simple terms, an eligible startup will get 100% tax rebate on profit for 3 consecutive years, provided that such startup is granted an IMB certificate and its annual turnover does not exceed INR 100 Cr in any financial year. This Section was introduced by Government of India with the aim to initiate the development of startups and provide a competitive platform for businesses which are newly established to thrive amidst the aggressive business atmosphere. DPIIT has setup an inter-ministerial board which validates the startup for allowing tax related benefits as per the section 80-IAC of income tax act.
WHAT IS THE UPDATE MADE UNDER UNION BUDGET 2022?
Startups have emerged as drivers of growth for India’s economy and with an aim to booth this segment, on February 1, 2022, Finance Minister Nirmala Sitharaman announced extended tax benefits for this particular segment. Till now, startups that were incorporated between April 1, 2016 and March 31, 2022 were eligible for this tax incentive. However, Finance Minister extended the eligibility to March 31, 2023, which is an additional year for the startups. This amendment took effect from April 1, 2022 and will apply to assessment year 2022-23. So basically, the amendment was that the startup tax holiday program will be extended to companies incorporated till March 31, 2023, in addition to the firms that were previously qualified for the exemption.
The FM also recommended extending the capital gains tax exemption for start-up investments for another year, until March 31, 2023. Newly-established manufacturing startups will also enjoy an extension on the concessional tax regime of 15%, which was introduced for newly-incorporated domestic manufacturing companies.
However, in India out of 61,400 government registered start-ups, only 400 have IMB certification which makes them eligible for tax concessions. Therefore, despite the extension of tax holidays, announced by the FM, nearly 99% of the start-ups may not be eligible to avail the benefits as one of the criteria to get such benefit is to hold a certificate of eligible business from Inter-Ministerial Board of Certifications. In this regard, the start-up community has been repeating the demand of overhauling the tax reforms, especially doing away with the IMB certification in order to qualify for the tax concessions.
WHAT DOES IT MEAN FOR NEW STARTUPS?
Such startups will now be eligible to get a 100% tax rebate on the profit made for a period of three years in a total time frame of ten years of operations. This move is likely to help young startups in meeting their working capital requirements, especially during the crucial initial years of their operations. Venture capital investors and startup founders are likely to benefit from a tax tweak as the surcharge on long-term capital gains tax has been capped at 15% for all listed and unlisted companies. This addresses a long-standing demand of new-age companies, which wanted share sales of unlisted firms to be taxed at par with those of listed ones. To be sure, only the surcharge levied on unlisted share sales has been reduced from 37.5% to 15%. The tax rate still remains at 20%.
WHAT IS THE GOVERNMENT HOPING TO ACHIEVE FROM THIS AMENDMENT?
This attempt is made with a hope to establish a globally competitive business environment for local companies. The Finance Minister said that- “startups have emerged as a growth driver for the economy”. Covid-19 pandemic had led to significant business losses; therefore tax incentives for startups have been increased from three to four years. In our economy, start-ups have become the major source of new growth and over the last few years, there has been a huge rise in the number of successful businesses as in 2021, emerging economy companies raised a record $42 billion through global and domestic funds.
It is clear that the economy is still recovering from the setbacks caused due to the pandemic and the lockdowns and is therefore finding its way out of the most recent troubles. In such times, the anticipation of a visionary budget with the aim to boost resilience and progress is quite obvious. FM also mentioned that- “it has the prospect of creating more jobs and additional production of 30 lakh crore during the next keycap digits five years. This scheme will create a bursary effect on the Atma Nirbhar Bharat Abhiyan.”
DPIIT RECOGNITION AND ITS BENEFITS
The DPIIT was first established in 1995 and was reconstituted in 2000. Its main role is to promote and accelerate industrial development by facilitating investment in new technology, foreign direct investment and supporting balanced development.
“Startup India” is an initiative of the Government aiming to build a strong ecosystem for innovation and entrepreneurship and to catalyze startup culture in India. The main objective is to support entrepreneurs, build a robust startup ecosystem and transform India into a nation of job creators. DPIIT acts as the nodal Department for coordinating the efforts of governments in carrying out this plan.
Under this initiative, eligible companies get recognized as Startups by DPIIT, in order to access several benefits which are listed as follows:
- Sec 80-IAC-Tax exemption
- Concession in Trademark filings fees
- Tax Exemption under Section 56 of the Income Tax Act (Angel Tax)
- Self-certification under labour and employment laws and no inspection for three years.
- Preference in Government tenders
- Funding support by government
- Easy winding up of company
WHERE DOES INDIA STAND IN THE FIELD OF STARTUPS?
India presently has over 61,400 recognized startups with almost 75% of districts each having at least one startup. Out of which 14,000 recognized startups were added in the 2021-22 fiscal. India has also surpassed the United Kingdom to become the third largest nation in terms of the number of unicorns (Unicorns are such startups that obtain a valuation of $1 billion). In 2021, India generated 44 unicorns taking the total count to 83, to emerge third after the United States and China which added 487 and 301 unicorns respectively. Delhi has become the startup capital of India, outdoing Bangalore on the number of startups added since April, 2019.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
Sources:Taxguru.com, The Economic times, moneycontrol.com, e-startupindia.com, Businesstoday.in, Speedup. in