Here’s a complete guide on income-tax benefits for startups

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The Indian government has actively been taking various steps to boost the start-up ecosystem in the country. India has emerged as the third-largest start-up ecosystem in the world after the US and China. Start-ups have emerged as engines of growth for our economy. Over the past year, the government has taken several measures to hand-hold them and support their growth.

The various benefits have been introduced under the Income-tax Act for start-ups such as relief from angel tax, tax holiday under section 80-IAC for three years, exemption on investment in shares of start-ups, deferment of taxes on ESOPs and relaxation in carry forward of losses etc.

Is your startup eligible to avail Income tax benefits?

A Company or an LLP registered with the Department of Industrial Policy and Promotion (DPIIT) is an eligible start-up to claim deduction under Section 80-IAC of the income-tax Act. It has to satisfy certain conditions to claim this deduction:

– It is incorporated between 01-04-2016 to 01-04-2022 – Its turnover does not exceed Rs. 100 crores in the previous year for which deduction is claimed – It holds a certificate of eligible business from the IMB (Inter-Ministerial Board) – It is engaged in the business of innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation

Eligible start-ups after satisfying the above conditions can claim deduction up to 100% of the profits and gains derived in three consecutive years out of the 10 assessment years beginning from the year of incorporation.

“The start-up claiming this deduction shall not be formed by splitting up or reconstruction of a business already in existence. Further, it shall not be formed by the transfer to a new business of machinery or plant previously used for any purpose. It is required to get its books of account audited from a Chartered Accountant for the financial year for which deduction is claimed,” said Tarun Kumar, chartered accountant and direct tax leader at Coherent Advisors.

The audit report has to be filed electronically in Form 10CCB one month before the due date of furnishing return of income.

Liberalised approach in extending benefit of Section 80-IAC

As per data available on the start-up India portal, 55,654 start-ups have been recognized by DPIIT, out of that only 396 start-ups have been granted benefit under Section 80-IAC of the Income Tax Act.

“This benefit is extended not even to 1% of the start-ups recognised by DPIIT. There is a wide difference between the number of start-ups recognised by the DPIIT and the start-ups granted deduction under section 80-IAC of the Income Tax Act,” Kumar highlighted.

Start-ups hope for faster policy execution at the government front. Hence, the government should have a more liberal approach to pass on the benefit of tax exemption to eligible start-ups.

For start-ups, how can losses be set off?

“Generally, the losses of private limited companies are not allowed to be carried forward and set off against the income of the previous year, unless on the last day of the previous year, the shares of the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred,” Kumar explained.

Eligible start-ups are allowed to carry forward and set off losses against the income of the previous year even if the above condition isn’t satisfied. They can carry forward and set off against the income of the previous year even if all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year and such loss has been incurred during seven years beginning from the year in which such company is incorporated.

Exemption on capital gains

If a part of the capital gains from the sale of residential property is invested in a startup, one can claim deduction on the income. But does this rule apply for all kinds of  start-ups?

“Exemption under Section 54GB is allowed to the shareholders who invest in shares of an eligible start-up. This exemption can be claimed by an Individual or HUF in respect of any long term capital gains arising from the transfer of a residential property,” Kumar suggests.

He added, “This exemption is available if the amount of net consideration is invested, before the due date of furnishing of return of income, in equity shares of a start-up after satisfaction of the specified conditions.”

What is Angel tax?

If a closely held company raises funds through the issuance of its shares to an Indian resident at a price more than its fair market value (FMV), then the amount received more than the fair market value of shares is taxable in the hands of the issuer. It is popularly known as Angel Tax.

“The start-ups are allowed exemption from angel tax on submission of declaration in Form 2 with the DPIIT along with the relevant details of the company,” Kumar points.

Deferred payment of Tax on ESOPs

Giving Employee Stock Option Plan (ESOP) is a usual trend in start-ups where the companies give the option to their employees, instead of high salary, to save high cash outflows, as the resources are limited in the initial phase. ESOPs provide employees with ownership stakes in the company via stocks.

Generally, the taxability of ESOPs arises in the hands of the employee at two stages. Firstly, when an employee exercises his right to apply for the shares under ESOPs and, secondly, when such shares are sold by the employee.

“The Government deferred the payment of income tax on ESOPs for the eligible start-ups. The payment of taxes has been deferred to the earliest of any of the specified events which are the 48 months from the end of the assessment year during which shares were allotted or the date of the sale of such shares by the employee or date of the individual ceasing to be an employee of the concerned employer,” Kumar concluded.

Indian startups differ from conventional businesses. They like to depend on innovation and technology to expand their vision exponentially. Hence, their tax issues differ from other traditional businesses. The govt must bring more ease in the ITR filing procedure for such entrepreneurs. It’s a bubbling sector and can bring a boost to domestic economy is ways more than one.