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Tax Exemptions For Startups In India


Given all the anticipation built up around Budget last year, the actual announcement may have been a tad anticlimactic - especially on taxation issues.

Although startups can now avail income tax exemption for three years in a block of seven, many industry leaders, investor groups and startups feel there is little to celebrate in this development since most startups take a lot more time to just equalize their balance books.

Startup India has faced a series of allegations since its very inception. Right from the day the scheme was announced a lot has been written and spoken against the campaign.

There are reports from Forbes which state that 90% of the startups will fail within one year of their incorporation. Another report by Quartz India reveals that “Almost half-way into plan tenure, just over 10% of the total fund has been released. As on Dec. 18, Rs. 605.7 Crore has been committed by SIDBI and Rs. 90.62 Crore disbursed to 17 Alternative Investment funds (AIFs), who in turn have invested Rs. 337.02 Crore in 75 startups.”

Another report by Business Standard writes, “Many companies lured by the attraction of B2C commerce have fallen by the wayside, and the success stories of entrepreneurial ventures in other consumer and business sectors have been few and far between.”

Is Startup India All That Bad?

It was in January 2016 when the ambitious Startup Scheme was first launched; the government received a lot of appreciation both from the aspiring founders and the investors. The tax exemptions, patent reforms, incubation programmes under the said scheme seemed promising and were aimed at encouraging the budding entrepreneurs. With the reduction in red tape and establishment of startup hub, it was expected that there would be excellent assistance provided too.

As per this article, “Startup India in January 2016 through its aggressive policies and incentives promised to provide any such assistance to such entrepreneurs. However, it failed miserably. Even after 2 years, Startup India doesn’t seem to be coming close to providing such assistance. It wouldn’t be entirely wrong to say that such flawed operations and inactive approach have only resulted in a handful of startups becoming successful.”

The only way that individuals have been able to keep themselves abreast with the new changes and policies is by either speaking to other entrepreneurs or by reading the endless content on the internet. In either case, they are often misguided or left confused. The ones which are a step ahead are taking up online courses which give them comprehensive guidance on everything they need to know. Apart from this one failure of proving the required assistance, the Startup India scheme does not seem too bad.

There is a specific action plan which is designed by the government with an aim to promote financing, provide tax exemptions, and face various challenges amicably.

However, all such benefits and exemptions are restricted to only eligible startups.

Is Your Startup Eligible For Gaining The Benefits Under Startup India?

Startup India has certain eligibility brackets that one must fall under to avail any benefits. Here are the conditions that need to be fulfilled before any business is eligible for the exemptions and incentives:

  • If you are incorporated with an aim to work towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
  • If you are incorporated as a private limited company, registered partnership firm or a limited liability partnership (and you are not a product of corporate restructuring).
  • If you are incorporated or registered in India for a period not exceeding 7 years.
  • If you are a biotechnology startup, you need to be incorporated for a period not exceeding 10 years.
  • If your annual turnover has not exceeded Rs. 25 Crores in any of the preceding financial years.
  • If you have obtained clearances from the Inter-Ministerial Board setup for operating your business.
  • If you fall into the above categories, you are very much entitled to all the benefits under the scheme. However, these exemptions are on incomes and gains. If you want to know about exemptions that can be availed under GST, you can take up this course to know more.

    What are the tax exemptions I can avail?

    You can avail these exemptions:

    1. Enjoy a tax holiday for 3 years!

    This exemption is provided to ensure that you are able to meet the working capital requirement in a block of 7 years. If you are a startup that has been incorporated after 1st April 2016, you are eligible to get a 100% tax exemption for a period of three years, provided that your annual turnover has not exceeded Rs. 25 Crores in a financial year in this span of these 3 years.

    2. Get exemption on long-term capital gains!

    Section 55 EE has been inserted in the Income Tax Act to ensure that an eligible startup can claim tax exemptions on a long-term capital gain. However, this is subject to whether such a capital gain or a part thereof is invested in a fund notified by the Central Government in a span of 6 months from the date of transfer of the asset. This exemption is subject to a limit of Rs. 50 Lakhs only. It is a prerequisite that such amount is invested in the specified fund for a minimum period of three years. If the fund is withdrawn anytime before that, the exemption is liable to be revoked on the amount withdrawn.

    3. Investment above the market value? All hail exemption!

    If you are an eligible startup, then you can avail exemptions on the investments which are above the fair market value. These investments include, and are not restricted to, resident angel investors, family funds or the funds which are not registered as venture capital investments. In addition to this, the investments which are made by any incubator above the fair market value are also exempted under the Startup India scheme.

    4. HUF or individual? Claim exemption on long-term capital investment in equity shares!

    Section 54 GB of the Income Tax Act, exempts a HUF or an individual’s long-term capital gains arising out of the sale of residential property, if the said gains are invested in a small or medium enterprise as defined under the Micro, Small and Medium Enterprises Act, 2006.

    To ensure that such an exemption is provided in the startups also, this section has been amended accordingly. As per the new amendment, if an individual or a HUF sells its property to invest in a startup’s 50% or more equity shares, then they are eligible for tax exemption on long-term capital investment.

    The condition to claim such exemption is that the shares are not sold for 5 years from the date of acquisition. The startups are also required to use the invested amount to purchase assets and not transfer the asset for a similar period.

    Although, this year budget has very little to be rejoiced by Indian startup ecosystem as startups are not given its due importance by FM in Budget 2018. Nevertheless, there is little positive news for startups via this year budget, and this is — time for claiming a tax holiday/exemption by eligible startups has been extended till April 1 2021.

    Earlier, eligible startups could claim deduction for three out of seven years, if incorporated between April 1, 2016 and April 1, 2019. This has been extended by two more years to April 1, 2021.

    Although startups can now avail income tax exemption for three years in a block of seven, many industry leaders, investor groups and startups feel there is little to celebrate in this development since most startups take a lot more time to just to break even.

    Moreover, only those startups that have been incorporated after April 1, 2016 are eligible for getting 100% tax rebate under this provision, which will further narrow down the number of startups that can fall within its scope.

    In fact, according to a statement by Department of Industrial Policy and Promotion (DIPP), government has selected only 67 startups out of the 671 startups that they were considering for income tax exemption.

    It is undeniable that Startup India has its own set of loopholes, problems, and challenges. However, the only way to deal with a challenge is to find out the possible ways to combat it. The imposition of GST is already a question for many, and to avail tax benefits can certainly be a breather. You can learn much more about tax exemptions, business incorporation, challenges, and solutions by being smart and taking an online course which can help you through the thick and thin.


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