Start-up Without Hiccups – Income-tax Incentives For Start-ups

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The role of Start-ups as  engines of economic growth and in generating employment is increasingly recognized throughout the world.  India is no exception.  Realising the need to nurture Start-ups at their infant stage, the Government of India is implementing a plethora of schemes under Start-up India initiative launched on 16th January, 2016 like simplification of process of registering, funding support, etc., to enable Start-up to build sustainable business model.  The main challenge any Start-up face in the initial year of its establishment is to mobilize funds or in other words, to attract investment.  Here, tax policy plays a significant role in incentivising investors and also in encouraging budding entrepreneurs to turn their Start-up dream into reality. 

Let us examine the income-tax incentives available to Start-ups as codified in the Income-tax Act, 1961. 

First and foremost is Section 80-IAC of the Income-tax Act, 1961.  This section provides 100% tax exemption on profits earned by eligible businesses for three consecutive assessment years out of seven years starting from the year in which the Start-up was incorporated.  A Start-up certified by an Inter-Ministerial Board, is treated to be an ‘eligible business’ for sec. 80-IAC if its business involves innovation, development or commercialization of new products, services or process driven by technology.  Further, to avail this benefit, the Start-up should be a private limited company or partnership firm or LLP and should be incorporated on or after 1st April 2016 but before 1st April 2021.  Here, it is important to note that the sec. 80-IAC is aimed at encouraging small Start-ups and there is a difference between small Start-up as per the Department for Promotion of Industry and Internal Trade (DPIIT) and Central Board of Direct Taxes (CBDT).  The investors and enterprises should take note of the difference in definition as it would avoid unnecessary litigations in future.  A small Start-up, as per CBDT, is one with turnover of up to Rs.25 crores and as per DPIIT it is one with turnover of up to Rs.100 crores.  The CBDT in a statement has recently clarified that a small Start-up with turnover of up to Rs.25 crores will get the promised tax holiday.

Another provision in the Income-tax Act, 1961, which has perennially irked entrepreneurs and investors is section 56(2)(viib), wherein “angel tax” is levied in cases where investors invest in Start-ups at premium over the book value of shares.  To enable a healthy investment climate to the Start-ups, the Government has announced that sec. 56(2)(viib) of the Income-tax Act, 1961, shall not apply to Start-ups recognized by the DPIIT and in whose case aggregate amount of paid-up share capital and share premium after issue or proposed issue of shares, does not exceed Rs.25 crores.

Further, in order to incentivize investment in eligible Start-ups, it is proposed to amend section 54GB of the Income-tax Act, 1961, w.e.f. 1st April 2020, to exempt proceeds on sale of residential properties from capital gains tax if it is utilized for funding Start-up.

In addition to the above incentives, the CBDT has recently constituted a Start-up Cell to redress the grievances and address various tax related issues.

To conclude, even though tax incentives help in nurturing the Start-ups in the initial stage, whether the Start-up will script a success story or end with a whimper depends on how effective a Start-up is able to understand the market and cater to the needs of the customers at competitive prices.

 (The Writer is Joint Commissioner of Income Tax. Views are personal.)

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