To boost and promote entrepreneurship in India, Prime Minister Narendra Modi proclaimed the Startup India campaign in 2016 The action plan aimed at promoting financing for new startups, simplifying the incorporation of the startup process and grant of various tax exemptions and other benefits to startups to help them grow and establish in the market. However, the benefits and exemptions are available to the startups only if they are registered with the Department for Promotion of Industry and Internal Trade (DPIIT) and hence are the DPIIT recognized.
Eligibility Criteria for Startup Recognition
- The Startup should be incorporated as a private limited incorporation or registered as a partnership firm or a limited liability partnership
- Turnover should be less than INR 100 Crores in any of the previous financial years
- An entity shall be considered a startup up to 10 years from the date of its incorporation
- The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth. An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Startup”
Tax Benefits and Exemptions
Income Tax Exemption on profits under Section 80-IAC of the Income Tax (IT) Act
The Inter-Ministerial Board of Certification is a Board set up by the DPIIT which validates Startups for granting tax-related benefits. A DPIIT-recognized Startup is eligible to apply to the Inter-Ministerial Board for a full deduction on the profits and gains from business (exemption under Section 80IAC of the Income Tax Act) provided the following conditions are fulfilled. The entity should be
- A private limited company or a limited liability partnership,
- Incorporated on or after 1st April 2016 but before 1st April 2021, and
- Products or services or processes are undifferentiated, have the potential for commercialization and have significant incremental value for customers or workflow
The deduction is for any three consecutive years out of seven years from the year of incorporation of a start-up.
Tax Exemption on Investments above Fair Market Value
The DPIIT Recognized Startups are exempt from tax under Section 56(2)(viib) of the Income Tax Act when such a Startup receives any consideration for the issue of shares which exceeds the Fair Market Value of such shares. The startup has to file a duly signed declaration in Form 2 to the DPIIT {as per notification G.S.R. 127 (E)} to claim the exemption from the provisions of Section 56(2)(viib) of the Income Tax Act.
Section 54EE in the Income Tax Act, 1961
Exemption from tax on the long-term capital gain if the such long-term capital gain is invested in a fund notified by Central Government. The maximum amount that can be invested is Rs. 50 lakhs.
Section 54GB of the Income-tax Act
Exemption from tax on capital gains arising out of the sale of a residential house or a residential plot of land if the amount of net consideration is invested in a prescribed stake of equity shares of an eligible Startup for utilizing the same for the purchase of a specified asset
- The condition of minimum holding of 50% of share capital or voting rights in the start-up relaxed to 25%
- The period of extension of capital gains arising from for sale of residential property for investment in start-ups has been extended up to 31
Carry forward Losses
Startups can carry forward their losses on the satisfaction of any one of the following two conditions:
- Continuity of 51% shareholding/voting power or
- Continuity of 100% of original shareholders
Important Points:
- Department of Industrial Policy and Promotion, Ministry of Commerce and Industry has not appointed any Agency/Representative/ Franchise for the DPIIT Certificate of Recognition for Startups.
- Application for Startup India Certificate of Recognition should be filed by the Startup on its own, using its own details/ mobile No./ email.
- The Ministry of Commerce and Industry does not charge any fee for the DPIIT Certificate of Recognition for Startups.
- Any charging of fees for Recognition for Startups is illegal and will invite appropriate legal action.
References
- https://www.startupindia.gov.in/content/sih/en/startupgov/startup_recognition_page.html
- https://pib.gov.in/Pressreleaseshare.aspx?PRID=1595854
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