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Recognition and Benefits for Startups Including Tax Benefits

Written by gkkedia Dt. August 13th, 2020

Start UP India Scheme is an initiative of the Central Government with the aim of strengthening the economy through innovation, sustainable growth &large scale employment opportunities.

Eligibility Criteria for Startup Recognition:

  • The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership.
  • Turnover should be less than INR 25 Crores in any of the previous financial years.
  • An entity shall be considered as a startup up to 10 years from the date of its incorporation for Biotech ones and 7 years for others.
  • 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 (merger/demerger) or reconstruction of an existing business shall not be considered a “Startup“.

Startup India: 80 IAC Tax exemption:
Post getting recognition a Startup may apply for Tax exemption under section 80 IAC of the Income Tax Act. Post getting clearance for Tax exemption, the Startup can avail tax holiday for 3 consecutive financial years out of its first ten years since incorporation.

Eligibility Criteria for applying to Income Tax exemption (80IAC):

  • The entity should be a recognized Startup .
  • Only Private limited or a Limited Liability Partnership is eligible for Tax exemption under Section 80IAC.
  • The Startup should have been incorporated after 1st April, 2016.

Relief from Angel Tax u/s 56(2) (vii b):

  • Start-up should be registered with DPIIT (‘eligible startup’ not required)
  • It’s aggregate amount of paid-up share capital and share premium after issue or proposed issue of shares, does not exceed 25 crore. While calculating this threshold limit, issue of shares to following persons shall not be included:
    1. A non-resident person
    2. Venture capital company/ fund
    3. Any listed company
    4. A specified company whose net worth exceeds Rs. 100 crore or turnover exceeds Rs. 250 crores for the financial year preceding the year in which shares are issued.

Relief for set off and carry forward of losses u/s 79:

  • Finance Act, 2019 has relaxed the conditions for carry forward and set off of losses in case of the eligible start-ups.
  • It has been provided that losses incurred within 7 years of incorporation by the closely held eligible startup, shall be allowed to be carried forward and set off against the income of the previous year on satisfaction of either of the two conditions , i.e. continuity of 51% shareholding, or continuity of 100% of original shareholders (irrespective of the shareholding they hold).

Reduced tax rate on royalty income from patents u/s 115BBF:
Section 115BBF is beneficial for startups not registered under the Startup India Program and who have patents developed and registered in India. For innovative products startups with a portfolio of granted patents who missed the Startup India Program scheme can make use of this opportunity under Section 115BBF at a concessional rate of 10% on royalties arising from licensing, sale or other commercial exploitation of patents developed and registered in India.

Other benefits for start-ups:
Simple Going Approach: In start-ups fancy or attractive ideas will not work to increase in production. The best way to expand the business is to keep everything simple.

Fast processing: This is the one of the main advantage of startup companies that they are ready to take risks as compare to bigger organizations and implement their ideas and strategies quickly and because of this reason they succeed faster as compared to bigger organizations.

Easy Collaboration: In start-ups, it is easy to collaborate with companies at multinational level. This will increase the amount of profit and opportunities to establish their brand name on a bigger platform.

Conclusion: Nowadays , Government of India is taking a great interest in promoting startups so as to encourage young minds in doing so .This will enable national and international stakeholders to go hand in hand .This will provide huge networking opportunities.

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