Businesses of all types and sizes have been having a challenging time under the pandemic. Throughout the last year, the government has launched several schemes to offer tax exemption to startups as a form of relief during tough times. It has been proven quite fruitful.
Now, let's look into the Startup India campaign launched by PM Narendra Modi in 2016 and the startup tax exemption facility provided by the government.
Defining the Startup India campaign.
It was initially launched to boost commerce and entrepreneurship in India. The initiative helped emerging businesses by offering them with requisite finances and simplifying the incorporation process. Also, such startups received several monetary benefits such as subsidies and tax breaks.
Last year, the government also proposed tax exemption for startups in India to make sure they get some financial relief right from online GST return filing to late return filing.
Eligibility for it.
Exemptions and benefits are not available to all startups in India. Here are the eligibility criteria.
- Startup should have their incorporation and registration in India.
- It has to be operational for not more than seven years for normal companies and up to ten years for biotechnology companies.
- Annual return should not have exceeded Twenty-five crores in any financial year.
- It has to be working towards development, commercialisation, deployment or innovation of new products, IP, services and technology.
- Also, it should not have been established as a reconstitution, reshuffle, or split up of a business in existence.
- It should acquire certification from the concerned inter-ministerial board.
- The startup might be incorporated as a partnership firm, LLP or private limited company.
Tax exemption and holidays for startups.
Three-year tax holiday.
Startups incorporated betwixt the 1st of April and 31st of March 2021 will be eligible for a three-year tax holiday within seven years of incorporation. This year's budget further extended the eligibility for this tax holiday for startups to 31st of March, 2022.
Those eligible startups would receive a total tax rebate on whatever profit they have earned for three years as long as their annual turnover does not go beyond Rs. Twenty-five crores. This would make it easier for startups to meet their working capital demands and make sure fluid cash flows.
Long-term capital gains tax exemption.
According to the latest section 54EE, which was enacted into the income tax act, certain eligible startups would be exempted from paying tax on the long-term capital gain. To be beneficiary, the long-term capital gain or at least a part of it should have an investment as mentioned by the central government within six months of receiving it.
The maximum amount one can save by this way is Rs. fifty lacs. Also, the invested sum should remain in the fund for at least three years. Withdrawal within that period would lead to the exemption being revoked.
Exemption on investments going beyond the fair market value.
The Indian government has exempted startups from paying taxes on investments valued above the fair market price. These might include investments made by the family or any other angel investor. Nonetheless, it does not include the funds received via registered VCs. Likewise, investments received from incubators at a price more than the fair market value are also exempted.
Exemption under section 54GB.
Long-term capital gains received on the sale of residential property were exempted from the purview of taxation if invested in a small or medium enterprise. This is possible via section 54GB of the small, micro, and medium enterprises act 2006. Recently, the government amended this section to extend the exemption to investments in eligible startups as well.
Suppose the person or HUF invests the capital gains earned in purchasing fifty per cent or more shares of an eligible startup; they would be exempted from paying long-term capital gains tax. Nonetheless, to be a beneficiary, they should make sure that they do not sell or transfer these shares within five years of acquisition.
Startups might use this amount to buy assets that they cannot transfer for five years from the date of purchase. It would boost the investment in small startups and help businesses to grow and expand.
Setting off the carry forward of gains and losses.
While it is one of the quick tips that every startup should follow, eligible startups are allowed to carry forward losses. This is only possible if all the shareholders who have voting power hold their shares on the last day of the year in which the loss is forwarded. Also, the limitation of acquiring fifty-one per cent voting rights to be left unchanged according to section 79, but eligible startups can enjoy some relaxation.
Extension of tax holiday.
FM Sitharaman announced that startups would receive extended tax holidays to assist them amidst the pandemic. The tax holidays for startups have been extended by one more year till 31st of March, 2022.
The extension on capital gains has also been extended.
Definition of small companies according to the companies act, 2013 will undergo a revision to include those with paid-up capital. All the restrictions have been removed for one-person companies as well by the government.
Impact of tax holidays.
The proposed tax holiday would be available only to around 500 startups, according to experts in India. For that, startups have to be certified by the department of promotion of industry and internal trade. Under the startup India program, startups that meet all the criteria mentioned under GSR notification 127(E) would receive certification and recognition. Once received, startups might apply for exemption according to section 80 IAC. Nonetheless, financial experts have commended the initiative to extend tax holidays for startups as an efficient method to energise the economy.