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- MEANING OF A START-UP (as defined by DIPP in its latest notification dated 11th April, 2018)
(a) An entity shall be considered as a Startup:
- Upto a period of seven(7) years from the date of its incorporation/registration
(In the case of Start-ups in the biotechnology sector, the period shall be upto ten years from the date of its incorporation/ registration)
- It should be incorporated as:
– a Private Limited Company (as defined in the Companies Act, 2013), or
-a Partnership firm (registered under section 59 of the Partnership Act, 1932), or
-a Limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
- Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded Rs. 25 crore.
- Entity is working towards:
-Innovation, development or improvement of products or processes or services,
-if it is a scalable business model with a high potential of employment generation or wealth creation.
Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered ‘Startup’.
- If a person registers a company by converting its existing Proprietorship or Partnership, the resulting entity shall not be considered as a Startup.
- If a company is formed by splitting an existing company, the resulting entity shall not be considered as a Startup.
- A company shall cease to be a Startup on date of completion of seven years from the date of its registration.
- A company shall cease to be a Startup once its Turnover for any previous year exceeds Rs. 25 Crore.
- As per the definition, a conventional business can also become a Startup if it’s scalable and has a potential to generate employment or high returns.
- PROCESS FOR OBTAINING RECOGNITION AS A START-UP:
Step 1: Make an online application on Website of Startup India Action plan i.e. https://www.startupindia.gov.in
Mobile Phone Application of Startup India Action Plan
Step 2: Submit the following documents and details along with the application:
- Copy of Certificate of Incorporation or Registration, as the case may be
- Write up on nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services
- its scalability in terms of employment generation or wealth creation.
Step 3: DIPP shall, after reviewing the documents and calling for more information, if required, accept or reject the application.
- APPLYING FOR TAX BENEFITS:
- Obtaining Startup recognition and tax benefits are two separate processes.
- An applicant has to apply for Startup recognition first.
- Only after obtaining the startup recognition, an entity can apply for tax benefits.
- Application for obtaining Tax benefits shall be made separately after obtaining the recognition.
- The Startup seeking Tax benefits should be registered on or after 1st April, 2016 but before 1st April, 2021
- Section 80-IAC of the Income Tax has been inserted to provide tax benefits to a Startup.
Step 1: After obtaining Startup recognition, an entity shall get account access to the web portal of Startup India Action Plan. Login credentials are sent through mail to the applicant once it’s recognised.
Step 2: After login, a recognised start-up can apply for tax benefits.
Step 3: the application for Tax benefit shall be reviewed by the Inter-ministerial Board (“Board”) of Certification comprising of 8 members from various regulatory bodies.
Step 4: The Board shall, after reviewing the documents and calling for more information, if required, accept or reject the application.
- TAX BENEFITS:
- No Tax for 3 consecutive years: Tax deduction of an amount equal to 100 % of the profits and gains for any 3 consecutive assessment years out of 7 years beginning from the year in which the eligible start-up is incorporated.
- Tax exemption on investments above the fair market value:
- No tax on the value of investments above the fair market value in eligible start-ups.
- Clause (viib) of sub-section (2) of section 56 of the Income Tax Act.
- Such investments include investments made by resident angel investors, family or funds which are not registered as venture capital funds.
- Investments made by incubators above fair market value is also exempted
A separate application in Form -2 (available on Startup India website) has to be made for claiming this exemption.
Requirement for claiming this exemption:
i) the aggregate amount of paid up share capital and share premium of the start-up after the proposed issue of shares does not exceed Rs 10 Crore,
ii) the investor/ proposed investor, who proposed to subscribe to the issue of shares of the start-up has,
(a) the average returned income Rs. 25 Lakhs or more for the preceding three financial years;
(b) the net worth of Rs 2 Crore or more as on the last date of the preceding financial year, and
iii) the startup has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11UA of the Income-tax Rules, 1962.
- Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Start-ups u/s 54GB
if an individual or HUF sells a residential property and invests the capital gains to subscribe the 50% or more equity shares of the eligible start-ups, then tax on long term capital will be exempted provided that such shares are not sold or transferred within 5 years from the date of its acquisition.
The start-ups shall also use the amount invested to purchase assets and should not transfer asset purchased within 5 years from the date of its purchase.
- Tax exemption on Long-Term Capital Gains:
Section 54 EE has been inserted in the Income Tax Act for the assesse to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by Central Government within a period of six months from the date of transfer of the asset.
The maximum amount that can be invested in the funds is Rs 50 lakh. Such amount shall remain invested in the specified fund for a period of 3 years.
If withdrawn before 3 years, then exemption will be revoked in the year in which money is withdrawn.
- Carry forward and set off of loss in case of eligible start-ups:
Carry forward and set off of loss not available to companies in which shareholding of the existing shareholders (year in which loss was incurred) falls below 51% in the year in which loss is to be carry forward.
Finance Act, 2017 amended section 79 to provide Carry forward and set off of loss in start-ups.
This provision is applicable in the case of a company, not being a company in which the public are substantially interested and being an eligible start-up.
The carry forward of losses in respect of eligible start-ups is allowed if all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of previous year in which such loss is to be carry forward.
The restriction of holding of 51 % of voting rights to be remaining unchanged u/s 79 has been relaxed in case of eligible Startups.
- As per the status report issued by DIPP on 4th January, 2018, out of 6096 recognised Startups, only 74 Startups were approved for availing tax benefits by IMB.
- As per an article issued on Moneycontrol.com on 5th April, 2018, only 88 Startups have got tax benefits out of 8765 recognised Startups – Source: DIPP Secretary Ramesh Abhishek
- IMB seeks various rounds of information and details before approving a startup for providing Tax benefits. All startups are not getting these benefits.
- True Innovativeness, scalability and employment generation are the only criteria for giving tax benefits. IMB rejects the application if similar ideas and business already exists and no proper justification is furnished to IMB regarding it.