Government Broadens the definition of Startups

Last Updated at: Oct 06, 2020
Government Broadens the definition of Startups
While announcing the economic relief package, the FM announced on 17th May that India’s robust start-up ecosystem would be linked to the atomic energy sector as well. Technology development centres would be established to foster synergy between tech entrepreneurs and research facilities.


The legislature of India so far has found a way to support and promote startups in the country. It has not just introduced countless advantages for the new businesses and MSMEs (Micro Small and Medium Enterprises) yet has likewise opened different roads for imparting economic support.

In this way, the government of India has as of late announced further help to the Indian startups by extending the definition of new businesses.

Expanding the exposure of startups will assist new companies with raising tax-exempt value subsidising from sponsorers.

Let us comprehend

  • Section 56 (2) (viib) of the Income Tax Act 1961 necessitate companies to pay income tax on finances raised far beyond the market estimation of organisation shares.
  • But, the above assessment provision is not relevant to organisations that fall under the category of startups.
  1. What was the previous definition of a startup?

As per the earlier definition of a startup by Department of Industrial Policy and Promotion (DIPP), a startup is an entity incorporated as a private limited company, an enterprise in a partnership or as an LLP (Limited Liability Partnership) in India whose revenue is up to Rs 25 crores.

An organisation could gain tag of startup till the initial 7 years from the date of its inception.

The corporation could resume being known as a startup if its yearly turnover did not surpass Rs 25 crores.

Previously, the term of a Startup was 10 years from the date of its inception only for the biotechnology division.

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  1. How the definition of a startup is broadened?

With the end goal of upgrading the accessibility of capital for new companies, the government has now broadened the meaning of a startup

  • Now, an entity will be called Startups for a period of 10 years from the very date of its foundation. Prior, this length was 7 years.
  • Similarly, a unit will currently keep on being considered as a Startup, if yearly turnover for any of the financial years from the time of formation of the organisation does not surpass Rs100 crore. Prior this limit was Rs25 crore.
  1. Why the government provided further relaxation to startups?

Previously, there were sure apprehensions with respect to income tax on investments made by the angel investor to the new businesses. This issue must be routed to make simple accessibility of funding to the Start-up firms.

  1. How the government settled these issues?
  • A meeting was assumed on 4th February 2019 with the Startups, all the angel investors, as well as all other stakeholders.
  • The point was to talk about some new measures to address the issue of tax relaxation on Angel investment and comprehend the system to manage it institutionally.

Hereafter, the startup has been re-definition and broadened so as to determine this issue.

  1. Which startups are eligible for income tax exemption?

New companies will profit the exclusion u/s 56 (2) (viib) of the Income Tax Act 1961 if it’s a private limited acknowledged by the Department for Promotion of Industry and Internal Trade (DPIIT).

It ought not to have put resources into any of these properties:

  • Land or house for private reason. In any case, this excludes the land or building that is leased or held as stock-in-exchange over the span of business
  • A non-private property, with the exception of those involved for business or in the event that it is leased, or held as stock-in-exchange, throughout the business.
  • Any Loans or advances, aside from those given while the business is active by a Startup held with cash loaning considerably.
  • The capital investment  made to some other unit or organisation
  • Shares and deposits;
  • A vehicle, aeroplane, yacht or some other means of transportation, the genuine expense of which surpasses Rs10 lakh. This is exclusive of those vehicles which are held by Startups for handling, renting, leasing or as stock-in-exchange, in the standard course of business
  • Ornaments with the exception of those held as stock-in-exchange by the Startups over the span of the business.
  • Any other sort of property or asset, regardless of whether a capital resource or something else, whose nature is one indicated in section 56 (2) (vii) clause (d) sub-clauses (iv) to (ix) of the Income Tax Act 1961. This incorporates the accompanying resources
    • Antique collection
    • Sculpture
    • Drawings
    • Painting
    • Any other artwork
    • Ingots (gold and silver)

The new businesses can benefit these exclusions during ITR filing.

  1. How much equity funding is exempted from tax?

Assets up to Rs 25 crore, which the qualified new businesses received for the shares imparted or which are intended to be issued are currently exempted. These exclusions can be profited while annual assessment forms filing.

  1. Whether listed organisations can benefit this tax exemption?

Certainly. The assets that the qualified Startups received for the offers issued or intended to be issued to a recorded organisation that has total assets of ₹100 crore, or turnover above ₹250 crore are additionally exempted