Streamline your tax compliance with our expert-assisted GSTR 9 & 9C services @ ₹14,999/-

Tax efficiency, interest avoidance, and financial control with advance payment @ 4999/-
ITR

Startups Can Continue to Enjoy their Tax Holiday!

The coronavirus pandemic dealt a heavy blow to businesses across the country, leading to the government working overtime to provide support to such companies. One of the most prominent schemes enacted has been the tax holiday for startups. 

Businesses of all sizes and types have been having a tough year courtesy of the coronavirus pandemic. Throughout the past year, the government has enacted various schemes to provide tax holidays for startups as a form of relief during these troubled times. This has proved to be quite successful. 

Let us now take a closer look at the Startup India campaign launched by Prime Minister Narendra Modi in 2016 and the start-up tax holiday facility offered by the government.

What is the Startup India Campaign?

The Startup India campaign was an initiative launched to boost commerce and entrepreneurship in India. The initiative helped young businesses by providing them with the required finance and simplifying the process of incorporation. Additionally, such startups received various monetary benefits such as tax breaks and subsidies. 

During the past year, the government also proposed a tax holiday for startups in India to ensure they get some financial relief. 

Unlock Financial Success With Our Unparalleled Accounting Services – Your Gateway to Streamlined Bookkeeping and Prosperity.

Eligibility For Startup India

Not all benefits and exemptions are available to all Startup in India. Here is a quick look at the eligibility criteria that the startups have to meet to receive benefits under the Startup India Program.

  1. The startup must have their registration or incorporation in India
  2. Been operational for less than seven years for normal companies and up to ten years for biotechnology companies
  3. Annual turnover must not have exceeded ₹25 crores in any financial year
  4. Must be working towards commercialisation, development, deployment, or innovation of new products, intellectual property, technology, or services
  5. Additionally, must not have been formed as a reconstitution, reshuffle, or split up of a business in existence
  6. Must obtain certification from the concerned Inter-Ministerial Board 
  7. The startup may be incorporated as a limited liability partnership, partnership firm, or Private limited company.

Tax Holidays and Exemptions for Startups 

The Startup India program offers the following tax holidays and extensions to eligible startups in India:

1. Three-year Tax Holiday

Startups incorporated between 1 April 2016 and 31 March 2021 are eligible for a 3-year tax holiday within seven years of incorporation. Budget 2021 further extended the eligibility for this tax holiday for startups to 31 March 2022. 

The eligible startups will receive a 100% tax rebate on whatever profit they have made for three years as long as their annual turnover does not exceed ₹25 crores. This will make it easier for startups to meet their working capital requirements and ensure fluid cash flows.

2. Long-term Capital Gains Tax Exemption

As per the new Section 54EE which was inserted into the Income Tax Act: https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx, certain eligible startups will be exempt from paying tax on a long-term capital gain. To avail of this benefit, the long-term capital gain or at least a part of it must have an investment as stated by the central government within six months of receiving it. 

The maximum amount which can be saved in this way is ₹50 lakhs. Additionally, the invested sum must remain in the fund for at least three years. Withdrawal within that period will lead to the exemption being revoked.

3. Exemption on Investments Exceeding the Fair Market Value

The Indian government has also exempted startups from having to pay taxes on investments valued above the fair market price. These may include investments made by family or any other angel investor. However, it does not include the funds received through registered venture capitalists. Similarly, investments received from incubators at a price above the fair market value are also exempt. 

4. Exemption Under Section 54GB

Long-term capital gains received on the sale of residential property were exempt from taxation if invested in a small or medium enterprise. This is possible through Section 54GB of the Micro, Small and Medium Enterprises Act, 2006. The government recently amended this section to extend the exemption to investments in eligible startups as well. 

Empower your financial decisions. Estimate your income tax with our intuitive Tax Calculator India.

If a HUF or individual invests the capital gains earned in buying 50% or more shares of an eligible startup, they will be exempt from paying long-term capital gains tax. However, to avail of the benefit, they must ensure that they do not sell or transfer these shares within 5 years of acquisition. 

The startups may use this amount to purchase assets that they cannot transfer for five years from the date of purchase. Not only will this exemption boost investment in small startups; but it will also help such businesses to expand and grow.

5. Setting off Carry Forward Losses and Gains

Eligible startups can carry forward losses if all shareholders who have voting power hold their shares on the last day of the year in which the loss is forwarded. Additionally, the restriction of requiring 51% voting rights to be left unchanged as per Section 79. But eligible startups might enjoy some relaxation.

Extension of Tax Holiday for Startups in India

Finance Minister Nirmala Sitharaman announced that startups would receive extended tax holidays as a means to help them amid the coronavirus pandemic. The tax holiday for startups has been extended by an additional year till 31 March 2022 as per Budget 2021. The extension on capital gains extents for an additional year. 

The definition of ‘small companies’ as per the Companies Act, 2013 will undergo a revision to include those with paid-up capital. Additionally with an annual turnover below ₹2 crores and ₹20 crores. This update will benefit over 2 lakh companies, making it easier for them to receive investments and maintain compliance.

Additionally, the government has empowered one-person company by allowing them to grow without restrictions on paid-up capital and turnover. Such companies will also have the power to convert into any other legal entity at any time. 

The extension of the startup tax holiday for an additional year will be crucial for startup growth in India. This move provides startups with an opportunity to grow sustainably and enrich the economy during such troubling times. The government has lowered the residency limit for NRIs from 182 days to 120 days to further incentivise investments. 

Impact of a Tax Holiday For Startups in India

The proposed tax holiday will be available only to around 500 startups in India as per financial experts. To be eligible for such benefits, startups must be certified by the Department for Promotion of Industry and Internal Trade. As a result, over 40,000 recognised startups that require such aid will not receive the benefits as they are not certified by the DPIIT. 

Under the Startup India Program, only startups that meet all the criteria prescribed under GSR notification 127 (E) will receive recognition and certification. After receiving recognition under the program, startups may apply for exemption as per Section 80 IAC. However, financial experts have praised the move to extend tax holiday for startups as an effective method of reinvigorating the economy.

Read More:


Subscribe to our newsletter blogs

Back to top button

Adblocker

Remove Adblocker Extension