ITRTaxation

Startups to Continue Receiving a 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 to extend the tax holiday for startups for an additional year. Read on to learn more about the Startup India campaign and how the tax holiday extension will help companies.

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Businesses of all sizes and types have been having a tough year courtesy of the coronavirus pandemic. The Indian government has been working overtime to ensure that such companies get the support they need to make it through the crisis. 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. The major move of extending the startup tax holiday for an additional year has proved 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 extension offered by the government.

What is the Startup India Campaign?

The Startup India campaign is an initiative launched in 2016 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 proposes a tax holiday for startups in India to ensure they get some financial relief. 

Eligibility for Startup India

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

  1. The startup must have their registration in India.
  2. Been operational for less than seven years for normal companies and up to ten years for biotechnology companies.
  3. Must not have been formed as a reconstitution, reshuffle or split up of a business in existence. 
  4. Annual turnover must not have exceeded INR 25 crores in any financial year.
  5. Must be working towards commercialisation, development, deployment or innovation of new products, intellectual property, technology or services.
  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.

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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. Hence, 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 INR 25 crores. Such a start-up tax holiday 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 54 EE which was inserted into the Income Tax Act, certain eligible startups will be exempt from paying tax on a long-term capital gain. However, to avail of this benefit, the long-term capital gain or at least a part of it must invest in a fund that states by the Central Government within six months of receiving it. The maximum amount which can be saved in this way is INR 50 lakhs. Additionally, the invested sum must remain in the fund for at least three years with withdrawal within this said period leading 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 tax 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 was 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.

Hence, 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 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. 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 on the last day of the year hold their shares on the last day of the year in which the loss is forwarded.

Extension of Tax Holiday for Startups in India

Finance Minister announced that startups would receive extended tax holidays as a means to help them amid the coronavirus pandemic. The tax holiday for startups can have extension by an additional year till 31 March 2022 as per Budget 2021.

The extension on capital gains has also been extended for an additional year. Additionally, the definition of ‘small companies’ as per the Companies Act 2013 will undergo a revision to include those with paid-up capital and annual turnover below INR 2 crores and INR 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 companies 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 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 extension of the capital gains tax exemption will incentivise funding of startups significantly. To further incentivise investments, the government has lowered the residency limit for NRIs from 182 days to 120 days. 

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 recognise; and certify 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 criteria under GSR notification 127 (E) will receive recognition and certification. After receiving recognition under the program, startups may apply for an exemption. This is as per Section 80 IAC or Section 56 of the Indian Income Tax Act. However, financial experts appreciate the move to extend tax holiday for startups as an effective method of reinvigorating the economy.

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