A 'relief package' is requested by startups and VCs in India for the disruption caused by Coronavirus India has become the third largest start-up support economy in the world. As it develops, it will soon become one of the world's leading technology startup hubs.
Tax Benefits For Startups In India: In order to promote and nurture startups in India, the government has developed several programs through which they can benefit, including the STARTUP INDIA program. A major objective of this initiative is to create an environment that encourages startups in the country and promotes the advancement of entrepreneurs. Check out the tax benefits available to these startups and how they can utilize these programs to enhance their growth.
Define a startup
Here’s a list of conditions that must be met, to define a company as a startup in India as per the Startup India policy:
- It should have started not earlier than five years since the initiative was given shape.
- The annual turnover of the venture must not exceed ₹ 25 crores.
- The company must be a pioneer in its area of expertise and must be pushing for innovation.
- It must be a new venture and not one formed by the splitting up or revamping of an earlier enterprise.
Tax Exemptions
Startup programs help entrepreneurs by providing them with several tax benefits, and those which function as private limited companies, limited liability partnership or Partnership firms may also be eligible for other benefits as per the schemes available to them.
First three years
- Startups are eligible for 100% exemption of tax excluding the Minimum Alternate Tax (MAT) which will follow the 18.5% of the profit as stated in the books, on earnings for the first three years.
- To qualify, startups must be registered with the Department of Industrial Policy and Promotion (DIPP). Such a benefit helps startups as the business set up costs is in itself a substantial financial burden on entrepreneurs and hence, getting away without having to pay tax for three years will help them balance out their expenditure and break even sooner, leading to higher profits later on.
Funds
Another benefit provided by the government to help startups is a fund which has an initial corpus of ₹ 2500 crores and a final corpus of ₹ 10000 crores lasting four years. This comes under the Funds of Funds (FOF) benefit which will serve as the direct investment under the direction of SEBI and will only apply to startups registered under DIPP.
With financial shortage being the most prominent problem faced by companies early on in their journey, such a benefit comes as a welcome relief for many and will serve as a considerable accelerator for the growth of such ventures.
Capital Gain Tax
Companies raise capital through sharing stock and the profits earned by engaging in such dealings are known as capital gains and thus are eligible to be taxed. Startups receive an exemption of 20% of their capital gains resulting in them having to pay less tax on profits earned through the sales of stocks, bonds and shares.
Angel Investment Tax
Investments serve as significant sources of funding for entrepreneurs, but when a venture starts, it might not be able to capture the trust of investors and hence might not be able to find a large number of brokers and investors who are ready to spare their cash. ]
Consequently, entrepreneurs are left with no choice but to approach angel investors who negotiate with the entrepreneur on terms regarding interest and amount payable. The government in a bid to help entrepreneurs gain access to the capital they require has abolished the, thereby making investments made by angel brokers non-taxable.
The amendment of Section 56(2) (vii) (b) of the Income Tax Act has also given entrepreneurs the right to issue shares at a higher rate than the value noted in the books, helping them raise funds with more ease.
Other Provisions
Apart from such tax benefits, the government has introduced several provisions that help and support entrepreneurs in the country. Some of these are as follows.
- Funds up to ₹ 500 crores have been set aside to help support entrepreneurs who belong to the Schedule Tribe and Scheduled Caste sect and also to help Women Entrepreneurs.
- Lowering of Long-term capital gains from three to two years
- Amendment of the Motor Vehicle Act to encourage entrepreneurship
- Presumptive tax schemes for companies whose turnover falls below ₹ 2 crores while these schemes were earlier available to businesses whose turnover fell below ₹ 1 crores.
- Employee Provident Fund provision for the first three years.
Conclusion
Indian government officials have realised that the best way to push innovation forward is to help entrepreneurs with their taxation related woes. All the provisions stated above help entrepreneurs avail tax benefits and gain funds and in the long run, help them establish self-sustainable companies.
FAQs
When should a business apply for multiple GST registrations?
A business operating from two or more cities is eligible to apply for separate GST registrations for each vertical of the business. Understand the procedure for GST registration and GST returns here.
What is the purpose of registering your business under MSME?
MSME stands for Micro, Small and Medium Enterprises. MSME Registration is not mandatory by the Government but is beneficial in terms of credit facilities, startup business, taxation, loans, etc.What is a return of income?
It is the refund amount that a tax payee can claim from the income tax department. One has to file different forms for the income tax returns.
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