11 Jun 2019, 10:15 — 7 min read
Background: Launched in the year 2016, the Startup India initiative has since then introduced a large number of schemes for the startup community in India. From making the process of startup registration easier, making funds easily accessible, to finance and tax benefits, the initiative has been helping startups grow. Vakilsearch in their previous article shared some important points that traders need to keep in mind while filing their income tax and tax returns. In this article they share the various tax benefits for startups listed under the Startup India program.
India is growing and has already become the third largest startup supporting economy. It is developing day by day and will soon become the most prominent tech startup hub in the world. To encourage and nurture startups in India, the government has announced several programmes through which they can avail benefits, one of them being the Startup India programme. The main aim of this initiative is to create an environment that helps startups in the country and pushes for the progress of entrepreneurs. Here’s a look at the tax benefits these startups can avail and how they can use these programmess to fuel their growth.
Definition of 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 programme:
Startup programmes 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 to 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 avail of this benefit, the startup must be registered under the Department of Industrial Policy and Promotion (DIPP). It must also be one that pushes for innovation and development of new products and services related to intellectual property. Such a benefit helps startups as the cost of setting up 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.
Startup programmes help entrepreneurs by providing them with several tax benefits and entities which function as private limited companies, limited liability partnership or partnership firms may also be eligible for these benefits.
Another benefit provided by the government to help startup is a fund which has an initial corpus of INR 2500 crore and a final corpus of INR 10,000 crore 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 is 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 relaxed norms for startups facing the Angel Tax burnt, 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.
Apart from such tax benefits, the government has introduced several provisions that helps and supports entrepreneurs in the country. Some of these are as follows.
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.
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Posted byVakilsearch Staff
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