Section-80-IAC

Section 80-IAC: Tax Incentives for Startups

Section 80-IAC: Tax Incentives for Startups

To initiate the development of startups in India and provide a competitive platform for businesses which are newly established to thrive amidst the aggressive business atmosphere, the Government of India has introduced Section 80-IAC in the Income Tax Act. Section 80-IAC mentions that an eligible startup shall be allowed a deduction of an amount equal to 100 per cent of the profits and gains. With the intention to promote job-creating entrepreneurs, this section was promulgated as part of the Finance Act of 2016 and was later amended in the Finance Bill of 2018.

To avail the deductions offered by this section, a startup should engage in the eligible business for three consecutive assessment years out of seven years (five years until the assessment year 2017-18) beginning from the year in which the qualified startup was incorporated. To provide a useful incentive for startups and aid their growth in the early phase of businesses, a new known as Section 80-IAC has been introduced. Accordingly, a deduction of 100 per cent of the profits and gains derived by an eligible startup from a qualified business is allowed for any three consecutive assessment years among the five years beginning from the particular year in which the eligible startup is incorporated. This article briefly discusses Section 80-IAC of the Act, that offers tax incentives for startups in India.

Requirements

The incentives mentioned in this section are available to an eligible startup which fulfils the following conditions:

Timeline

With effect from the assessment year 2018-2019, the benefit would be open to startups incorporated on after the 1st of April, 2019 but before the 1st of April, 2021. Up to the assessment year 2017-2018, the benefit was available to startups incorporated between the 1st of April, 2016 but before the 1st of April, 2019.

Incorporation and Turnover

The benefit under the section shall be available exclusively upon fulfilment of the following conditions:

  • If the business is incorporated as a Limited Liability Partnership (LLP) or a Company.
  • If the total turnover of the business does not exceed INR 20 Crores in any of the prior years beginning on or after the 1st of April, 2016 and ending on the 31st of March, 2021.

Taxpayers should note that the requirement of the turnover not exceeding INR 25 Crores would apply to seven previous years commencing from the date of incorporation. Further, turnover should not exceed the prescribed limit of INR 25 Crores for the year for which the startup claims the 100 per cent deduction.

Nature of the business

The business enterprise is engaged in an eligible business that is involved in innovation, improvement of products or development of processes or services, or a scalable business model with a high potential of employment generation or wealth creation, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.

Structure of the Incorporation

The startup should not be formed by splitting up, or the reconstruction, of a business that is already in existence. However, this condition shall not apply in respect of a startup which is formed as a result of a re-establishment, reconstruction, revival or reconstruction by the assessee of the business of any such undertaking as stated in Section 33B, in the circumstances and within the period specified in that section.

Plants and Machinery

The business enterprise should not be formed by a transfer to a new business of machinery or plant previously used for any purpose. However, any machinery which was used outside India by any individual other than the assessee shall not be regarded as machinery or plant used in prior for any purpose, if all the following conditions are fulfilled, namely:

  • If the machinery or plant was not, at any time before the date of the installation by the assessee, used in India.
  • If the machinery or plant is imported into India.
  • No eduction on account of depreciation with respect of such machinery or plant has been permitted or is allowable under the provisions under the Income Tax Act of 1961 in calculating the total income of any individual for any period before the date of the installation of the machinery or plant by the assessee.

Further, wherein the case of a startup, any machinery or plant or any part thereof previously used for the purpose is transferred to new business and the total value of the machinery or plant or part. This should not exceed 20 per cent of the total cost of the machinery or plant used in the business. Then, the condition specified that it should not be formed by the transfer to a new business of plant and machinery used for any purpose shall be deemed to have been compiled.

Certification

The startup should hold a certificate of an eligible business from the Inter-Ministerial Board as published in the Official Gazette by the Indian Central Government:

  • Where “eligible business” means a business which involves innovation, deployment, development or commercialisation of new products, services or processes driven by technology or intellectual property.
  • Where “eligible startup” means a company or a limited liability partnership engaged in an eligible business which fulfils the following conditions.
  • Where “limited liability partnership” means a partnership referred to in clause (n) of sub-section (1) under Section 2 prescribed in the Limited Liability Partnership Act of 2008 (6 of 2009).

Eligibility

Eligible Business Considered as Exclusive Source of Income

As per the Income Tax Act, for computing deduction under this section, the gains and profits of the eligible business shall be computed as if such businesses are the only source of income of the assessee during the relevant previous years.

Audit of Accounts

The deduction shall be allowed only if a chartered accountant has audited the accounts of the startup for the relevant previous year and the assessee furnishes the audit report in the form that is prescribed, and duly signed and verified by such an accountant along with his return of income.

Transfer of Goods/ Services between an Eligible Business and Other Business

For any products or services held for the eligible business are transferred to any other business carried out by the assessee or vice versa. Also, if the consideration for such transfer does not correspond with the market value of the goods or services, then, then profits and gains of the business shall be computed as if the transfer was made at market value. However, if, in the opinion of the Assessing Officer, such computation presents exceptional difficulties, the Assessing Officer may compute the profits on such reasonable basis as the Officer may deem fit.

Deduction not to Exceed Profits of the Eligible Business

The deduction claimed and allowed under this section shall not exceed the profits and gains of the eligible business. Further, where the deduction is claimed and approved under this section for any assessment year, no deduction with respect of such profits will be allowed under any other section under this chapter.

Assessing Officer Empowered to make Adjustments

The Assessing Officer is authorised to make adjustments while computing the profit and gains of the eligible business by the reasonable profit that can be derived from the transaction.  This is in case the transaction between the assessee carrying on the eligible business under Section 80-IAC, and any other person has so arranged that the transaction produces excessive profits to the eligible business. However, if the arrangement involves a specified domestic transaction referred to in Section 92BA, then the number of profits from such transaction shall be determined to have regard to the arm’s length price.

Empowerment of the Central Government

The Central Government is empowered to deny the deduction to any class of startups if the Government is of the opinion that the provisions of the Act are being used to procure an unjust advantage. The section allows the Central Government to declare any class of startup as not being entitled to a deduction under this section. The denial of exemption shall come into effect from the date which is specified in the notification issued in the Official Gazette.

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