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Startup tax exemption

Startup Tax Exemption under Startup India Initiative

Startup Tax Exemption under Startup India Initiative

Startup tax exemption is one of the major highlights of the Startup India Action Plan unveiled by The Prime Minister Shri. Narendra Modi at the Startup India event held in Delhi on 16th January, 2016. Tax exemption for startup is provided under three different schemes and in this article, we look at those tax exemptions for Startups in detail.

Three Year Tax Exemption for Startups

Startups in their initial years, struggle with cash flow as they work on turning ideas into commercially viable products or services. Bootstrapped startups incur expenditure in terms of rental, equipment, salaries, taxes and more, which are most often funded by savings of the Entrepreneur. To provide better chances for Startups to succeed and to increase the number of Entrepreneurs, it is important for the Government to reduce burden on the Entrepreneur.

Thus, Startup India Action Plan has announced a three year income-tax exemption for Startups to help them grow and meet their working capital requirements during the initial years of operations. The startup income tax exemption is subject to the non-distribution of dividend by the Startup.

Tax Exemption on Capital Gains

Equity funding for startups is limited in India as it is a new concept gaining traction just over the last few years. Also, due to the high risk nature, startups find it hard to attract investment in its initial stage. Hence, to provide an impetus to investors to invest in Startups and to create a vibrant investor community, the Startup India Action plan has announced tax exemption on capital gains. Under this scheme, tax exemption will be given to persons who have capital gains during the year, if they have invested such capital gains in the Funds of Funds recognized by the Government. This is help increase the funds available with various VCs and Angel Funds, thereby providing better availability of capital for Startups.

In addition, existing capital gain tax exemption for investment in newly formed manufacturing MSMEs by individuals shall also be extended to all Startups. Currently, such an entity needs to purchase “new assets” with the capital gain received to avail such an exemption. Under the new tax exemption scheme for startups, investment in “Computer or Computer Software” would also be considered as purchase of “new assets” in order to promote technology driven startups.

Tax Exemption on Investments above Fair Market Value

Under the Income Tax Act, 1961, if a startup or company receives any consideration (money) for issue of shares which exceed the fair market value of the shares of the company, then such excess amount received over the fair market value is taxable in the hands of the recipient (Startup) as Income from Other Sources.

However, in most cases, the fair market value of shares of a startup are hard to exactly calculate. Furhter, in most cases, the valuation at which investment is made in the Company is significantly higher than the fair market value of the shares, thereby resulting in tax being levied on the Startup.

Currently, investment by Venture Capital Funds in Startups is exempted from the above provision of the Income Tax Act. With the Startup India Initiative, the same has been extended to investment made by incubators in Startups.

Startups Eligible for Tax Exemption

It is important to note that not all startups are eligible for the tax exemption announced under the Startup India initiative. To be eligible for the startup tax exemption, the Startup must conform to the eligibility criteria for Startups mentioned in the Startup India Action Plan.

Further, Startup would be eligible to obtain tax benefits only after it has obtained certification from the Inter-Ministerial Board, setup for such purpose. The Inter-Ministerial Board setup by DIPP would validate the innovative nature of the business for granting tax related benefits. Hence, the process for obtaining tax exemption for Startups could be time-taking and cumbersome.

Comments (10)

A.Anas

Jan 19, 2016 at 7:52 PM

My name is A.Anas, aged 40 years , a Gulf returnee, and wish to start up a business set-up under small scale Industry at Trivandrum City, in the field of PACKAGED PURIFIED DRINKING WATER, with a capital investment of Rs.20.41 Lakhs

Kindly guide me with all the relevant details and the office where I should go and discuss further

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IndiaFilings

Feb 26, 2016 at 4:19 PM

Hi anas, you can discuss this with our Business Advisors. Please contact 04440247777 or email [email protected]

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Ratan Singh

Feb 05, 2016 at 2:38 PM

Dear Sir,
India feeling is a great platform for a new startup. Greeting to India feeling that it Healps l to us How to start a company.
I want to start a Nidhi Company. So let me know what is the prosiser and how I
can I start it.

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IndiaFilings

Feb 26, 2016 at 6:36 PM

Hi ratan ,
Please call our business advisors @ 04440247777.

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Seema Singh

Feb 09, 2016 at 12:23 PM

please let me the criteria mob no 9818134840

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IndiaFilings

Feb 26, 2016 at 5:30 PM

Hi seema, Please contact with our business advisors @ 04440247777 or email [email protected]

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KAMAL BHATIA

Feb 20, 2016 at 3:02 PM

Can a Startup be a partnership Registered firm?

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IndiaFilings

Feb 26, 2016 at 4:18 PM

Hi kamal, you can discuss this with our Business Advisors. Please contact 04440247777 or email [email protected]

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Suresh Adsul

Mar 20, 2016 at 7:54 AM

we want launch small scale business of spice in rural area of Maharashtra please guide us.

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Sumesh

Mar 21, 2016 at 10:15 AM

Hi Suresh,
you can discuss this with our Business Advisors. Please contact 04440247777 or email [email protected]

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