Tax provisions startups must know

By Puneet Puri

To encourage entrepreneurship and accelerate economic growth through its "StartUp India" Scheme, the Government is offering tax holiday for three years under section 80IAC of the Income Tax Act, 1961, to eligible startups running eligible business.

A startup has to obtain two certificates, one for eligible startup and another certificate for tax benefits for eligible business. The certificate of eligible business is granted by the inter-ministerial board of certification. Also, a startup needs to bear in mind that only those will get tax benefits which have been incorporated after April 1, 2016.

Startups formed as private limited companies, limited liability partnerships (LLPs), one person company (OPC) and registered partnership firms are eligible for tax/other benefits. The main activity should cater to innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.

A startup entity shall cease to be a startup on completion of five years from the date of its incorporation/registration or if its turnover for any previous year exceeds Rs 25 crore.

A simple online application, along with recommendation from any incubator or a letter of support by any incubator or a letter of funding of not less than 20% in equity by any incubation fund/angel fund/private equity fund/accelerator/angel network duly registered with the Securities and Exchange Board of India (SEBI) that endorses innovative nature of the business etc, will make the new business earn a startup certificate.

The government has granted further exemptions from capital gain tax, if the funds are invested in the shares of a start-up company (minimum 50% shareholding) or invest in startup funds up to Rs 50 lakh per annum. " Startup Funds" would be similar to mutual funds (MFs). Section 54GB of the Income Tax Act, 1961, provides exemption from long-term capital gain tax to an individual/HUF on transfer of residential property on or before 31st March, 2017, upon reinvestment of sale consideration before the due date of furnishing the return of income in the Equity of Eligible Business.

Section 54EE of the Income Tax Act, 1961, provides that where the capital gain arises from the transfer of a long-term capital asset and the tax payer has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall not be charged to tax. The investment made on or after April 1, 2016, in the long-term specified asset should not exceed Rs 50 lakh.

Section 56(2)(viib) of the Income Tax Act levies tax on investments done by residents above fair market value(FMV) in any company as excess amount above FMV is considered as income of the Investee company. In June 2016, the tax department issued another notification that even if investment in start-up is above FMV, tax exemption on investments will continue to be available and also it won’t be taxable for start-ups.

Though the profits of eligible start-ups are eligible for tax holiday, these profits will be subject to minimum alternate tax (MAT) applicable @ 18.5% plus surcharge and cess (effectively 20.4%). Hence, the MAT could impact the cash flow of start-ups in initial years. However, the credit of the MAT is available in later years.

Once the tax holiday period expires, the start-ups (even existing business) can consider claiming deduction under provision of section 80JJAA which has now been extended to all taxpayers who have tax audit requirements.

Under Section 80JJAA, deduction in respect of employment of new workmen is granted @ 30 per cent of additional wages paid to the new regular workmen employed. The wage of workmen should not exceed Rs.25,000 per month.

Further, start-ups anticipating less business turnover may opt for presumptive tax provisions u/s 44AD, where in tax @ 8 per cent gross receipts have to be paid if the total gross receipts do not exceed Rupees Two Crore Per Annum. A startup selecting the presumptive taxation scheme has to set up business either as sole proprietorship or HUF or registered partnership firms. Under this scheme, start-ups are relieved from maintaining books of account also.



The author is a Chartered Accountant.