Tax Exemption for Startups Entity under section 80-IAC & Angel Tax Exemption (After Union Budget 2020)
Startup India is a flagship initiative of the Government of India, intended to catalyse startup culture and build a strong and inclusive ecosystem for innovation and entrepreneurship in India. Since the launch of the initiative on 16th January, 2016, Startup India has rolled out several programs with the objective of supporting entrepreneurs, and transforming India into a country of job creators instead of job seekers. Vide the various campaign, various benefits and facilities were provided to the Startups.Let’s decode this in greater detail. I have tried to summarise the article by looking at various provision of Income Tax Act, 1961.
1. When is an entity deemed as start-up for the purpose of Income-tax Act,1961?
There are certain benefits that flow to an entity if it is an 'Eligible Start-up'. To become an eligible startup an entity has to satisfy various conditions. These conditions are not same for all the provisions of the Income-tax Act under which these benefits are allowed. The different set of conditions and their applicability for different provisions have been discussed below.
- Conditions prescribed by DPIIT - As per Notification issued on 19.02.2019 which states that an entity shall be considered as a start-up up to a period of 10 years from the date of its incorporation/registration if the following conditions are satisfied:
- It is incorporated as a private limited company, partnership firm or an LLP.
- An entity shall be considered as startup up to 10 years from the date of its incorporation or registration.
- Its turnover for any of the financial years since incorporation does not exceed Rs. 100 crores.
- It is working towards innovation, development or improvement of product or process or services or business model of the entity is scalable with high potential of employment generation or wealth creation.
- It is not formed by splitting up or reconstruction of an existing business.
2. What are the benefits available to an eligible Start-up?
Following benefits shall be available to an eligible start-up or its shareholders:
- Exemption from levy of angel tax under section 56(2)(viib)
- Deductions under section 80-IAC
- Liberalized regime of section 79 to carry forward and set-off the losses
- Exemption under section 54GB to the shareholder for making investment in a startup
- Access to the dedicated cell created by the CBDT to address the problems of startups.
3. Is there any deduction under Income Tax Act, 1961 is available to startup entities from its Profit?
Yes, Startup Entities are eligible to claim deduction under section 80-IAC of Income Tax Act, 1961 subject to fulfillment of certain prescribed condition.
4. What are the Conditions prescribed under Section 80-IAC for Profit Exemption to eligible
Deduction at the rate of 100% of its profits and gains is allowed to an eligible startup for three consecutive assessment years out of the seven years (ten years from 01.04.2020) beginning from the year of incorporation. As per Section 80-IAC, an entity shall be considered as an eligible startup if it fulfils following conditions:
- It is incorporated as a company (Private Ltd. Co. or Public Ltd. Co.) or an LLP.
- It is incorporated on or after April 1, 2016 but before April 1, 2021.
- Its turnover does not exceed Rs.25 Cr (Rs.100 Cr from 01.04.2020) in the previous year relevant to assessment year for which such deduction is claimed.
- It is not formed by splitting up or reconstruction of a business already in existence.
- It is not formed by transfer to a new business of machinery or plant previously used for any purpose. (Refer Note 1)
- It holds a certificate of eligible business from the Inter-Ministerial Board of Certification.
- It is engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation.
5. How to claim deduction under section 80-IAC?
A recognized startup is required to file Form 1 along with the specified documents to the Inter-Ministerial Board of Certification. The board may call for certain documents or information and may make such enquiries, as it deems fit, to recognize the entity as an eligible startup and grant a certificate for claiming exemption under section 80-IAC. The board may reject the application by providing the reasons thereof.
6. What is angel tax under section 56(2)(viib)?
Angel tax is the tax charged on the closely held company when it issues shares to a resident person at a price which is more than its fair market value. When this provision is triggered, the aggregate consideration received from issue of shares as exceeds its fair market value is charged to tax under the head 'Income from other sources' under section 56(2)(viib).
7. When exemption is provided to an eligible startup from angel tax levied under section 56(2)(viib)?
A start-up shall be eligible for claiming exemption from levy of angel tax under section 56(2)(viib) if following conditions are satisfied:
(a) Start-up is registered with DPIIT;
(b) Its aggregate amount of paid-up share capital and share premium after issue or proposed issue of shares, does not exceed Rs.25 crore. While calculating this threshold limit, issue of shares to following persons shall not be included:
- A non-resident person ;
- Venture capital company;
- Venture capital fund
- Listed company whose net worth exceeds Rs.100 crore or turnover exceeds Rs.250 crore for the financial year preceding the year in which shares are issued.
(c) It does not invest in any of the following assets for a period of 7 years from the end of the latest financial year in which the shares are issued at premium:
- Land or building, being a residential house, other than that used for the purposes of renting or held as stock-in-trade in the ordinary course of business
- Land or building, not being a residential house, other than that occupied by start-up for its business or renting purposes or held as stock-in-trade in the ordinary course of business
- Loans and advances, if start-up is not engaged in ordinary business of lending of money
- Capital contributions to any other entity
- Shares and securities
- Motor vehicle, aircraft, yacht or any other mode of transport, if the cost of such an asset exceeds Rs. 10 lakhs other than that held by the Start-up for the purpose of plying, hiring, leasing or as stock-in-trade in ordinary course of business
- Jewellery held otherwise than as stock-in-trade
- Archaeological collections, drawings, paintings, sculptures, any work of art or bullion
8. What if the Eligible Startup invests in any of above assets specified before the end of threshold period?
In case the Startup files a declaration in Form-2 and subsequently invests in any of the assets specified above before the end of seven years from the end of the latest financial year in which the shares are issued at premium, the exemption provided under section 56(2)(viib) of the Act shall be revoked with retrospective effect.
9. How to claim exemption from angel tax?
The exemption from applicability of angel tax shall be available in respect of all shares issued by the start-up from the date of its incorporation. To claim this exemption, the start-up has to make self-declaration in Form 2 with the DPIIT. The DPIIT shall forward the self-declaration form to the CBDT for approval.
a) For the purposes of this clause, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if all the following conditions are fulfilled, namely:
i) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India
ii) such machinery or plant is imported into India;
iii) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.
b) Where in the case of a start-up, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business.
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