4 Tax Incentives for Startups India Entrepreneurs

Startups India has got four tax incentives as per the Finance Bill 2016 in tune with this government’s big resolve to create a culture of entrepreneurship in India. The amendment and insertion of law in the Income Tax Act have been proposed to fund the startup, motivate to setup and earn tax free profit and easy tax compliance. So, as per the proposed tax relief to startups , one can sell his residential house and will not have to pay capital gains , or if invests in specified bonds etc.

List of Tax Incentives

Below is the list of four tax incentives proposed under Finance Bill 2016

1. 3 Years – Tax Free Profits for Startups

A new provision  section 80IAC is inserted in the Income Tax Act . This provision is exclusively for the Startups companies . As per this provision , an eligible start-up which is setup before 01.04.2019 will get 100%  deduction of the profits. The said provision is as under :

80-IAC. (1) Where the gross total income of an assessee, being an eligible start-up, includes any profits and gains derived from eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of

35      an amount equal to one hundred per cent. of the profits and gains derived from such business for three consecutive assessment years.

(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any three consecutive assessment years out of five years beginning from the year in which the eligible start-up is incorporated.

3) This section applies to a start-up which fulfils the following conditions, namely:—

(i) it is not formed by splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of a start-up which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as referred to in section 33B, in the circumstances and within the period specified in that section;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Explanation 1.— 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:—

(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;

(b) such machinery or plant is imported into India;

(c) 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.                                                                                                                                       

Explanation 2.—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, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have   10 been complied with.

(4) The provisions of sub-section (5) and sub-sections (7) to (11) of section 80-IA shall apply to the start-ups for the purpose of allowing deductions under sub-section (1).

Explanation.—For the purposes of this section,—

(i) “eligible business” means a business which involves innovation, development, deployment   15 or commercialisation of new products, processes or services driven by technology or intellectual property;

(ii) “eligible start-up” means a company engaged in eligible business which fulfils the following conditions, namely:—

(a) it is incorporated on or after the 1st day of April, 2016 but before the 1st day of   20 April, 2019;

(b) the total turnover of its business does not exceed twenty-five crore rupees in any of the previous years beginning on or after the 1st day of April, 2016 and ending on the 31st day of March, 2021; and

(c) it holds a certificate of eligible business from the Inter-Ministerial Board of Certification    as notified in the Official Gazette by the Central Government.’.

In simple terms , deduction of 100% of profit for three years are allowed u/s 80IAC to

1. A startup incorporated after 01/04/2016 and 31/03/2021 and startup is certified by Board of Certification
2. Profit is out of an eligible business
3. Deduction can be claimed for any three consecutive years out of five years from date of start.

2. Private Company Share Long Term in 2 Years

Finance Minister , in his speech announced as under :

The period for getting benefit of long term capital gain regime in case of unlisted companies is proposed to be reduced from three to two years.

But , unfortunately , this is not in the Finance Bill 2016. I hope that during the passage of bill, this will also be inserted .

Since , the majority of startups will be private limited company , the rule of treating the shares held fo two years as long term capital asset , shall be beneficial to the investors of startups  also.

3.Capital Gains exemption u/s 54EE introduced.

Finance Bill 2016 has proposed to insert a new Section 54EE to provide exemption from capital gains tax if the long term capital gains proceeds are invested by an assessee in units of such specified fund, as may be notified by the Central Government in this behalf, subject to the condition that the amount remains invested for three years failing which the exemption shall be withdrawn. The investment in the units of the specified fund shall be allowed up to Rs. 50 lakh

4. Section 54GB Amended in favour of Startups

Section 54GB provides exemption from tax on long term capital gains in respect of the gains arising on account of transfer of a residential property, if such capital gains are invested in subscription of shares of a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 . Some of the conditions are inbuilt in the said provision to stop misuse of the provision . One change is proposed in favour of starups :

1. If an assessee (Individual or HUF ) earns long term capital gains on transfer of residential property
2. The long term capital gain is invested in an eligible startup in which Individual or HUF has more than 50% shareholding
3. The amount received by the startup is invested to purchase new asset before due date of filing of return

The new asset , apart from assets already stated in section 54GB , can be computers or computer software in case of technology driven start-ups so certified by the Inter-Ministerial Board of Certification notified by the Central Government in the official Gazette.