What is a Startup?

What is a Start-Up?

A start-up, in general terms means, an entity formed by a group of entrepreneurs (called “Founder/(s)”) with the idea of introducing a new product/service, a new innovative idea or a big improvement of something already existing in the market. A typical start-up is a brainchild of the founder who needs financial backing to launch the product/service in the market.

Definition

Having briefly understood what a start-up is, now it is critical to see the definition of the term for the purpose of Government Schemes. Following are the key conditions for an entity to be a ‘Start-up’ as per the notification issued by the Ministry of Commerce & Industry, GSR 127(E) dated 19-Feb-2019:

1.An entity can be recognized as a start-up for up to ten years since incorporation.

2.The annual turnover should not excess Rupees 100 crores in any previous financial years since incorporation.

3.The entity should work towards innovation,development, deployment,or improvement of new products, processes or services or if it is a scalable business model with a high potential of employment generation or wealth creation.

In case the entity completes ten years from the date of incorporation/registration, it will cease to be start-up. Also,if the turnover exceeds Rupees 100 Crores in any previous financial years, the entity will lose the start-up identity.

Recognition of a Start-up 

Under the ‘Start-Up India’initiative, The Department of Promotion of Industry and Internal Trade (DPIIT) is authorized to recognize an entity as start-up in order to avail the various tax benefits, IPR fast tracking etc.,

The process of getting recognition from DPIIT is a simple process, focused on getting information about business of the start-up, to check whether the idea is unique, is it a scalable business model, will it create employment opportunities in the future, wealth creation etc. After due verification of documents and information submitted, the DPIIT will issue a certificate recognizing the entity as a Start-up.

It should be noted that only a private limited company incorporated under Companies Act, 2013 is covered under the definition of start-up.Further, both Limited Liability Partnership (LLP) and a partnership firm (registered under the partnership Act) is included in the definition of Start-up.

There are currently more than 32000 startups recognized by the DPIIT all over India.

Income Tax incentive

In order to provide tax incentive to start-ups, Section 80IAC was introduced by Finance Act,2016, whereby 100 percent deduction of profits from the business of an ‘eligible start-up’is allowed for three consecutive years. An option is given to the entity to choose any consecutive period of three years within seven years from incorporation.

Eligible Start-up 

The definition of the term ‘Eligible Start-up’ under the Income tax act is significantly different from that of the DPIIT 

in respect of the criteria to be satisfied by an entity to qualify for tax deductions. The aspects of the definition are as follows:

1. The start-up should have been incorporated on or after 01-04-2016 but before 01-04-2021.

2. The turnover doesn’t exceed Rupees 25 Crores for the year in which the deduction is claimed.

3. It holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government Further, the benefit is available only for an eligible start-up being a Company incorporated under Companies Act,2013 or a Limited Liability Partnership (LLP).

Procedure to get Certificate

The Inter-Ministerial Board of Certification is a Board set up by Department for Promotion of Industry and Internal Trade (DPIIT) which validates Startups for granting tax related benefits. A startup can make an application in Form-1 along with required documents specified therein to get the certificate for claiming deduction under Section 80IAC.

Following documents are required to be submitted along with the application:

1. Copy of Memorandum of Association or LLP/Partnership Deed etc.,

2. Annual accounts for last three financial years (as applicable)

3. Copies of Income tax returns for the last three financial years (as applicable)

Conditions to claim deduction

This deduction is subject to various conditions laid out under the section 80 IAC (3) as follows:

1. The start-up is not formed by splitting up,or the reconstruction,of a business already in existence.

2. It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Any plant or machinery which was used outside India by any person other than the start-up is allowed, provided such machinery is imported into India and it is not used by any person in India prior to its installation. No depreciation should have been claimed in respect of the machinery or plant under the Income Tax Act earlier.

There is a relaxation from condition (2) above, allowed in respect of cases, where the plant or machinery transferred to the new business of the start-up doesn’t exceed 20 percent of the total value of machinery used in the business.

Apart from the specific conditions under section 80IAC, certain conditions as mentioned under sub sections (5) and sub sections (7) to (11) of section 80IA also apply for claiming deduction under this section.

Declaration

A start-up fulfilling the conditions should make a self-declaration in Form 2 and submit the same to DIPP, which will in turn forward the same to CBDT after due consideration.

Withdrawal of exemption

If it found that the certificate is obtained based on falseinformation or the start-up invests in any of the assets listed in the notification before the stipulated period of seven years,the certificate will be revoked and the exemption provided will be withdrawn with retrospective effect.

Capital Gains

Section 54EE 

This section provides exemption from capital gains tax if the long term capital gains 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.

Section 54GB

Long term capital gains arising on account of transfer of a residential property (ahouse or plot of land) shall not be charged to tax if such capital gains are invested in subscription of shares of a company which qualifies to be an eligible start-up subject to the following conditions:

1. The assessee should invest the amount in the equity share of an eligible company before due date for filing return of income under section 139.

2. The company has, within one year from the date of subscription in equity shares by the assessee, utilised this amount for purchase of new asset as prescribed.

3. The assessee should hold more than 50 fifty percent of the equity share capital after the subscription of shares.

4. The company in which amount is invested should be a small or medium enterprise or an eligible start-up.

This section was introduced to provide tax exemption to entrepreneurs or promoters of a startup selling their residential property in order to raise funds to invest in the company.

Conclusion

As it can be seen from above discussion, the Government, with a view to accelerate the growth of the startups has introduced many tax incentives which will go a long way in benefitting the start-up ecosystem. As tax professionals, it is our duty to analyse various tax provisions and provide a feasible solution to the start-ups and help them in fighting the ongoing difficult times due the pandemic.