India is home to the third largest startup ecosystem in the world, with over 60 unicorn startups functioning currently. One of the major reasons behind the exponential growth of startups in recent years is government support.
With startups emerging as drivers of economic growth, the Indian government launched Startup India initiative in 2016 to boost entrepreneurship in India.
Since then, over 50,000 ventures spread across 623 Indian districts have been recognized as startups by DPIIT (Department for Promotion of Industry & Internal Trade).
The startups eligible for Startup India undergo a simplified recognition process and get financial support, various tax exemptions, option to self-certify compliance, among other benefits. This article discusses how CAs, accountants and other professionals can help their clients run startup businesses with tax exemptions.
Conditions to be Eligible for Startup India Program
In order to gain tax exemptions under the Startup India program, a business should fulfill the following conditions:
Must be registered as a limited liability partnership (LLP) or a partnership firm or incorporated as a private limited company (Pvt Ltd).
Should not have completed a period of ten years from the date of registration/ incorporation.
Must not exceed an annual turnover of INR 100 crores in any of the financial years since registration/ incorporation.
Should be working towards innovation or improvement of services, products, or processes such that the potential of creating wealth or generating employment is high.
It must be noted that if the business is formed by reconstructing or splitting up a pre-existing business, it is not recognized as a startup.
Tax Exemptions Eligible for Startups
There are several scenarios of tax exemptions that startups can avail.
- 3-Year Tax Holiday
Recognized startups incorporated between April 1, 2016 and March 31, 2022 can apply for a 100 percent tax rebate and claim all gains and profits for 3 consecutive years out of its first ten years since incorporation under Section 80-IAC of the IT Act. However, the total annual turnover should not exceed the amount specified by government.
This tax holiday is given to startups for sustaining during their initial years of operation and utilizing their working capital optimally.
In such cases, taxation software like EasyOFFICE can help in automatic generation of balance sheet, trading account, and profit and loss account. It also provides multi-angle MIS reports to understand the performance of a startup so that the exemption can be availed accordingly.
- Exemption to HUF/Individuals on Investing Long-Term Capital Gain
Under the provisions of section 54GB of the IT act, tax exemption on capital gains invested in eligible startups is available. If a HUF/ individual sells a residential property to invest the capital gains for subscribing to at least 50 percent of the equity shares of eligible startups, then the tax on long term capital gets exempted. It must be noted that the shares must not be transferred or sold within 5 years of its acquisition date.
Earlier, this section only included the SMEs under the MSME Act, 2006. But after the amendment, startups get the opportunity to further expand and grow.
CAs and other tax professionals can keep track of such changes by regularly visiting taxation related websites. Those using taxation software and tools like EasyOFFICE maintain all the direct links to frequent websites in the tax library.
- Exemption on Long-Term Capital Gains
Under section 54EE, all eligible companies can ask for tax exemption on long-term capital gains if the entire gain or a part of it is invested in a long-term specified asset mentioned by central government. Such an investment can be up to INR 50 lakh and must be made within six months from the date of asset transfer.
Tax exemption can be on the amount of invested capital gain or INR 50 lakh, whichever is lower. However, if the investment is withdrawn before completion of 3 years, then the exemption will be revoked in the year when money is withdrawn. Professionals and companies dealing with taxes can utilize taxation software for dealing with such situations.
For instance, EasyOFFICE software offers features like import and export for handling large volumes of files. Besides auto generation of IT statement and summary of tax calculation, it also provides pre-validation of ITR to prevent errors.
- Exemption on Investment More than the Fair Market Value (Angel Tax)
There are provisions under Section 56(2) for tax exemption on investment in eligible startups by family, resident angel investors, or funds that do not come under venture capital funds.
A 100 percent exemption on investments above fair market value is available for angel investors with a net worth of at least INR 2 crore or the average returned income of above INR 25 lakhs for the last three financial years. The aggregate amount of paid-up share capital/ premium after the proposed issue of share for startup must not exceed INR 25 crore.
- Carry Forward of Losses
In the case of recognized startups, set off or carry forward of past year losses is allowed under section 79. It is based on the condition that not less than 51 percent of voting power is held by the same shareholders on the last day of the year when loss is incurred and the last day of the year in which the loss is to be set off.
EasyOFFICE ensures automatic set off & carry forward of losses to ease the work of tax professionals, CAs, and others. You can view income tax summary of previous year to avoid any mistakes. It also integrates with Tally, a popular ERP for SMEs and startups in India.
In the early years, when a startup is still finding its feet, every benefit and tax exemption counts. CAs and other tax professionals can ensure they help their startup clients in filing taxes accurately.
EasyOFFICE taxation software can guide them through a step-by-step process so that they are up-to-date with every regulation and don’t miss out on anything.
Even if your client does not meet Startup India criteria, they can gain benefits from MSMEs schemes.
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