A large increase in India’s entrepreneurial spirit has been observed in recent years, in part due to the government’s proactive efforts to promote innovation and economic growth. The government launched the STARTUP INDIA program, which aims to create an ecosystem that is supportive of businesses, to spark this trend. The variety of tax benefits offered to startups, intended to spur their growth and encourage innovation, is one of the key components of this strategy.

Definition of Startup

A business must satisfy the requirements listed below in order to be eligible for startup status under the Startup India policy:

– It must have begun no more recently than five years after the project was first introduced.

– The company’s annual revenues should not go over Rs. 25 crores.

– The business must be innovatively oriented and a leader in its industry.

– It should be a brand-new business, not a subsidiary of an older one or its rebirth.

 

 

Tax Benefits for Startups

Entrepreneurs who operate as private limited companies, limited liability partnerships, or partnerships may also be eligible for additional benefits based on the tax scheme accessible to them. The Startup Program assists entrepreneurs by offering them a number of tax perks.

First 3 Years

For the first three years, startups are exempt from paying taxes, with the exception of the Minimum Alternate Tax (MAT), which is calculated as 18.5% of the profit reported in the books.

Startups must register with the Department of Industrial Policy and Promotion (DIPP) in order to be eligible. This benefit enables new enterprises to balance their budgets and reach break-even faster, which ultimately results in larger earnings.

Government Funds

The government also offers a fund with a Rs. 2500 crore initial corpus and a Rs. 10000 crore final corpus lasting four years to assist startups. This falls under the Funds of Funds (FOF) advantage, which only applies to startups registered under DIPP and functions as a direct investment under the authority of SEBI.

Such an advantage comes as something that many people accept and will serve as something that happens quickly for the expansion of this type of work since the shortage of cash is the most obvious obstacle that companies confront at the beginning of their trip.

Tax on Capital Gain

Corporations make earnings known as capital gains when they sell equities, and these profits are taxed appropriately. However, startups are entitled to a 20% capital gains exemption, which results in a lower tax rate on profits made from the sale of stocks, bonds, and other securities used to raise cash.

 

 

Tax of Angel Investment

For business owners starting their own enterprises, investment security is crucial. Finding entrepreneurs and investors who are prepared to invest is challenging since it can be tough for new enterprises to win over investors’ trust. The government has abolished the investment tax in order to assist entrepreneurs in obtaining the cash they require. Because of this, angel investors’ investments are not repaid, which can assist companies get the necessary financing. Additionally, investors may issue shares at a price higher than the nominal value stated in the books according to Section 56(2) (vii) (b) of the Income Tax Act, which makes it simpler to obtain capital.

 

Tax Benefits of turning home into an office

Startups might benefit from being free from utilities and property taxes if they register their home address as an office location.

Employee’s Health Insurance

Startup companies may also deduct their health insurance contributions under Section 80G. There may be an 80G deduction available when purchasing health insurance. Section 80G of the Income Tax Act allows donations to designated emergency relief and charitable organizations to be tax deductible. However, not all donations are eligible for a deduction under Section 80G. All contributions to the designated funds are tax deductible. This deduction is available to all taxpayers, including individuals, corporations, and firms.

Advantages of keeping all bills

One can qualify for tax deductions and exemptions if they maintain all of their bills, invoices, and other financial receipts. All investors now have concrete evidence that the startup is up and running.

Presumptive tax benefits

Profit from tax deductions is presumed to exist under sections 44AD, 44ADA, and 44AE. According to the Ministry of Income Tax, “The Income Tax Act has developed a system of assessment of Tax to assist taxpayers in the challenging process of managing accounts and verifying accounts. You can learn more about the various provisions of the tax system of sections 44AD, 44ADA, and 44AE in the articles under section 44AD, section 44ADA, and section 44AE. Tax A businessperson or professional is obligated by the Income Tax Law to maintain ongoing financial records and to audit those records. The Income Tax Act has developed tax assessment processes under sections 44AD, 44ADA, and 44AE to relieve small taxpayers of this challenging task. , in As a result, he will be freed from the arduous task of maintaining information and destroying his financial records.”

 

 

Long-term Capital Gain Tax Benefits

Certain qualified startups are excused from paying tax on long-term capital income under the new Section 54EE added to the Income Tax Act. However, to be eligible for this benefit, long-term funds must be placed in federal funds in full or in part within six months of receipt. This method allows for a 50 lakh rupee savings cap. Additionally, the investment will stay in the fund for a minimum of three years, and any termination made during this time will not be effective.

Exemption on Investment higher than the Fair market value

Startups in India are not required to pay taxes on investments that are worth more than their fair market value. Family investments and other angel investors are both possible. This does not, however, include subscription fees. The same exemption applies to income from incubators that exceeds fair market value.

Exemption under Section 54GB

If invested in a small or medium-sized business, long-term capital gains on the sale of residential real estate are excluded. Section 54GB of the Micro, Small, and Medium Enterprises Act of 2006 provides access to this. To prolong the exemption on investments in startups, the government has changed this clause.

Therefore, if a HUF or any individual invests money made from buying 50% or more of a startup, they will not be required to pay tax on long-term capital gains. However, they must not transfer or sell these shares within five years of acquiring them in order to receive the benefit. Beginners may purchase non-transferable assets with this money for a five-year period. This exemption will help small firms grow and expand in addition to encouraging investment in them.

 

 

Setting off Carry forward losses and gains

If all shareholders with voting rights on the last day of the year still hold onto their shares on that day, eligible startups may also carry forward losses.

The overall goal of these tax advantages is to promote investment in small enterprises and aid in their expansion and growth.

 

Read More: Income tax department rolls out angel tax rules for startup

 

Section 80 IAC

A startup that has been approved by the Department of Industry Policy and Promotion is eligible for a three-year tax exemption under section 80 IAC of the Income Tax Act of 1961. On February 1st, 2023, this was mentioned in the budget for that year.

New angel tax regulations, which include a system to evaluate the shares issued by unlisted firms to investors, have been made known by the Income Tax Department.

The Income-tax Act of 1961 (the Act) was amended by the Finance Act of 2023 to include the consideration received from non-residents for the issuance of shares by an unlisted company within its purview. The Act’s section 56(2)(viib) states that if the consideration for the issuance of shares exceeds the Fair Market Value (FMV) of the shares, it shall be subject to income tax under the heading “Income from other sources.”

 

 

As part of the government’s commitment to include stakeholders in the preparation of the law, comments and recommendations on the Draft Rule 11UA for valuing the approaches to determining the Fair Market Price were solicited from stakeholders and the general public. Press announcement from May 19, 2023.

In accordance with the notification number. 81/2023 dated September 25, 2023, Rule 11UA for the valuation of shares for the purposes of section 56(2)(viib) of the Act has been changed in light of the proposals submitted in this regard and the extensive discussions held with stakeholders.

 

The key highlights of the changes in Rule 11 UA are

a) In addition to the two share valuation techniques, Discounted Cash Flow (DCF) and Net Asset Value (NAV), made available to residents under Rule 11UA, five additional share valuation techniques, including the Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method, have been made available to non-resident investors.

b) The price of the equity shares equivalent to the consideration received for the issuance of shares from any non-resident entity that has been notified by the Central Government may be considered the FMV of the equity shares for resident and non-resident investors, subject to the following:

 

 

(i) Insofar as the consideration from such FMV is not above the total consideration received from the notified entity.

(ii) Within ninety days before or after the date the shares that are the subject of the valuation were issued, the company received the payment from the notified entity.

 

Read More: Do you know the Appropriate Tax Regime for a Revised Return Filing?

 

c) Along the same lines, price matching with regard to investments made by venture capital funds or specified funds would be available to resident and non-resident investors.

d) Valuation techniques have also been offered in order to determine the FMV of Compulsorily Convertible Preference Shares (CCPS).

g) A 10% value fluctuation safe harbor has been offered.

The announced Rule calls for a broad parity between resident and non-resident investors and a broadening of the valuation procedures to incorporate internationally recognized methodologies.