Finance Taxation

Tax Exemption to startup, exmeption us Sec80-IAC, eligibility ,definition for Forms for application 80IAC and 56(2)(viib) of Income-tax Act, 1961

  • To promote new startup and make in India, government has taken several initiative to give benefit to startup and attract fresh fund in startup business.
  • Hereby we are trying to consolidate all the provision that provide exemption to startups under section 80-IAC,
  • We will see who the eligible startup as per latest government notification are,
  • what form person need to file to claim exemption u/s 80-IAC of Income tax Act
  • What details need to provided in Form -1 for Startup for exemption u/s80-IAC and 56(2)(viib) of Income-tax Act, 1961

Index

Tax Exemption to Startups

Following direct tax incentives were provided in Income-tax Act,1961 (‘the Act’) to promote Start-ups through Finance Act,2016:

Further, vide Finance Act,2017, following benefits have been provided to start-ups:

Amendment in sec 80-IAC made in Finance bill 2018.

Notification by Ministry of commerce and industry

Approval for the purposes of clause (viib) of sub-section (2) of section 56 of the Act

Tax Exemption to Startups

As per Press release of 12th April 2017; Ministry of Commerce & Industry,Various tax exemptions have been given to Startups in the recent past.

Following direct tax incentives were provided in Income-tax Act,1961 (‘the Act’) to promote Start-ups through Finance Act,2016:

  • Introduction of new section 54EE in Income-tax Act, 1961 to exempt investment of long term capital gains by an investor in a fund notified by Central Government.
  • Amendment of section 54GB to provide exemption of capital gains arising out of sale of residential property, on investing the same in shares of Start-up company.
  • Introduction of new section 80-IAC to provide 100% deduction for three consecutive years out of five years, to profits of start-ups which are approved by Inter-Ministerial Board of Certification notified by DIPP.

To prevent incidence of “Angel Tax” on angel investors investing in approved start-ups, CBDT vide Notification No.45/2016 dated June 14,2016 notified that Angel investors funding to approved start-ups shall be exempt from incidence of tax under section 56(2)(viib).

Further, vide Finance Act,2017, following benefits have been provided to start-ups:

  • Amendment of section 79 of the Act to provide that in the case of a company being an eligible start-up, loss shall be carried forward and set off against the income of the previous year, even if a change in shareholding has taken place in a previous year subject to all the shareholders of such company on the last day of the year or years in which the loss was incurred, continuing to hold shares on the last day of such previous year. The restriction of fifty one percent of shareholding of company to remain unchanged in order to carry forward and set-off the loss of earlier years has therefore been relaxed in the case of start-ups.
  • Amendment to provide that deduction under section 80-IAC can be claimed by an eligible start-up for any three consecutive assessment years out of seven years beginning from the year in which such eligible start-up is incorporated as against three years out of five years provided by Finance Act, 2016. The above exemptions would encourage seed-capital investment in Startups, facilitate their growth and meet the working capital requirements during the initial years of operation. Further, they would also promote investments into Start-ups by mobilizing the capital gains arising from sale of capital assets.This information was given by the Commerce and Industry Minister Smt. NirmalaSitharaman in a written reply in Rajya Sabha today.

Amendment in sec 80-IAC made in Finance bill 2018.

  1. In section 80-IAC of the Income-tax Act, in the Explanation below sub-section (4),––

(a) for clause (i), the following clause shall be substituted, namely:––

‘(i) “eligible business” means a business carried out by an eligible start up 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;’;

(b) in clause (ii),––

(i) in sub-clause (a), for the figures “2019”, the figures “2021” shall be substituted;

(ii) in sub-clause (b), for the words, figures and letters “previous years beginning on or after the

1st day of April, 2016 and ending on the 31st day of March, 2021”, the words “seven previous years beginning from the year in which it is incorporated” shall be substituted.

In below Given notification government has specified the definition of startup for Sec80 IAC, also government specified process for eligible startup application, form for availing benefit u/s 80-IAC.

Notification by Ministry of commerce and industry

G.S.R. 364(E).,11th April 2018—This notification is being issued in supersession of Gazette Notification No. G.S.R. 501(E) dated May 23, 2017.

  1. In this notification,—

(a) An entity shall be considered as a Startup:

  1. Upto a period of seven years from the date of incorporation/registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act,2008) in India. In the case of Startups in the biotechnology sector, the period shall be upto ten years from the date of its incorporation/ registration.
  2. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded Rs. 25crore

iii. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.

Explanation-

An entity shall cease to be a Startup on completion of seven years from the date of its incorporation/ registration or if its turnover for any previous year exceeds Rupees 25 crore. In respect of Startups in the biotechnology sector, an entity shall cease to be a Startup on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds Rs. 25 crore.

(b) “Act” means the Income-tax Act,1961;

(c) “Board” means the Inter-Ministerial Board of Certification comprising of the following members: —

(i) Additional Secretary, Department of Industrial Policy and Promotion, Convener
(ii) Representative of Ministry of Corporate Affairs, Member
(iii) Representative of Ministry of Electronics and Information Technology, Member
(iv) Representative of Department of Biotechnology, Member
(v) Representative of Department of Science & Technology, Member
(vi) Representative of Central Board of Direct Taxes, Member
(vii) Representative of Reserve Bank of India, Member
(viii) Representative of Securities and Exchange Board of India, Member

(d) “limited liability partnership” shall have the meaning as assigned to it in clause (n) of sub-section(1) of Section 2 of the Limited Liability Partnership Act, 2008;

(e) “merchant banker” means category I merchant banker registered with Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(f) “partnership firm” means a firm registered under section 59 of the Partnership Act, 1932;

(g) “private limited company” shall have the meaning as assigned to it in clause (68) Section 2 of the Companies Act, 2013;

(i) “turnover” shall have the meaning as assigned to it in clause (91) Section 2 of the Companies Act, 2013;

(j) All references to “Forms” in this notification shall be construed as references to the forms set out in Appendix-I hereto.

Recognition

  1. The process of recognition of an eligible entity as startup shall be as under: —

(i) A Startup shall make an online application over the mobile app or portal set up by the Department of Industrial Policy and Promotion.

(ii) The application shall be accompanied by—

(a) a copy of Certificate of Incorporation or Registration, as the case may be, and

(b) a write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.

(iii) The Department of Industrial Policy and Promotion may, after calling for such documents or information and making such enquires, as it may deem fit, —

(a) recognise the eligible entity as Startup; or

(b) reject the application by providing reasons.

Certification for the purposes of section 80-IAC of the Act

  1. A Startup being a private limited company or a limited liability partnership incorporated on or after 1st day of April 2016 but before 1st day of April 2021 may, for obtaining a certificate for the purposes of section 80-IAC of the Act,

make an application in Form-1 along with documents specified therein to the Board and the Board may, after calling for such documents or information and making such enquires, as it may deem fit, —

(i) grant the certificate referred to in sub-clause (c) of clause (ii) of the Explanation below sub-section (4) of section 80-IAC of the Act; or

(ii) reject the application by providing reasons

Approval for the purposes of clause (viib) of sub-section (2) of section 56 of the Act

  1. (1) A Startup being a private limited company and in conformity with the definition as per definition stipulated at Para

1(a) shall be eligible to apply for approval for the purposes of clause (viib) of sub-section (2) of section 56 of the Act, if the following conditions are fulfilled: —

(i) the aggregate amount of paid up share capital and share premium of the startup after the proposed issue of shares does not exceed ten crore rupees,

(ii) the investor/ proposed investor, who proposed to subscribe to the issue of shares of the startup (hereinafter in this notification referred to as “investor”) has, —
(a) the average returned income of twenty five lakh rupees or more for the preceding three financial years;

or

(b) the net worth of two crore rupees or more as on the last date of the preceding financial year, and
(iii) the startup has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11UA of the Income-tax Rules, 1962.

(2) the application for approval under this para shall be made in Form-2 to the Board and shall be accompanied by the

documents specified therein.

(3) The Board may, after calling for such documents or information and making such enquiries, as it may deem fit, —

(i) grant approval for the purposes of clause (viib) of sub-section (2) of section 56 of the Act, specifying the

relevant details, including details of investor, amount of premium on which shares are to be issued, and the

latest date by which the shares are to be issued; or

(ii) decline to grant the said approval after providing reasons.

Revocation

5.(1) In case it is found that any certificate or approval referred to para 3 or para 4 have been obtained on the basis of false information, the Board reserves the right to revoke such certificate or approval.

(2) Where the certificate or approval has been revoked under sub-para(1), such certificate or approval shall be deemed never to have been issued or granted by the Board

Effect

  1. This notification shall come into effect on the date of its publication in the Official Gazette. The Government will undertake independent evaluation of the benefits of this Notification and carry out a review before 31.03.2019.

[F. No.
5(4)/2018-SI]

ANIL AGRAWAL, Jt. Secy.

Form-1

Application for certificate for the purposes of section 80-IAC of the Income-tax Act, 1961

  1. Name of the Startup – …………………………
  2. Date of incorporation/ registration of Startup – ……………………………..
  3. Incorporation No./ registration No.…………………………
  4. Address and business location- ………………………………..
  5. Nature of business…………………
  6. Contact details of Startup (Phone No. and Email)- ………….
  7. Permanent Account No – ………………………………..
  8. Existing/ proposed activities – ……………………………………

(Enclose copy of Memorandum of Association, LLP/partnership Deed, Board Resolution etc.)

Declaration

I/ We hereby certify that the above information furnished by me is true and no relevant information has been concealed.

For (Name of the Startup)

(Name of the authorised signatory) Designation

Place: _______

Date: _______

This form shall be accompanied by the following documents (if applicable)-

  1. Annual Accounts of the startup for the last three financial years
  2. Copies of income-tax returns for the last three financial years

Application for approval for the purposes of section 56(2)(viib) of the Income-tax Act, 1961

  1. Name of the Startup – …………………………
  2. Date of incorporation/ registration of Startup – …………………………..
  3. Incorporation No./ registration No.…………………………
  4. Address and business location- ………………………………..
  5. Nature of business…………………
  6. Contact details of Startup (Phone No. and Email)- ………….
  7. Permanent Account No. – ………………………………..
  8. Startup Recognition number allotted by DIPP – ……………………………….
  9. Existing/ proposed activities – ……………………………………

(Enclose copy of Memorandum of Association, LLP/partnership Deed, Board Resolution etc.)

  1. Details of certificate granted under section 80-IAC of Income-tax Act,1961 , if any…………
  2. Details of share capital as on the date of application-

(i) Amount of share capital………

(ii) Amount of share premium……

(iii) Type of shares…………

(iv) Number of shares………

(v) Face value…………………

(vi) Issue price………………..

  1. Details of proposed issue of shares-

(i) Type of shares………..

(ii) Number of shares………

(iii) Face value…………………

(iv) Premium per share……….

(v) Issue price………………..

(vi) Proposed date of issue of shares………………….

  1. Details of the investor-

(i) Name of the investor(s)- ………………………………………………..…

(ii) Address – ……………………………………………………………………

(iii) Contact Details (Phone No. and Email) – ………….

(iv) Permanent Account No – ………………………………………………..

(v) Nature of business- ………………………………………………………..

(Enclose copy of Memorandum of Association, LLP/Partnership Deed, Board Resolution etc., if applicable)

(vi) Residential status………………………………………………………

(vii) Amount of investment proposed …………………………..

(viii) Average Returned income of the investor in the last three financial years-

(ix) Net-worth of the investor on the last date of the preceding financial year-

  1. Fair market value of shares as per the report of a merchant banker……………………..

Declaration

I/We hereby certify that the above information furnished by me is true and no relevant information has been concealed.

For (Name of the Startup)

(Name of the authorised signatory) Designation

Place: _______

Date: _______

This form shall be accompanied by the following documents —

  1. the annual accounts of the startup from the date of its incorporation;
  2. name, PAN and address of the existing shareholders along with their shareholding and the amount at which shares are issued to them;
  3. copy of income-tax returns of the investor for the last three financial years;
  4. copy of balance sheet of the investor as on the last day of the preceding financial year; and
  5. merchant banker’s report. Uploaded

 

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