- April 15, 2020
- Posted by: IBA LLP
- Category: Articles, Direct Tax
“Startup India campaign” was launched in 2016 to ensure that the Startups mushrooming in the country have right access to various resources and facilities to grow. There are a lot of incentives for Startups provided by the government like tax exemption, exemptions under various legislations etc.
However, these benefits and exemptions are available to the Startups only if they fulfill the criteria of an ‘Eligible Startup’. Thus, through this note we have tried to answer some of the questions related to how a business would qualify as eligible Startup.
1. What are the eligibility criteria to qualify as “eligible Startup”?
- The Startup should be incorporated as a private limited company, limited liability partnership or registered as a partnership firm
- Its turnover should be less than INR 100 Crores in any of the previous financial years
- It shall be considered as a Startup up to 10 years from the date of its incorporation
- It should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth.
An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Startup”.
2. What is the process of recognition of eligible entity as Startup?
- A Startup shall make an online application over the mobile app or portal set up by the DPIIT1.
- 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.
- The DPIIT 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.
3. What are the eligibility criteria to claim exemption under Income Tax Act, 1961?
- The eligible Startup must be engaged in the business of 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
- Eligible Startup” means a company or a limited liability partnership or a registered partnership 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 April, 2021;
(b) the total turnover of its business does not exceed twenty-five crore rupee [in the previous year relevant to the assessment year for which deduction is claimed]; 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.
- It is not formed by splitting or reconstruction of business already in existence
- It is not formed by the transfer of machinery or plant previously used for any purpose to a new business.
4. How can a certificate be obtained for the purpose of Income Tax exemption?
A Startup which fulfils the conditions as stated above may follow the below mentioned process to obtain the certificate:
- Make an application in Form-1 along with specified documents to Central Board of Direct Taxes (“CBDT”).
- The CBDT 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
5. What is the meaning of splitting up or reconstruction?
There is no specific definition of splitting up and reconstruction under the Income Tax Act, 1961. However, based on various judicial precedents it can be fairly concluded that, if there is any substantial change in the person carrying on the business and substantial change in the business of the entity, it cannot be construed as reconstruction. However, this is highly litigative.
6. What other information/ documents are required for registration, in relation to the business of Startup?
- Any awards/recognition received by the entity
- What is the problem that the Startup is solving?
- How does the Startup propose to solve the problem?
- What is the uniqueness of the solution provided by the Startup?
- How does the Startup generate revenue?
- Any other that may be requested for by the DPIIT
7. Are there any recommendation letters that can help in getting the registration easily?
- Any patent filed and published in patent journals available online or offline;
- Recommendation letter from Incubators which are established in post-graduation colleges in India;
- Support letter from any one of the Startups which is funded through Central or State Government authorities or any incubator which is duly recognized by the Government of India;
- Letter of funding in an equity which should not be less than 20% by angel or incubation fund;
- Letter of recommendation (regarding innovative nature of business), from an Incubator, recognized by the Government of India in DIPP specified format.
- Letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation
8. What are the tax exemption and benefits allowed to Eligible Startups under Startup India Program?
- Tax exemption under Section 80-IAC is given for any three consecutive years out of seven years from the year of incorporation of Startup
- Angel Tax Exemption for Investment above Fair Market Value under Section 56 of the Income Tax Act is available, if the aggregate amount of paid up share capital and share premium of the Startup after issue or proposed issue of share, if any, does not exceed, twenty five crore rupees
- Exemption from tax on Long Term Capital Gains u/s 54EE
- Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups u/s 54GB
- Set off of carry forward losses and capital gains allowed in case of a change in shareholding pattern
9. List of some tech incubators
- Kerela Startup Mission
- DLabs, Indian School of Business
- Indian Angel Network
- Amity Technology Incubator
- PayPal Incubator
StartUp India is a wonderful initiative undertaken up by the government which provides incentives to budding entrepreneurs to scale up their business, which in turn provide solutions to varied challenges & problems along with innovation, development or improvement of products/processes/services. This initiative has given a boost to the start up community.
1.Department for Promotion of Industry and Internal Trade
This article is also published in Taxguru: https://taxguru.in/corporate-law/start-recognition-registration.html