Tax Incentives to Startups in India

The introduction of the Goods and Services Tax (GST), the Insolvency and Bankruptcy Code, 2016 and the General Anti Avoidance Rule are instrumental in bringing more business under the vigilance of government and preclude tax evasion and corruption. The OECD data of 2017 cuts India’s growth forecast to 7%, according the secretary general Angel Gurria reports that India tops in tax reforms amongst the G- 20 countries, further calling the reforms to be historic and effective.

The challenge is to sustain the reform momentum in order to generate investments and lucrative job avenues. In addition to this the government needs to find solution to relatively high corporate taxes, income tax rates, slow land acquisition methods and non- performing loans.

Startup India- A boon to the Entrepreneurs

Startup India is a flagship program of the Indian government launched in January 2016, to foster entrepreneurs in doing business through innovation and startups which is defined by the Department of the Industrial Policy and Promotion as an entity, whether incorporated or registered in India.

Keeping in track with the objectives of the program, the government launched ‘Startup India Action Plan’ which included-

1. Simplification

2. Funding Support and Incentives.

3. Industry- Academic Partnership and Incubation

It helped those entrepreneurs without any business back ground by providing support through mentors, accelerators, investors through Apps, learning programs. The silver lining of the plan is that it enables the entrepreneurs to self-certify themselves under six Labor Laws and three Environment Law and escape the tedious process of going around various government offices and lengthy paper work.

Incentives to start ups can be both tax based or non- tax based like:

1. Providing Funding Support through a Fund of Funds with a Corpus of INR 10,000 crore

2. Credit Guarantee Fund for Startups

3. Tax Exemption on Capital Gains

4. Tax Exemption to Startups for 3 years

5. Tax Exemption on Investments above Fair Market Value

Tax incentives can be provided by the state governments, but nation-wide incentives are commonly opted for. The latter is further categorized into-

1. Location- based

2. Industry- based

3. Export- linked

4. Activity- based

These includes incentives for businesses situated in special economic zone (SEZs) or less developed regions; incentives for specific industries, such as power, ports, highways, electronics, and software; newly set-up Indian companies, startups recognized under the National Startup Policy, and establishing a new industrial undertaking

Those funds that are not registered as venture capitals (VC) like domestic funds from family and friends or funds which are categorically raised from VC firms set up for backing such ventures, will not be taxed on their investment into a startup. Such funds include funds from angel investors who are former entrepreneurs or professionals who provides starting or growth capital in ventures, and further act as the indirect advisors.

Apart from these, there is exemption from the Angel Investment tax of 2012. This provides that funds from angel investors, who is a former entrepreneur or professional providing starting or growth capital in promising ventures and act as indirect advisors.

Amendments made by the Finance Bill, 2018

1. 100% deduction to start-ups for 3 consecutive years out of seven years if it is incorporated between 01.04.2016 to 31.03.2018 and the turnover is upto INR 25 crores per year between 01.04.2016 to 31.03.2021. Start-ups incorporated between 01.04.2019 to 31.03.2021 can also avail the benefit of this Section. Further, turnover limit of INR 25 crores is applicable for first seven years from start date.

2. The startups have to pay Minimum Alternate Tax [MAT] at 18.5% along with the applicable surcharge and cess MAT exemptions will be ensured for the first 5 years in case the startup fails to make any profit .

3. Long-term capital gains (LTCG) u/s 54EE will be invested in the Government’s special funds. The investment may go up to INR 50 Lakh and to be invested within 6 months from the date of transfer of assert and the exemptions will be applied for three years

4. The domestic companies who hold turnover less than INR 5 Crore in the 2014-15 will be liable for 29% tax along with surcharge and other cess

5. The Finance Minister has also proposed different taxes for the new domestic manufacturing companies that have been setup on or after 1st March, 2016. Such companies will be taxed at 25% plus with cess and surcharge. The tax is proposed on the conditions if the company do not claim any incentives under profit or investment.