The Budget 2016 came at a time when the expectations from the startup ecosystem were sky high. In order to boost small business and MSME sectors, the Finance minister announced various schemes and policies in sync with the Startup Indian Action plan announced by PM Modi. Apart from giving 100 per cent tax deduction for three years and allotting Rs 500 cr fund for Women and SC/ST entrepreneurs, he also revealed some more positive strokes for these sectors.
In January, Prime Minister Narendra Modi had unveiled a slew of incentives to boost startup businesses, offering them a tax holiday and inspector raj-free regime for three years, capital gains tax exemption and Rs 10,000 crore corpus to fund them.
A few in the industry, however, criticized that such measures are more optical than practical as It is a well known fact that the prospect of earning profits is anyway a challenge for the first three to five years for startups. In view of this, Commerce and Industry Minister Nirmala Sitharaman has asked the finance ministry to consider raising tax holiday for startups to seven years to encourage budding entrepreneurs.
ANGEL TAX – Axed!
Latest roll-out being The Central Board of Direct Taxes (CBDT’s) notification providing that if a startup gets investment from resident angel investors, it will not be taxed even if the investment is made in excess of the fair value. The exemption provided to startups from the ‘rigour’ of section 56(2)(viib) of the Income Tax Act, 1961 has been long awaited. Due to the Indian Govt’s introduction of a draconian and regressive tax for startups called ‘Angel Tax ‘ in 2012, Startups had to pay 33% tax on their funding and this was one of the primary reasons for mass exodus of Indian startups to startup friendly nations like Singapore. This can be viewed as a welcome relaxation and would ensure that startups can issue shares to investors at higher than fair value without worrying about any tax consequence.
A week ago, the DIPP (Department of Industrial Policy & Promotion) had launched a portal and mobile app through which startups can gather all latest updates on various notifications, circulars issued by various departments and different funding agencies.
Northeastern states of India
Tax benefits are available for setting up undertaking/manufacturing facilities (“units”) in the Northeastern states of India. No area restrictions are applicable in these states, i.e., the unit can be set up anywhere in the notified regions. The notified states are Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura.
The Eligibility criterion includes those entities manufacturing or producing any article or thing or carrying out any eligible business (such as hotels in the two-star category or above, bio-technology, manufacturing of information technology hardware). The Manufacturing activity must be initiated before 1 April 2017.
However, the following products are not eligible for deduction in respect of direct tax incentives:
- Tobacco and manufactured tobacco products, Pan Masala, Plastic carry bags and Goods produced by petroleum oil or gas refineries.
The key incentives are:
- Deduction of 100% of profits of the qualifying unit for 10 consecutive years
- Deduction restricted to profits of the unit on a stand-alone basis
- Refund on excise duty payable on specified value addition for 10 consecutive years
Additional Investment Allowance
Section 32AD of the Income Tax Act, 1961 provides for an additional investment allowance of an amount equal to 15% of the cost of new asset acquired and installed by an assessee, if-
(a) he sets up an undertaking or enterprise for manufacture or production of any article or thing on or after 1st April, 2015 in any notified backward areas in the State of Andhra Pradesh and the State of Telangana; and
(b) the new assets are acquired and installed for the purposes of the said undertaking or enterprise during the period beginning from the 1st April, 2015 to 31st March, 2020.
This deduction shall be available over and above the existing deduction available under section 32AC of the Act.
Start Up – Defined
To avail the benefits the start up should be eligible under the definition of STARTUPS.
“Startup” is an entity, incorporated or registered in India not prior to five years, with an annual turnover of less than Rs.25 crores in any preceding financial year, working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
Such entity should have not been formed by splitting up, or reconstruction, of a business already in existence.
This implies the fact that there is no chance for me-too products. If you are creating another e-commerce firm, you are not liable to get the tax benefits as you will not be defined as a startup unless there is some innovation in your product or process or services.
Only Private Limited Companies, Limited Liability Partnership and Registered Partnerships are eligible for the Government schemes.
Eligible Startup would be the one which is:-
- Supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an Incubator established in a post-graduate college or by Incubator recognized by GoI.
- Be supported by an incubator which is funded (in relation to the project) from GoI.
- Be funded by an Incubation Fund/Angel Fund/ Private Equity Fund/ Accelerator/Angel Network duly registered with SEBI that endorses innovative nature of the business.
- Be funded by GoI as part of any specified scheme to promote innovation.
- Have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.
Some of the highlights of the Startup India Action Plan 2016: –
Compliance based on Self-Certification:
To reduce the regulatory and compliance burden on Startups and allowing them to focus on their core business, the government has relaxed various regulatory formalities required in labor and environment laws. Only random checks would be carried out in certain cases.
80% rebate on filing patent applications by startups – To enable startups to reduce costs in their crucial formative years, startups shall be provided an 80% rebate in filing patents vis-a-vis other companies.
Startup India Hub:
The Startup India hub will be created to create a single point of contact for the entire Startup ecosystem and enable knowledge exchange and access to funding. It will collaborate with Central & State governments, Indian and foreign VCs, angel networks, banks, incubators, legal partners, consultants, universities and R&D institutions to assist Startups on various aspects through their life-cycle.
This will definitely act as a great support system and platform to nurture the whole range of booming entrepreneurs who will add to the Indian economy.