Government of India now Broadens the Definition of Startups
The government of India so far has taken several steps to promote and support startups in India. It has not only announced a large number of benefits for the startups & MSMEs but has also opened multiple avenues for providing financial support.
In this regard, the government of India has recently extended further relief to the Indian startups by widening the definition of startups.
Widening the coverage of startups will help startups to raise tax-free equity funding from investors.
Let us understand how?
- Section 56 (2) (viib) of Income Tax Act 1961 requires companies to pay income tax on funds raised over and above the fair market value of company shares.
- However, the above tax provision is not applicable to companies who fall under the definition of startups.
#1. What was the earlier definition of a Startup?
As per the earlier definition of a startup by Department of Industrial Policy and Promotion (DIPP), a startup is an entity incorporated as a private limited company, a partnership firm or as an LLP in India whose Turnover is up to ₹25 crores.
- A company could avail tag of startup till the first 7 years from the date of company incorporation.
- The Company could continue to be called a startup if its annual turnover did not exceed ₹25 crores.
- Earlier, the duration of a Startup was 10 years from incorporation only in the case of in the biotechnology sector.
#2. How Startup definition is broadened?
With a view to enhancing the availability of capital for startups, the government has now broadened the definition of a startup.
- Now, an entity shall be called a Start-ups till the period of 10 years from the very date of company incorporation. Earlier, this duration was of 7 years.
- Likewise, an entity shall now continue to be considered as a Start-up, if annual turnover for any of the financial years since company formation does not exceed ₹100 crore. Earlier this threshold was ₹25 crore.
#3. Why has the government given further relaxation to Startups?
The Union Minister of Commerce & Industry and Civil Aviation, Sh. Suresh Prabhu has recently approved a proposal to simplify the process of exemption to Startups.
Earlier, there were certain concerns with regard to income tax on investments made by the angel investor to the startups. This issue had to be addressed to make easy availability of capital to the Start-up firms.
#4. How has the government resolved these issues?
Sh. Suresh Prabhu had considered the aforesaid issues with concerned authority.
- As a result, a meeting was held on 4th February 2019 with the Start-ups, all the angel investors, and all other stakeholders.
- The aim was to discuss some new measures to address the issue of tax relaxation on Angel investment and understand the mechanism to deal with it institutionally.
Henceforth, the definition of startup has been broadened in order to resolve this issue.
#5. Which Start-ups are eligible for Income Tax exemption?
Start-ups shall avail the exemption u/s 56 (2) (viib) of Income Tax Act 1961, if its a private limited company recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).
It should not have invested in any of these assets:
Land or building for the residential purpose. However, this won’t include the land or building that is rented out or held as stock-in-trade during the course of business.
A non-residential property, except those occupied for business or if it is rented out, or held as stock-in-trade, during the course of business.
Any Loans or advances, except those given during the course of business by a Start-ups engaged in money lending substantially.
The capital contribution made to any other entity;
Shares and securities;
A motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds ₹10 lakh. This excludes those vehicles which are held by Start-ups for plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;
Jewellery except those held as stock-in-trade by the Start-ups during the course of business.
Any other type of asset, whether a capital asset or otherwise, whose nature is one specified in section 56 (2) (vii) clause (d) sub-clauses (iv) to (ix) of the Income Tax Act 1961. This includes the following assets-
- Archaeological collection
- Any other artwork
- Bullion (gold & silver)
The startups can avail these exemptions while income tax return filing.
#6. How much equity funding exempt from tax?
Funds up to ₹25 crore, which are received by the eligible startups for the shares issued or which are proposed to be issued are now exempted. These exemptions can be availed while income tax return filing.
#7. Whether listed companies can avail this tax exemption?
Yes. The funds got by the eligible Start-ups for the shares issued or proposed to be issued to a listed company that has net-worth of ₹100 crore, or turnover above ₹250 crore are also exempted.
If you want any sort of guidance regarding the process of company formation, or income tax return filing, you can feel free to contact our business advisor at 8881-069-069.
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