Start Up Tax Benefits - Summary

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1. 100% Tax Exemption for First Three Years

“It is proposed to provide a deduction of 100% of the profits and gains derived by an eligible startup from a business involving innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property,” said Finance Minister Arun Jaitley while announcing the Union Budget 2016-17 in Parliament.

In order to give budding entrepreneurial ventures a much-needed boost, the government has decided to do away with taxing them for the first three years of their operation.

It was declared in the Budget Session of the Parliament that startups will not incur any taxes on profits incurred in their first three years except MAT. MAT stands for ‘Minimum Alternate Tax’ and is calculated on ‘book profit’.

2. Abolition of ‘Angel Investment Tax’

As a form of further relief, the government has also done away with the ‘Angel Investment Tax,’ introduced in 2012.

Under this, angel investors, i.e., family and friends and domestic funds not registered as VC funds, which one raises from venture capital firms set up for the very purpose of backing such ventures, will not be taxed on these investments. They have the liberty to issue shares to investors at rates higher than fair value without any taxation hassles. This was brought into being by amending Section 56(2)(vii)(b) of the Income-Tax Act.

However, there are some restrictive terms here. Only startups which fulfill the conditions specified by the Department of Industrial Policy and Promotion (DIPP) are eligible for this startup tax exemption. In order to avail this concession, a startup will have to attain a certificate stating its eligibility from the ‘inter-ministerial board of certification.’

3. Setting up of a ‘Fund of Funds’ for Startups

In order to help startups in their initial stage by providing them with the necessary financial boost, the government has decided to set up a fund with an initial corpus of Rs. 2,500 crore and a total corpus of Rs. 10,000 crore over a four year period.

The fund will come under ‘Fund of Funds (FoF)’ which won’t invest directly in startups but will be directed through SEBI registered venture funds, as the action plan suggests.

A board of professionals from diverse areas will be set up to manage this fund. Life Insurance Corporation of India will be an investor in this fund which will support a whole range of sectors like manufacturing, agriculture, health, etc.

4. Exemptions in Capital Gains Tax

The government has also recently made provisions for an exemption of 20% capital gains tax. Capital gains tax is the tax charged on profits from sale of capital assets, such as stocks, bonds, etc. This was a long-pending demand and is deemed to prove highly lucrative for startups as before, overseas venture capital investors were forced to route their investment through Mauritius.

Before this provision, most investments in Indian startups were routed through Mauritius as capital gains tax on investment from there was waived following provisions in the Double Tax Avoidance Treaty.

5. Other Tax Adjustments and Fund Allocations to Boost Startups

Some other important adjustments and allocations made in this area to boost startups are as follows:

Setting up of provisions to support entrepreneurs belonging to Scheduled Caste and Scheduled Tribes.
Allocation of Rs. 500 crore for SC/ST and women entrepreneurs under Startup India.
Lowering long-term capital gains for unlisted firms from three to two years.
Amendment in the Motor Vehicles Act to enable entrepreneurship in the road transport sector.
Raising of the eligibility for the presumptive tax scheme for small businesses. This is done by allowing businesses with a turnover of up to Rs. 2 crore from the earlier Rs. 1 crore to enjoy coverage under it.
Provision for ‘Employee Provident Fund’ for the first three years. This is thought to save 12 % of the costs for the startups and provide security benefits for the employees.
Providing relief to entrepreneurs living in rented houses away from their native places, because of the effect of the area on the success of startups, by raising the 80GG deduction from Rs. 24,000 to Rs. 60,000.
These policies under the “StartupIndia” scheme of the government as proposed in the Union Budget 2016-2017 seem to be made with the purpose of providing impetus to all budding ventures. It is also a subsidiary of the ‘MakeInIndia’ scheme as it aims to create more jobs within the country so that the youth doesn’t have to look to other countries for employment. more