START UP COMPANY AND TAX BENEFITS AVAILABLE TO START UP

Start-Up Company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognized as such in accordance with notification number 16[G.S.R. 127 (E), dated the 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade]:

G.S.R. 127(E) — This notification is being issued in supersession of the Gazette Notification No. G.S.R. 364(E) dated April 11, 2018 as modified vide Gazette Notification No. G.S.R. 34 (E) dated January 16, 2019.

Definitions

  1. In this notification,-
  • An entity shall be considered as a Startup:
    1. Upto a period of ten years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
    2. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees.
    3. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.

Explanation

An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds one hundred crore rupees.

  • “Act” means the Income-tax Act, 1961;
  • “Board” means the Inter-Ministerial Board of Certification comprising of the following members:
  1. Joint Secretary, Department of Promotion of Industry and Internal Trade, Convener
  2. Representative of Department of Biotechnology, Member
  3. Representative of Department of Science & Technology, Member
  • “CBDT” means Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963);
  • “limited liability partnership” shall have the meaning as assigned to it in clause (n) of subsection(1) of Section 2 of the Limited Liability Partnership Act, 2008;
  • “Partnership firm” means a firm registered under section 59 of the Partnership Act, 1932;
  • “Private limited company” shall have the meaning as assigned to it in clause (68) Section 2 of the Companies Act, 2013;
  • “Turnover” shall have the meaning as assigned to it in clause (91) Section 2 of the Companies Act, 2013;
  • All references to “Forms” in this notification shall be construed as references to the forms set out in Appendix-I hereto;
  • “DPIIT” means Department for Promotion of Industry and Internal Trade.

Recognition

  1. The process of recognition of an eligible entity as startup shall be as under: —
    • A Startup shall make an online application over the mobile app or portal set up by the DPIIT.
    • The application shall be accompanied by—
      • A copy of Certificate of Incorporation or Registration, as the case may be, and
      • 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 enquiries, as it may deem fit, —
      • Recognize the eligible entity as Startup; or
      • Reject the application by providing reasons.

Certification for the purposes of section 80-IAC of the Act

  1. A Startup being a private limited company or limited liability partnership, which fulfills the conditions specified in sub-clause (i) and sub-clause (ii) of the Explanation to section 80-IAC of the Act, may, for obtaining a certificate for the purposes of section 80-IAC of the Act, make an application in Form-1 along with documents specified therein to the Board and the Board may, after calling for such documents or information and making such enquiries, as it may deem fit, —
    • Grant the certificate referred to in sub-clause (c) of clause (ii) of the Explanation to section 80- IAC of the Act; or
    • Reject the application by providing reasons.

Exemption for the purpose of clause (viib) of sub-section (2) of section 56 of the Act

  1. A Startup shall be eligible for notification under clause (ii) of the proviso to clause (viib) of sub-section (2) of section 56 of the Act and consequent exemption from the provisions of that clause, if it fulfills the following conditions:
    • It has been recognized by DPIIT under para 2(iii)(a) or as per any earlier notification on the subject
    • 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:

Provided that in computing the aggregate amount of paid up share capital, the amount of paid up share capital and share premium of twenty five crore rupees in respect of shares issued to any of the following persons shall not be included─

  • A non-resident; or
  • A venture capital company or a venture capital fund;

Provided further that considerations received by such a startup for shares issued or proposed to be issued to a specified company shall also be exempt and shall not be included in computing the aggregate amount of paid up share capital and share premium of twenty five crore rupees.

  • It has not invested in any of the following assets,─
    • Building or land appurtenant thereto, being a residential house, other than that used by the Startup for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
    • Land or building, or both, not being a residential house, other than that occupied by the Startup for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business;
    • Loans and advances, other than loans or advances extended in the ordinary course of business by the Startup where the lending of money is substantial part of its business;
    • 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 ten lakh rupees, other than that held by the Startup for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;
    • Jewelry other than that held by the Startup as stock-in-trade in the ordinary course of business;
    • Any other asset, whether in the nature of capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act.

Provided the Startup shall not invest in any of the assets specified in sub-clauses (a) to (h) for the period of seven years from the end of the latest financial year in which shares are issued at premium;

Explanation.─ For the purposes of this paragraph,-

(i)“Specified Company” means a company whose shares are frequently traded within the meaning of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and whose net worth on the last date of financial year preceding the year in which shares are issued exceeds one hundred crore rupees or turnover for the financial year preceding the year in which shares are issued exceeds  two hundred
fifty crore rupees.

(ii) The expressions “venture capital company” and “venture capital  fund” shall have the same meanings as                 respectively assigned to them in the explanation to clause (viib) of sub Section( 2) of Section 56 of the Act.

Declaration

  1. A startup fulfilling conditions mentioned in para 4 (i) and para 4 (ii) shall file duly signed declaration in Form 2 to DIPP that it fulfills the conditions mentioned in para 4. On receipt of such declaration, the DPIIT shall forward the same to the CBDT.

Scope

  1. Notification referred in para 4 shall apply irrespective of the dates on which shares are issued by the Start up from the date of its incorporation, except for the shares issued in respect of which an addition under section 56(2) (viib) of the Act has been made in an assessment order made under the Act before the date of issue of the notification.
  2. Notification referred to in para 4 shall be applicable only in respect of applicability of the provisions of section 56(2)(viib) of the Act to the Startup and shall not grant any exemption in respect of applicability of other provisions of the Act.

Revocation

  1. (1)  In case it is found that any certificate referred to para 3 has been obtained on the basis of false information, the Board reserves the right to revoke such certificate or approval.

(2) Where the certificate or approval has been revoked under sub-para (1), such certificate or approval shall be            deemed never to have been issued or granted by the Board.

  1. In case the Startup which has furnished declaration in Form-2 invests in any of the assets specified in para 4(iii) before the end of seven years from the end of the latest financial year in which the shares are issued at premium, the exemption provided under section 56(2)(viib) of the Act shall be revoked with retrospective effect.

Key Takeaways

A start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship refers to all new businesses, including self-employment and businesses that never intend to become registered, startups refer to new businesses that intend to grow large beyond the solo founder. At the beginning, startups face high uncertainty and have high rates of failure, but a minority of them do go on to be successful and influential. In this situation the Government appreciates start-ups by giving them deductions in Tax. It reduces the start-ups tax burden at the initial stage of the business.

 

For more information and updates, you can contact CA Rajeev Gupta or visit our website https://www.sigmac.co.in/my-blog/.  

 

About the Author: This article is contributed by CA Rajeev GuptaPartner – SIGMAC & Co, Chartered AccountantsLocation- Delhi NCR and Gurgaon.

In case of any query please feel free to contact us at: rajeev@sigmac.co.in

 

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