Income Tax Incentives for Startups in India

Who doesn’t want to run their own company? Everyone does. However, the dynamics have altered. Owning a business no longer requires setting up shop in a well-known shopping centre or at a well-liked market. The way businesses are conducted has entirely changed in the twenty-first century, and this new mode of operation is startups. India has the third-largest startup ecosystem in the world, with some 38,000 start-ups calling the country home. This is another reason why startups are popular among adults as well as young people, as many experienced workers are quitting well-paying corporate jobs to work in this start-up ecosystem. Consider Nykaa, which recently joined the unicorn club with new funding of Rs. 100 crores. CEO Falguni Nayar launched Nykaa at the age of 50 after having achieved success as an investment banker at Kotak Mahindra.

Why does the government encourage new businesses?

Everyone has been bitten by the start-up bug, and students from ivy-league institutions now prefer start-ups to lucrative corporate jobs. Even though it might seem nice, leaving a steady job and taking a chance to launch a business that might or might not be successful is not an easy task.

Even Nevertheless, there are plenty of driven individuals prepared to venture into the startup industry. However, these start-ups are not only stories of passion; they are also tales of offering contemporary solutions to contemporary issues and enhancing the economy by generating jobs. Therefore, the government must intervene to provide incentives for these modern firms.

You know, every time a business considers the government, they just have one wish: tax exemption. Because, in India, enterprises pay around 50% of their earnings as tax if you consider Income tax, GST, and other state taxes combined. The government introduced the Startup India Programme in 2016 to encourage entrepreneurs, and those that qualify might experience their “dream-come-true moment.”

When does a Startup start to qualify?

The start-up should be registered as a corporation or LLP and should be established or registered for no more than 10 years.

It shouldn’t have made a 100 crore rupee profit since its formation.

The obvious one is that it should have the capacity to create wealth or jobs.

What types of tax exemptions are permitted?

A startup can receive the following tax advantages if it meets the prerequisites to qualify for tax incentives:

• 3 years in a row with no profit taxes

The business has the option to forgo paying any tax on its profits for three of the seven years in a block. The government decided to provide this tax exemption in any three consecutive years the company wanted to because the majority of start-ups experience losses in their first few years. The company must, however, meet the requirement that its annual turnover in none of those fiscal years exceeds Rs 25 Crores.

• No tax is levied when shares are issued above fair market value.

According to the Income Tax Act, a firm that issues shares and gets payment above the Fair Market Value is required to pay tax on the transaction. However, start-ups approved by the Department of Promotion of Industry & Internal Trade are exempt from this tax. As a result, start-ups can raise more money from angel investors based in India to buy equity holdings in those start-ups without having to worry about paying taxes.

• Tax exemption on LTCG

Startups can take advantage of this provision to receive exemptions on their long-term capital gains (LTCG) from the sale of any asset if such gains are invested in a fund announced by the Central Government within six months of the date of the asset transfer, even though this is not a feature specific to startups. The minimum time frame for such an investment is 3 years, and the maximum investment amount is Rs. 50 lakhs.

Set off and carry over losses

If the people who held 51% of the voting power at the beginning of the year still possess that 51% voting power on the last day of the year in which the loss was incurred, a private corporation can carry forward its losses. But this clause has been loosened for new businesses. Instead, the only need is that, regardless of voting power, all initial shareholders still own shares on the last day of the year.

• Individuals and HUFs investing in startups are exempt.

Additionally, to encourage people and HUFs to invest in start-ups, the government has included a provision in the Income Tax Act that exempts from taxation people and HUFs who use the proceeds from the sale of residential property, such as a house or a plot, to buy stock in a qualified startup. This action by the government encourages investment in startups from the general public and provides start-ups with another funding source. The government is also attempting to encourage the incorporation of OPCs (One Person Companies), which have no shareholding restrictions and can later be changed into any sort of company, such as a private limited company or an LLP. The person founding an OPC, however, had to have lived in India for at least 182 days to qualify. It has been suggested that these 182 days be cut down to 120 days in the budget for 2021. To encourage NRIs to join the Indian startup club.

Conclusion

India has grown to be the third-largest hub for start-ups thanks to its energetic young people and government incentives. As a result of the Covid epidemic, the unemployment rate in India increased from 7.9% in 2019 to around 10.3% in December 2020. However, the start-up industry thrived even during these challenging times, adding 14% more jobs in 2020 compared to 2019. The government has done a good job of upholding its end of the bargain by supporting digitization and including these tax breaks in each budget. With the rate at which Indian start-ups are thriving and the government’s goal of “Make in India,” the day when India becomes the top startup hub in the world is quickly approaching! How do you feel?

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