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India with a startup base of over 80,000 companies as at 2020, has witnessed an impressive growth in the landscape of startups. The growth in incorporation of entity across India has been increased significantly majorly in Fintech, AI, Digital Revolution, Entertainment, Transportation, Education Tech etc.,
Per definition of DPIIT a entity is considered to be startup if it fulfils the following criteria
Period of existence and operations should not be exceeding 10 years from the Date of Incorporation
A Private Limited, a Registered Partnership Firm or a Limited Liability Partnership
Should have an annual turnover not exceeding INR 100 crore for any of the financial year since its incorporation
Working towards innovation, development or improvement of products or process or services or it is a scalable business model with a high potential of employment generation or wealth creation.
Entity should not have been formed by splitting up or reconstruction an already existing business
The startup ecosystem in India mainly comprises entrepreneurs, funding houses such as seed, angel, VC’s, Private equity firms etc., research & knowledge organizations.
The startup funding is based on the Ideas, Technology & Solution the entity is providing to the globe.
To reduce the regulatory burden on Startups, thereby allowing them to focus on their core business and keep compliance costs low.
DPIIT recognised startups that are within 5 years of incorporation.
Government Schemes & Benefits – Income Ta
The Startup incorporated between April 1, 2016, till 31st March 2021 were eligible for this scheme. Budget 2021 has extended the eligibility to 31st March 2022. Such startups will be eligible for getting 100% tax rebate on profit for a period of three years in a block of seven years provided that annual turnover does not exceed Rs 25 crores in any financial year.This will help the startups to meet their working capital requirements during their initial years of operation.
A new section 54 EE has been inserted in the Income Tax Act for the eligible startups to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by Central Government within a period of six months from the date of transfer of the asset. The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Such amount shall be remain invested in the specified fund for a period of 3 years.If withdrawn before 3 years, then exemption will be revoked in the year in which money is withdrawn.
The government has exempted the tax being levied on investments above the fair market value in eligible startups. Such investments include investments made by resident angel investors, family or funds which are not registered as venture capital funds. Also, the investments made by incubators above fair market value is exempt.
The existing provisions u/s 54GB allows the exemption from tax on long-term capital gains on the sale of a residential property if such gains are invested in the small or medium enterprises as defined under the Micro, Small and Medium Enterprises Act, 2006. But now this section has been amended to include exemption on capital gains invested in eligible start-ups also.
Thus, if an individual or HUF sells a residential property and invests the capital gains to subscribe the 50% or more equity shares of the eligible startups, then tax on long term capital will be exempt provided that such shares are not sold or transferred within 5 years from the date of its acquisition.The startups shall also use the amount invested to purchase assets and should not transfer asset purchased within 5 years from the date of its purchase.
This exemption will boost the investment in eligible startups and will promote their growth and expansion.
The carry forward of losses in respect of eligible start-ups is allowed if all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of previous year in which such loss is to be carry forward.The restriction of holding of 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in case of eligible startups.