In this article, Roshni Singh, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the tax benefits every entrepreneur should know about.

Introduction

India is in its developing stage and day by day becoming one of the biggest tech startup hubs in the world. To flourish startups in India, the present government has announced STARTUP INDIA program with its main aim to create an environment which works for extension of startups in the country and the progress of entrepreneurs.

What is a startup?

To be considered as a startup under the Startup India policy, the following criteria must be met:

1. It should not be incorporated prior to five years from the day the program came to force.
2. Its annual turnover should not exceed INR 25 crores in the preceding financial year.
3. It should be working for some innovation or development.
4. Such entity should not be in existence by splitting up, or through a reconstruction of a business already in existence.

Tax exemptions given to startups

Startup program has benefited lots of entrepreneurs by giving lots of tax benefits to them. It should be noted that startup which are formed as private limited companies, limited liability partnership (LLPs), One person companies (OPCs) and/or registered as Partnership firms are eligible for tax exemptions and other benefits.

• Tax exemption for first three years

One of the most lucrative benefits which are given to eligible startups is the exemption of 100% of tax on profit gains for the first three years with the exception of Minimum Alternate Tax (MAT). MAT is taxable as 18.5% of the book profit.

For the realization of such benefit, the startup should be registered under the Department of Industrial Policy and Promotion (DIPP) and should be working towards innovation, development or commercialization of new product or service providing through intellectual property. Getting a tax holiday for complete three years can be really useful.

• Funds of Funds

Another benefit that is given by the government to entrepreneurs at their initial stage of development in order to boost up their startup is the fund with an initial corpus of INR 2500 crores and a total corpus of INR 10000 crores over a period of four years. This funding is under the head of “Funds of Funds (FOF)” which will be directly invested but would be under the direction of SEBI. It is only applicable to the eligible startups which are registered under DIPP.

The financial shortage is one of the most common problems faced by entrepreneurs and in that situation even a slightest financial help may result in great acceleration to their startup.

• Exemption on capital gain tax

Companies whether newly incorporated or having a remarkable existence have their shares in the market and they generally raise capital or funds from stock sharing and other things and it is generally a very common way of business with people. Profit earned by these ways are termed as capital gains and thus are under tax provisions. One another important tax benefit that has been provided is the exemption of 20% of capital gain tax to entrepreneurs, that is, tax exemption on getting profit from selling the capital assets like stock, bonds, shares, etc.

• Abolition of angel investment tax

Investments are major sources of funding for an entrepreneur. But during the initial stage of a startup, they lack trust in the market and hence, it is not possible for them to get an investment from a venture capitalist or loans from banks. So entrepreneurs generally prefer to seek angel investors. Interest and profit payable to them are generally negotiable. For further relief, the government has also taken away the angel investment tax, which means, an investment made by angel investors who are friends or family members not registered as Venture Capitalist funds will not be taxed.

Under the amendment of Section 56(2) (vii) (b) of Income Tax Act, they have got a liberty to issue shares to the investors at a higher rate than the fair value without any hassles of taxation.

The policies of the government which include taxation have been drastically changed under the budget of 2017-18. The government has introduced a number of policies which mostly seem to help to the entrepreneurs of the country especially under the startup India program.

• Other beneficiary provisions

Apart from tax benefits, the government had also introduced certain other provisions regarding benefiting and supporting entrepreneurs in the country. There are certain other provisions adjusting taxation and allocating funds to boost up the startup which are as follows:

1. Provisions of allocation of fund of INR 500 crores for support of entrepreneurs belonging to Schedule Tribe and Schedule Caste and Women Entrepreneurs.
2. Long-term capital gains have been lowered from three to two years for unlisted firms.
3. Motor Vehicle Act has been amended to encourage entrepreneurship in road transport sector.
4. Businesses with turnover INR 2 crores now are allowed to use presumptive tax schemes which earlier was INR 1 crores.
5. Employee Provident Fund (EPF) has been provided for the first three years.

Conclusion

Indian regulators find that the very way to help the entrepreneurs is helping them in taxation hassles. All the above tax benefits and other fund allocations are very vividly helpful to the startups. However, there are still rooms vacant to help the startups in India. Some of the long-term demands have been fulfilled by the government while others are left untouched.

• One of the main things is the work environment, which could be fertile for entrepreneurship, which should have been given more consideration in this startup India program.
• Also, the amount of exemption in capital gain tax is low as the initial capital gain is generally low so it is not going to help much effectively. The eligibility standards that has been created has disappointed many startups as they are not able to meet up the eligibility standards.
• One thing that should also be emphasized by the government is the interaction of young entrepreneurs with international investors or business personalities or technological upgradation in innovative startups in the field of technology.

BIBLIOGRAPHY

• https://blog.allindiaitr.com> Taxation
• https://www.thebetterindia.com
• https://m.economictimes.com> Legal
• Income tax act,1961