Respected Prime Minister Mr. Narendra Modi have unveiled the most ambitious project called as “Startup India, Stand up India”. This initiative is brought in to encourage and build up a hassle free environment for the startups, where range of activities and facilities are carried out for the startups like self-certification which will ease up the legal compliances, startup patent application which will pace up the patent process and will also allow almost 80% rebate while filing the patent.
However, most important aspect of any business is taxes and its impact. Startup India mission has taken care of that aspect also. Lets see how your startup business can get a tax exemption for 3 years.
How start up is defined?
Any business which
- Is Incorporated or registered in India not prior than 5 years,
- Does not have turnover exceeding Rs.25 crores in any preceding fiscal years,
- Is not formed by way of splitting up or reconstruction of an existing business,
- Is either private limited company or registered partnership or Limited Liability Partnership (LLP)
- Works towards innovation, development or commercialization of any new product, process or services, which is supported or driven by technology or intellectual property.
Will all the startups be eligible automatically for the tax exemption?
As per Startup Action Plan, for availing the tax holiday for 3 years, the startups would need to get approval as an eligible business from IMB (Inter Ministerial Board of Certification). This approval must be obtained by the end of the fiscal year 2018-2019 i.e. by March 2019. This process will typically go like this.
- Ensure that your startup is registered or incorporated since only startups registered on or after April 2016 will be considered for the tax exemption.
- Get a recommendation letter for your business with effect to innovation or development with technology or intellectual property, either from
- any incubator
- which is funded by the government, or
- from any post-graduation college, or
- recognized by the government of India.
- or any investor (i.e. startup is funded by Angel Fund/ Private equity Fund/ Accelerator / Incubation Fund)
- or from India Patent Office (where the patent is registered and granted to the business by this office)
This step will involve so many sub steps like presentations to these bodies, presenting of business plan etc. for better pitching. This process is introduced to check on the credibility of the basic business idea and to ensure that only worthy startups will obtain tax holidays.
- If you do get the letter saying that your business is innovative then the DIPP (Development of Industrial Planning and Promotion) which is set up by IMB, will give approval of eligibility of your startup for the tax exemption.
For being eligible startup, it should
- Not have been formed by splitting up or reconstruction of existing business,
- Have minimum 80% of the total plant and machinery as new and first hand equipment,
- Have turnover not exceeding Rs.25 crores during the period of 5 years from the year from which the startup starts availing the benefit of tax holiday.
What is this tax exemption all about?
Startups which are approved as an eligible startup till March 2019, would be able to avail the tax holiday for time window of 5 years from such approval. The actual benefit would be exemption of 100% profits derived from business for 3 years out of seven years’ period as per budget 2017.
For e.g. if any startup makes profits or losses as below;
Year 1- loss, Year 2 – profit, year 3- profit, year 4- profit, year 5 – profit, year 6 -profit, year 7 – loss
Then it won’t lose on the tax exemption for year 2, 3 and 4, even if it incurs loss in between.
- MAT will still be applicable in this case where the startup is availing the tax holiday for 3 years.
- Tax exemption is subject to non-distribution of dividends during such period of availment of tax holiday.
- Getting the recommendation letter as to effect that the business is innovative quite tricky since innovation is evaluated with respect to potential of development and commercialization of products which are differentiated and having incremental value. In short, innovation or development or commercialization should be with
- Either totally new product or services
- Or improvement in existing products and services which will add value
- 100% Tax holiday is only given with respect to income under the head business or profession, and for not any other income of the startups.
What does experts say?
For any startup, it is very difficult to even break even in first few years, since the business is not yet settled and known to the public. It takes longer period to render profits, so it is better and imperative that the tax holiday time window should be extended from mere 7 years to 10 years.
Also, ambiguity with respect to revocation of tax exemption is still there. It is not clarified whether the tax exemption will be revoked with retrospective or prospective effect if the turnover limit is breached (more than Rs.25 crores)