Tax Exemptions Available For Indian Startups
Startups are the answer to some of the challenges lying before our economy. There is a rising need for promoting entrepreneurship and business investment in India. India has no dearth of talent. All it needs to take is the right push to encourage budding entrepreneurs into investing in startups and thereby promote innovation and self-sufficiency. Startups need to be promoted because they can be formed with relative ease, owing to the encouragement of the government and they possess immense potential to turn into large corporations. It is ideas that drive startups. All it takes is the right mentoring and funding to achieve the full potential of an idea.
Role Of The Government
The role played by the Government of India in promoting startups have been commendable. The Union government launched an action plan called Startup India in order to make the process easier for startup registration, funding and mentoring. There are remarkable exemptions granted to startups in terms of tax and regulatory compliances. Banks are encouraged to provide venture funding for startups. Government investments would be made in Venture funds by SEBI, Government procurement norms are being relaxed to promote startups by avoiding the requirements for prior experience/turnover, in order to be eligible for government procurement. Patent applications of startups are being fast tracked and the entire registration procedures have been simplified.
Tax Exemptions Available For Startups
Tax Exemptions form a significant chunk of the overall support provided to startups by the government. Following are the ways in which the government provides exemptions to startups under the flagship initiative Startup India.
Capital Gains
Capital Gains mean the amount of margin earned by selling Capital Assets like Land, building etc. It is a significant source of gains owing to high monetary values of capital assets. The objective of providing exemption to capital gains is to promote startup investments by directing the capital gains arising from the sale of capital assets.
Startups find it difficult to attract investment in their initial stage due to their high risk nature. It becomes important to incentivise investments in startups. Therefore, persons who have capital gains during the year would be exempted, if they have invested the amount gained gains in the Fund of Funds recognized by the Government. The Fund of Funds will contribute to various funds registered with SEBI for investment in Startups.
Presently exemption from capital gains tax exists for investment in newly formed manufacturing Micro, Small Scale and Medium Enterprises (MSME) by individuals. This will be extended to all Startups. Usually, Capital Gains are taxed if the amount gained is not invested in New Capital Assets. Investment in Computers or Softwares for use in core business activity shall also be regarded as purchase of ‘new assets’. This is keeping in mind the promotion of technology driven Startups.
Tax Exemption For 3 Years
Income tax is levied by the central government from both individuals and business organisations. The amount of taxation can be a considerable portion of the total income earned by startups.
There is a need to address the growth of Startups and their working capital requirements. Considering the constraints faced by startups in funding, the deduction of income tax can have a direct bearing on the profitability and success of a startup.
Startups can grow only if Innovation is promoted. Initial years of a startup are crucial with ideas getting tested and re-tested. There would be a need for significant capital investment in adopting new technology in order to stay ahead in the race. The challenges faced by a startup are mostly unique. The burden of payments in the form of taxation can even stunt the growth of a startup, as raising funds for operational expenses is a challenge in itself.
The government exempts startups from income tax for a period of 3 years with a view to promote their development and to provide them a competitive platform. This fiscal exemption can have an effect on the growth of business and increases the availability of working capital during the initial years of business of a startup. The availability of the exemption shall be subject to non-distribution of dividend by the Startup.
Tax Exemption On Investments Above Fair Market Value
Seed Capitals are investments made during the initial stages of a startup. It is as crucial as the nutrients given to a seedling while planting. It is utmost important to encourage seed-capital investment in Startups by providing exemptions in Income Tax Act, 1961.
For companies, any consideration for issue of shares exceeding the Fair Market Value (FMV) of such shares, is taxable in the hands of recipient under the head ‘Income from Other Sources’ It is also difficult to determine the FMV of shares of a startup since the idea is in a development stage. In most cases, the Fair Market Value is estimated lower than the value at which the capital investment is made. This translates into tax being levied under Section 56(2) (viib) of the Income Tax Act.
Presently, investment in Startups by venture capital funds is exempted from being taxed under the above provision. The government shall extend the exemption to the investment made by incubators in Startups. Incubators are organisations that help in mentoring startups by way of investments management training, etc.
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