Tax sops to startups

Reports say that the stock market regulator, Securities and Exchange Board of India is exploring ways to encourage investments in alternative investment funds (AIF) which invest in start-ups. In this context, let us know some main encouragements by way of sops to encourage establishment of start-up companies in the country.

For the purpose of government schemes, a start-up means: An entity, incorporated or registered in India; Not older than five years; Annual turnover does not exceeding INR 25 crore in any preceding financial year; Working towards innovation, development, deployment or commercialization of new products; processes or services driven by technology or intellectual property.

Such entity should not have been formed by splitting up, or reconstruction, of a business already in existence. It cease to be a Start-up if its turnover for the previous financial years has exceeded Rs 25 crore or it has completed 5 years from the date of incorporation/ registration.

The exemptions are as follows: Section 54EE in Income-tax Act, 1961 exempt investment of long term capital gains by an investor in a fund notified by Central government. The Act provides provide exemption of capital gains arising out of sale of residential property, on investing the same in shares of Start-up company.

New section 80-IAC provides 100% deduction for three consecutive years out of five years, to profits of start-ups which are approved by Inter-Ministerial Board of Certification notified by DIPP. Government also decided to prevent incidence of “Angel Tax” on angel investors investing in approved start-ups.

In the case of a company being an eligible start-up, loss shall be carried forward and set off against the income of the previous year. The restriction of fifty one percent of shareholding of company to remain unchanged in order to carry forward and set-off the loss of earlier years has therefore been relaxed in the case of start-ups.

Deduction under section 80-IAC can be claimed by an eligible start-up for any three consecutive assessment years out of seven years beginning from the year in which such eligible start-up is incorporated as against three years out of five years provided by Finance Act, 2016.