It's raining benefits - Startups, SMEs Rejoice!

Published on 16 Jan 2018 by Tushar

The Prime Minister of India, Shri Narendra Modi announced some visionary goals to enhance the Startup ecosystem in the country. Promoting the Startup ideology, the PM initiated the Startup India plan, to fulfil the needs of the struggling entrepreneurs and encourage them to work in a more feasible manner.

Notably, the Budget 2016 also had a different section for the tax benefits and exemption for new startups. The Government aims to boost the economy with the help of technology and consumer-oriented startups.

The latest development being startups incorporated post-March 31, 2016 can apply to avail a tax holiday for three out of seven years, from the date of incorporation. Earlier, the limit was for three out of five years.

More than 3,500 startups have been recognized as eligible for benefits under the scheme. 67 startups have already started availing full benefits under the scheme.

Action Plan by the Government

The Government has also issued an action plan that lists around 19 points that could help the startups to grow at a faster rate. The action points are complied with

  1. Easy launch of mobile app and website,
  2. Self-certification,
  3. Startup India community,
  4. Low-cost patent examination,
  5. Proper funding support,
  6. Easier and faster exit

What qualifies as a ‘Startup’

The startup India action plan terms “Startup” if it qualifies for the following amongst various other requirements-

1. Incorporation- Individual entity which has to be registered with the Government of India (not prior to 5 years) hence must be incorporated as

a. Private Limited Company under the Companies Act, 2013; or
b. Registered Partnership firm under the Indian Partnership Act, 1932; or
c. Limited Liability Partnership under the Limited Liability Partnership Act, 2008.

2. Annual turnover should not exceed 25 crores in any financial year.

3. Nature of work-

  1. The Startup must aim to develop and commercialise:
    a) a new product or service or process; or
    b) a significantly improved existing product or service or process, ?that will create or add value for customers or workflow.
  2. The Startup must not merely be engaged in:
    a. developing products or services or processes which do not have the potential for commercialization; or
    b. undifferentiated products or services or processes; or
    c. products or services or processes with no or limited incremental value for customers or workflow

Tax Exemptions for the Startups, Effective from 2017-18

Following Tax exemptions for the startups have been introduced that will be effective from 2017-18. The proposed incentives and exemptions are:

  1. Tax Holiday! Startup incorporated after April 1, 2016, is eligible for getting 100% tax rebate on profit for a period of three years. Also, the annual turnover must not exceed Rs. 25 crores in any financial year up to 31 March 2021.
  2. 12 Compliance easy! Startups shall be allowed to self-certify compliance (through the Startup mobile app) with 9 labour and 3 environment laws
  3. Labour compliances- Start-ups have been exempted from inspection by labour inspectors for up to a three years period if they give a self-declaration for compliance with the nine labour laws. Various compliances have been simplified for startups to save time and money.
  4. Environmental laws- startups which fall under the “white category” would be entitled to certify and only random checks would be conducted once in a while. (for a list of white industries which are eligible under self-compliance- click here” )
  5. Foregoing MAT- The startups have to pay Minimum Alternate Tax [MAT] at 18.5% along with the applicable surcharge and cess. The FM has assured to provide MAT exemptions for the first 5 years in case the startup fails to make any profit
  6. Exemptions on Capital Gains-  Capital gains tax is the tax charged on profits from the sale of capital assets, such as stocks, bonds, etc. Long-term capital gains (LTCG) will be invested by the Government’s special funds. Hence the 20 % capital gains tax will be exempted by the Government. The investment may go up to INR 50 Lakh and the exemptions will be applied for three years.
  7. Promoters benefits -If the individual holds 50% equity then the company may utilize the invested amount for buying assets before the due date of filing the return. Another major relief is entrepreneurs living in rented houses away from their native places, because of the effect of the area on the success of startups, by raising the 80GG deduction from Rs. 24,000 to Rs. 60,000.
  8. Employee benefits- Provision for ‘Employee Provident Fund’ for the first three years. This could ideally save 12 % of the costs for startups as well as provide security benefits to the employees.
  9. Benefit for Manufacturing Industry Startups- The Finance Minister has also proposed different taxes for the new domestic manufacturing companies that have been setup on or after 1st March, 2016. Such companies will be taxed at 25% plus with cess and surcharge. The tax is proposed on the conditions if the company do not claim any incentives under profit or investment

Abolition of Angel Investment Tax for registered Startups under Startup India

  • Angel investors, i.e., family and friends and domestic funds not registered as VC funds, which one raises from venture capital firms set up for the very purpose of backing such ventures, will not be taxed on these investments. 
  • There is now liberty to issue shares to investors at rates higher than fair value without any taxation hassles.
  • Restriction*- Only startups which fulfill the conditions specified by the Department of Industrial Policy and Promotion (DIPP) are eligible for this startup tax exemption. In order to avail this concession, a startup will have to attain a certificate stating its eligibility from the ‘inter-ministerial board of certification.’

Legistify believes Angel Tax provisions should be amended to benefit the startup environment gaining momentum in India.

Intellectual Property Reforms

Fast-tracking of patent applications

  1. The examination process is under works to be fast tracked with priority being given to startups. In an ambitious move, the timeline of 5 years for obtaining a patent can be brought down to around 2 years. Once these reforms are fully realized, the technologically innovative startups can capitalize on the value of their inventions at the earliest.
  2. The new Patent (amendment) rules, 2016 have brought some changes in the patent process to include an option for expedited examination of patent applications. Such, expedited examination request by a startup is expected to cut the patent process timeline by a year or two.  
  3. The time for putting an application in order for the grant has been reduced from one year to six months.  

Rebate on the filing of applications

  1. The government has notified that a rebate of 80% will be provided on the filing costs as compared to other companies to ease the burden on startups.
  2. The rebate will be applicable on the government fee for different actions involved in process of registration, including filing, examination, form filings, etc..

IP filings for free

The Controller General of Patent Designs and Trademarks (CGPDTM) has been given the mandate to appoint a panel of facilitators for assisting startups.

Setting up of a ‘Fund of Funds’ for Startups

In order to help startups in their initial stage by providing them with the necessary financial boost, the government has decided to set up a fund with an initial corpus of Rs. 2,500 crore and a total corpus of Rs. 10,000 crore over a four year period. 

The fund will come under ‘Fund of Funds (FoF)’ which won’t invest directly in startups but will be directed through SEBI registered venture funds, as the action plan suggests.

A board of professionals from diverse areas will be set up to manage this fund. Life Insurance Corporation of India will be an investor in this fund which will support a whole range of sectors like manufacturing, agriculture, health, etc.

Other Notable Benefits

  1. Startup hub to support entrepreneurs coming under Scheduled Caste [SC] and Scheduled Tribe [ST] categories. Women entrepreneurs to get up to INR 500 crore under the startup India program

  2. Amendment in the Companies Act, 2013 to ensure better startup ecosystem and tackle the registrations in a hassle-free manner

  3. Apply for Government tenders - Startups can apply for government tenders. They are exempted from the “prior experience/turnover” criteria applicable for normal companies answering to government tenders.

With such tax exemptions for the Startup India, the Government aims to produce a better environment for new businesses and entrepreneurship. The tax relaxation for three years have brought up certain enthusiasm and the Indian entrepreneurs need not to worry about the downfall and should feel free to take the risk in the market.

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