To encourage entrepreneurship and accelerate economic growth, the Government is offering tax holiday for three years to eligible startups running eligible business through its StartUp India Scheme.
A startup has to obtain two certificates, one for eligible startup and another for tax benefits. The certificate of eligible business is granted by the Inter-Ministerial Board of Certification. Tax benefits will be enjoyed only by those incorporated after April 1, 2016.
Startups formed as Private Limited Companies, Limited Liability Partnerships (LLPs), One Person Company (OPC) and registered Partnership firms are eligible for tax/other benefits. The main activity should cater to innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.
A startup entity shall cease to be a startup on completion of five years from the date of its incorporation/registration or if its turnover for any previous year exceeds Rs.25 crores. The Government has granted further exemptions from Capital Gain Tax, if the funds are invested in the shares of a Startup company (minimum 50% shareholding) or invest in Startup Funds (similar to Mutual funds) up to Rs 50 lakhs p.a.
Again, exemption from Long-term Capital Gain Tax to an individual/HUF on transfer of residential property on or before 31st March, 2017, upon reinvestment of sale consideration before the due date of furnishing the return of income in the Equity of eligible business. If investment in Startup is above Fair Market Value (FMV), tax exemption on investments will continue to be available and also it won't be taxable for Startups.
Though the profits of eligible Startups are eligible for tax holiday, these profits will be subject to Minimum Alternate Tax (MAT) applicable @ 18.5% plus surcharge and cess. Hence, the MAT could impact the cash flow of Startups in initial years. However, the credit of the MAT is available in later years. Once the tax holiday period expires, the Startups can consider claiming deduction which has now been extended to all taxpayers who have tax audit requirements. Deduction in respect of employment of new workmen is granted @ 30% of additional wages paid to the new regular workmen employed. The wage of workmen should not exceed Rs.25000 p.m.
Further, Startups registered as Sole Proprietorship or HUF or Partnership firms and anticipating less business turnover may opt for Presumptive Tax provisions where in tax @ 8% gross receipts have to be paid if the total gross receipts do not exceed Rs.2 crores p.a. They are relieved from maintaining books of account also.
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