BASICS OF START-UP REGISTRATION

 

o   What is a startup?

 

A startup is a company in the first stage of its operations, often being financed by its entrepreneurial founders during the initial starting period.

 

o   What is Startup India initiative?

 

Startup India is a flagship initiative of the Government of India, intended to build a strong ecosystem that is conducive for the growth of startup businesses, to drive sustainable economic growth and generate large scale employment opportunities. The Government through this initiative aims to empower startups to grow through innovation and design.

 

o   Who can be recognized as a startup under Department of Promotion of Industry and Internal Trade (DPIIT)?

 

Eligibility Criteria for Startup Recognition:

 

a.      The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership.

b.     Turnover should be less than INR 100 Crores in any of the previous financial years.

c.      An entity shall be considered as a startup up to 10 years from the date of its incorporation.

d.     The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth.

Note: An entity formed by splitting up or reconsutrction of an existing business shall not be considered a "Startup".

 

o   What are the benefits provided under startup scheme?

 

The benefits provided to recognized startups under the Startup India initiative are:

 

1. Self-Certification: Self-certify and comply under 3 Environmental & 6 Labour Laws.

 

2. Tax Exemption: Income Tax exemption for a period of 3 consecutive years and exemption on capital and investments above Fair Market Value.

 

3. Easy Winding of Company: In 90 days under Insolvency & Bankruptcy Code, 2016.

 

4. Startup Patent Application & IPR Protection: Fast track patent application with up to 80% rebate in filling patents.

 

5. Easier Public Procurement Norms: Exemption from requirement of earnest money deposit, prior turnover and experience requirements in government tenders.

 

6. SIDBI Fund of Funds: Funds for investment into startups through Alternate Investment Funds.

 

o   What are the tax benefits for recognized startups?

 

There are various tax benefits to the entities registered as startup which fulfil the conditions as mentioned in various sections of the Income Tax Act, 1961. We would go through the section wise analysis of the same as under:

Section 80-IAC:

 

1. 100% deduction of profits and gains derived from eligible business (eligible business means business as defined in Point 1(c). of Definition above), for 3 consecutive years, these deduction shall be allowed at the option of the assessee can be claimed for any 3 consecutive years out of 7 years from date of incorporation of eligible start up.

 

2. It should not be set up by splitting up, reconstruction of business already in existence.

 

3. Plant and Machinery used in the startup shall be new (Max. 20% of Value of Plant and Machinery can be old). However if the Plant and Machinery was used outside India by any person other than assessee and following conditions are fulfilled than it would be treated as New Machinery:

 

a. Such Machinery or plant was never before installation used by assessee in India.

 

b. Plant or machinery was imported to India.

 

c. No deduction on account of Depreciation in respect of plant of Machinery is allowed or allowable under Income Tax law of any person for a period prior to date of installation of plant and Machinery by the assessee.

 

4. For the Purpose of Deduction under section 80-IAC, partnership firm is not recognized, so even the startup Partnership firms recognized by DIPP cannot claim exemption under section 80-IAC.

 

5. In order to claim deduction under 80-IAC, company or LLP should fulfill the below mentioned conditions:

 

a. Incorporated after 1st April, 2016 but before 1st April, 2021.

 

b. Turnover does not exceed 25 crores in the year of which deduction is claimed.

 

c. Registered as start up with Inter Ministerial board of Certification (i.e. DPIIT).

 

6. Accounts are to be audited by a Chartered Accountant in order to claim the Deduction.

 

7. For the year of Deduction, Previous year and subsequent years it would be treated that it is the only source of Income of the asssessee.

 

8. Company or LLP fulfilling the above conditions shall make an application to Inter Ministerial Board in Form 1, and after calling for the documents and making the inquiry the Board may grant a certificate, which is required to claim Deduction.

 

Section 56 (2) (viib):

 

If a company issues shares, and the issue is at the price above face value, then in such case the difference between the issue price and fair market value of the shares shall be treated to be the income of the company. However, this provision is not applicable to Notified entities

 

In order to escape this provision following conditions need to be fulfilled:

 

1. A startup company shall be a company registered with DIPP.

 

2. Total of paid up share capital and Share Premium after issue or proposed issue shall not exceed Rs. 25 crores.

 

3. For the calculation of Rs. 25 crores, shares issued to non – resident or venture capital company or venture capital fund shall not be included. Further, shares issued to listed companies whose more than 10% shares of the total share capital are traded during the previous 12 calendar months, shall also not be considered for above limit of Rs. 25 crores.

 

4. It should not invest in any of the following assets (for the period of 7 years from the end of the latest F.Y. in which the shares are issued at premium):

 

a. Building or land, being a residential house (except when used for renting or stock -in-trade or in ordinary course of business)

 

b. Land or Building other than residential house (except occupied by start up, used for renting purpose, or as a stock-in-trade or in ordinary course of business)

 

c. Loans and advances (except when loans as advances extended in ordinary course of business, where money lending is substantial part of business).

 

d. Capital contribution to any other entity.

 

e. Shares and securities.

 

f. a motor vehicle, yacht, or any other mode of transport, the actual cost of which exceeds ten lakh rupees (except when held by startup for plying, hiring, leasing or as a stock in trade).

 

g. Jewellery (except when held as stock in trade)

 

h. Archaeological collection, drawings, painting, sculptures, any other work of art, bullion.

 

5. On fulfilling all the above mentioned conditions, company shall file a duly signed declaration in form 2 to DIPP.

 

6. In case the company invests in assets which are not permitted as stated above, exemption given shall be revoked.

 

7. However, if company fails to comply with any of the conditions on a later it shall be deemed that company had under reported the income to the extent of consideration over fair Market value and tax should be payable further penalty is leviable at the rate of 200% of the amount of tax payable on under reported Income.

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