Tax Exemptions and Relaxations Available for Startups

Saptaparni Raha
Mar 10, 2023
3 min read

Written by Saptaparni Raha, Lawyer

Introduction

The Government of India issues several incentives for start-ups, and benefits are enhanced yearly. Income tax is a tax that is levied on income, not on sales revenue. It sometimes gets difficult to track sales, expenses, and depreciation at the early stage of a start-up. The government has introduced presumptive taxation schemes to simplify income computation.

Income: For professionals, it will be the 50% value of the service provided.

Income: For businesses, it will be 8% total value of goods sold.

Individual proprietors, only Hindu Undivided Families, and partnership firms can use this scheme; companies are not allowed to use the scheme.

Income tax on start-ups

Proprietorship/individual Income tax slab

Partnership/ LLP firm: 30%

Indian company: 25%

Manner of tax computation ITR Form

Income computed under the presumptive scheme: ITR 4

Income computed as revenue/expenses/deduction: ITR 3/ITR5/ITR 6/ ITR 7

Tax Incentives for start-up

There are 100% tax deductions for eligible start-ups under section 80 IAC. Any eligible start-ups formed on or after 1st April 2016 and before 1st April 2019 can claim this deduction for any consecutive 3 years. If the total revenue does not exceed Rs. 100 crores in any year from the beginning of its incorporation, then this deduction will be applicable.

Every eligible start-up that wants to claim the benefits shall maintain the following steps:-

They need to maintain separate books of accounts for eligible business
They need to get their account audited by a chartered accountant
They need to furnish an audit report in form 10CCB, including ITR.

Definition of eligible start-ups to avail of this deduction

The start-up is incorporated as a company or LLP.
That start-up was incorporated between 1st April 2016 and 1st April 2021.
The start-up has not exceeded its annual turnover of rupees 100 crores.
The start-up is certified by the inter-ministerial board of certification.
The start-up has not been formed by reconstructing a business that already exists.

Relaxation available for start-up

Start-ups need not be required to include their cash flow statements.
Start-ups are exempted from holding quarterly board meetings every year. Meetings are allowed to be held in a calendar year.
Interested directors are to be counted as a quorum as per MCA permission.
First-track corporate insolvency processes are available for corporate debtors.
The annual return will only calculate the aggregate remuneration drawn by the director.
Auditors are allowed to inspect the books and accounts of the company. They can prepare their reports as per the Companies Act.

Exemptions under labour laws

Start-ups are allowed to clarify their compliance with nine labour laws. No inspections shall be conducted for three years in case of labour laws.

Tax exemptions on long-term capital gains

According to newly inserted section 54 EE of the Income-tax Act, eligible start-ups are allowed to exempt their tax on long-term capital gains or part thereof if invested in a fund notified by the central government. These exemptions can be availed within six months of transferring the asset. A maximum of 50 lakhs can invest in the specified long-term asset.

Tax exemptions on investments above the fair market value

Investments above the fair market value are allowed on tax exemptions with the government's permission. These Investments include resident angel investors, family, or funds not registered as venture capital funds.

Conclusion

Based on the study above, every start-up founder should know about the relaxation of taxation laws and exemptions under labour laws before the inception of their entity. It would help them to run their business effectively and also help them to protect themselves from any unnecessary disputes arising.

References

Deepak Kumar Singh, Startup companies & Exemptions available under Income Tax Act,1961 (Taxguru)
Karan Batra, Income tax on startups in India &tax incentives to startups (Charteredclub)