“Are you a small business owner in India looking for ways to reduce your tax burden and invest in your company’s growth? Have you heard about the tax incentives provided under the Startup India Action Plan?” This blog post will explore how these incentives can help small businesses like yours succeed and thrive in the competitive business environment.

Tax incentives are provisions in the tax code designed to encourage certain economic activities. They can take many forms, including exemptions, deductions, credits, and preferential tax rates. Governments can need tax incentives to promote economic development, support specific industries, and encourage innovation.

There are two ways for small businesses in India to get tax, interest, and credit benefits from the government:

1. Registration under the Startup India Action Plan (SIAP) through the Department for Promotion of Industry and Internal Trade (DPIIT)
2. Udyam Registration Portal by Ministry of Micro Small and Medium Enterprises

Udyam Registration does not provide any specific tax benefits for businesses. However, it may give some tax benefits depending on the nature of the business. Read about these incentives in detail below.

Udyam Registration Portal

The Udyam Registration Portal is an online platform that allows startups to register with the government and access the benefits and support measures provided by the Central Government of India. The portal is open to all startups that meet the eligibility criteria. In addition, the portal includes a private limited company, partnership firm, or limited liability partnership operating for less than seven years. To register on the portal, startups must provide details about their business, including their products or services, target market, and growth plans.

Startup India Action Plan (SIAP)

The Startup India Action Plan is a government initiative launched in 2016 to promote and support the growth of startups in India. The initiative provides a range of support measures to help startups get off the ground, including access to funding, mentorship and networking opportunities, and regulatory support. One of the critical ways the Startup India Action Plan helps startups is through tax incentives.

Tax Benefits under SIAP

The Startup India Action Plan provides tax benefits to eligible startups. These include income tax exemptions on profits for up to 7 years, capital gains tax exemptions, and tax deductions on expenditures incurred on research and development. These incentives can help startups retain more of their profits, invest in growth and expansion, and reduce the overall tax burden on the company.

Tax exemption under Section 80IAC of the Income Tax Act 1961 (IT Act)

Eligibility

1. Must be recognised as an eligible startup by the DPIIT
2. Must meet the conditions in Section 80IAC of the IT Act.
3. Must obtain a certificate from the Inter-Ministerial Board by submitting Form I with supporting documents.
4. The Inter-Ministerial Board may review the application and either grant a certificate or reject it.

Benefits

1. An eligible startup can claim a deduction of 100% of its business profits for three consecutive assessment years out of five years starting from the year incorporated the startup. 
2. This deduction can be claimed for any three consecutive assessment years in five years starting from the year the eligible startup is incorporated.

Tax on Employee Stock Options (ESOPs) deferred for eligible startups under section 156(2) of the Income Tax Act 1961

Eligibility

1. Must be recognised as an eligible startup by DPIIT.

Benefits

1. Can defer Income tax on ESOPs from the time they exercise them.
2. From the financial year 2020-21, the TDS will not be deducted, nor the tax is paid when filing an Income Tax Return for the year the ESOPs were allotted.
3. The tax liability for ESOPs arises within 14 days from
   1. The end of the relevant assessment year (48 months after the end of the assessment year)
   2. The date the employee sells the ESOP shares
   3. The date the employee stops working for the company allotted the ESOPs
4. The startup’s liability to deduct tax at source (TDS) on the ESOPs is also deferred.

Angel tax exemption under section 56(2)(viib) of the IT Act

Eligibility

1. The company must be an eligible startup by DPIIT.
2. The company must be a private or public company or limited liability partnership (LLP) on or after April 1, 2016, and before March 31, 2023.
3. Paid-up share capital and share premium after issuing or proposing to issue shares is less than INR 25 crore.
4. Has not invested in any assets listed in clause 4(iii) of the G.S.R. notification 127 (E) for seven years from the latest financial year’s end in which shares were issued at a premium.
5. Must file a declaration in Form 2 with DPIIT seeking exemption from section 56(2)(viib) before issuing shares. This declaration is forwarded to the CBDT(Central Board of Direct Taxes) for approval.

Benefits

1. Section 56(2)(viib) of the Income Tax Act (IT Act) levies a tax on your private company. Taxing occurs when it issues resident shares at a value above the fair market value of the shares. This tax is considered “income from other sources”.
2. This tax is exempt for eligible startups that meet certain conditions.

Availing Tax Exemptions under Section 80-IAC of the IT Act:

Startups registered on the Udyam Registration Portal and meeting the eligibility criteria can avail of tax exemptions under Section 80-IAC of the Income Tax Act. This provision allows startups to claim exemptions on their profits for up to 7 years. To claim the exemption, startups must apply to the DIPP (which means Department of Industrial Policy and Promotion) and provide evidence of their eligibility. 

The Inter-Ministerial Board setup by the DIPP validates Startups for granting tax-related benefits. The Board comprises the following members:

1. Convener,(Additional Secretary, Department of Industrial Policy and Promotion)
2. Representative of Ministry of Corporate Affairs, Member
3. Representative of the Ministry of Electronics and Information Technology, Member
4. Representative of the Department of Biotechnology, Member
5. Representative of the Department of Science & Technology, Member
6. Representative of Central Board of Direct Taxes, Member
7. Representative of Reserve Bank of India, Member
8. Member (Representative of the Securities and Exchange Board of India)

Documents required to apply through the Form-1 for the tax exemptions under section 80-IAC of the IT Act are

1. Copy of Memorandum of Association and Board Resolution (if any)
2. Copies of Annual Accounts (Updated financial statements – Balance Sheet and Profit & Loss statement, certified by CA – for the last three financial years
3. Copies of income tax returns for the last three financial years
4. Updated Pitch deck and Video

Availing Angel Tax Exemption under Section 56(2)(viib) of the IT Act:

The Angel Tax Exemption is an Income Tax Act provision allowing startups to claim exemptions on investments received from angel investors. To avail of this exemption, startups must be registered on the Udyam Registration Portal and meet the eligibility criteria, which include being a private limited company or a limited liability partnership that has been in operation for less than seven years. In addition, startups must also provide evidence of the investment received from the angel investor, such as a copy of the investment agreement.

Subject to the fulfilment of additional prerequisites, a qualified startup must file a legally signed statement in Form 2. The DPIIT shall transmit such declaration to the CBDT upon receipt. Other documents needed are

1. Form of the declaration on letterhead;
2. Section 140 of the IT Act requires the declaration to be digitally signed by a person authorised to verify the return of income.

The Startup India Action Plan is a valuable resource for startups in India, providing a range of support measures, including tax incentives, to help them grow and succeed. By registering on the Udyam Registration Portal and availing of the tax exemptions and deductions provided under the initiative, startups can reduce their overall tax burden and retain more profits to invest in growth and expansion.