With the Union Budget of 2016-17, the government taxation policies, especially for startups have gone through several changes made under the “StartUp India” policy. It has resulted in a huge volume of exemptions and concessions.
Let us look into a few highlighting benefits regarding tax that every aspiring entrepreneur in India must be aware of:
Ban on “Angel Investment Tax”
The government has removed the “Angel Investment Tax” introduced in 2012, giving a huge relief to entrepreneurs. The angel investors that includes friends, families and domestic funds have been raised from venture capital funds. They are set up for the purpose of backing such ventures so that they are not taxed on any investments. They also have the privilege to provide investors with higher rate value shares without any taxation hurdles. It was brought into action by amending Section 56(2)(vii)(b) of the Income Tax Act. Still, there are some restrictive terms. Startups that fulfil the conditions specified by the Department of Industrial Policy and Promotion (DIPP) are eligible for this startup tax exemption. A startup must have eligibility certificate from the “inter-ministerial board of certification” to avail this concession.
Free from capital gain tax
A provision for an exemption of 20% capital gains tax has been recently issued by our government. This tax is specially charged on profits earned from the sale of capital assets such as bonds, stocks etc. It was a long-pending demand and has currently proved to be highly opportunistic for startups. This is because earlier overseas venture capital investors were made to channel their investment through Mauritius. Several Indian investments regarding startups were routed through Mauritius as capital gains tax on investment, before this provision. This has further paved provisions for the Double Tax Avoidance Treaty.
Initial 3 years complete tax exemption
The Indian government has proposed to make a deduction of 100% of the profits and other gains achieved from an eligible startup business mainly on the ground of development, commercialization, deployment and innovation of new products. This was confirmed by our former Finance Minister, Arun Jaitley while announcing the Union Budget 2016-17 in the parliament. In order to provide stamina, to budding entrepreneurs and their startups, the government has decided to remove any sort of taxation for the initial 3 years of operations. Furthermore, the startups will not incur any profit taxes incurred in their first 3 years leaving MAT as declared in the budget session of the parliament. MAT is ‘Minimum Alternate Tax’ charged on ‘book profit’.
Fund allocations and tax adjustments to strengthen startups
Some important adjustments and allocations have been made by our government to boost startups. They are:
Setting up of provisions to support entrepreneurs belonging to Scheduled Caste and Scheduled Tribes.
Allocation of Rs. 500 crore for SC/ST and women entrepreneurs under Startup India.
Lowering long-term capital gains for unlisted firms from three to two years.
Amendment in the Motor Vehicles Act to enable entrepreneurship in the road transport sector.
Raising the eligibility for the presumptive tax scheme for small businesses. This is done by allowing businesses with a turnover of up to Rs. 2 crore from the earlier Rs. 1 crore to enjoy coverage under it.
Provision for ‘Employee Provident Fund’ for the first three years. This is thought to save 12 % of the costs for the startups and provide security benefits for the employees.
Providing relief to 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.
Developing up a ‘Fund of Funds’ for every startup
For helping beginner startups during their initial years and to provide them with an optimum financial boost, the Indian government has decided to set up a fund with an initial amount of Rs. 2500 crore and a total of Rs. 10 thousand crore over a four year period. This is called ‘Fund of Funds (FoF)’. This fund won’t invest in startups directly but the investments will be directed through SEBI-registered venture funds. In order to implement this plan, a board of professionals from various areas must be set up. Here, LIC will be an investor that will support a wide scale of sectors like agriculture, health, manufacturing etc.