In order to give an impetus and boost to the Indian economy, the government of India has undertaken various initiatives over the years which include developing smart cities, digital India, development of international financial centers, Make in India etc.  

Start-up India is a flagship initiative of the Government, intended to build a strong eco-system for nurturing innovation and Start-ups in the country that will drive sustainable economic growth and generate large scale employment opportunities. Also the Government had announced a Start-up India Action Plan and several tax incentives were proposed to be provided vide the Finance Bill, 2016. These incentives are now a part of the Income Tax Act, 1961 (ITA) and includes the following:

- 100% deduction of profits for three years;

-Capital gain exemption in respect of long term capital gains (LTCG) proceed invested in specified start up fund (section 80IAC of the ITA);

- Capital gain exemption in respect of LTCG arising from transfer of residential property, invested in the shares of start up companies.

Summary of the above provisions is as under:

Start-ups to get 100 per cent tax exemption for three years (Insertion of new section 80IAC) –                    

A deduction of one hundred percent (100%) of the profits and gains derived by an ‘eligible start-up’ from an ‘eligible business’ in any 3 consecutive years out of 5 years beginning from the year in which the start-up is incorporated. 

An eligible start-up and eligible business shall mean the following: 

“Eligible Start-up”

i) It must be an entity registered/incorporated as a:

ii) Private Limited Company under the Companies Act, 2013; or

iii) Limited Liability Partnership under the Limited Liability Partnership Act, 2008.

iv) The startup should be incorporated between 1^st April, 2016 to 31^st March, 2019;

v) Total Turnover of the business should not exceed INR 25 crores in any of the previous years during the period of 1^st April, 2016 to 31^st March, 2021;

vi) It should have obtained a certificate from the Inter- ministerial Board of Certification;

vii) It should not be formed by splitting up, or the reconstruction, of a business already in existence expect where the same has been undertaken as referred to section 33B, in the circumstances and within the period specified in the section

viii) It should not be formed by the transfer to a new business of machinery or plant previously used for any purpose

ix) Where plant and machinery which was used outside India by any person other than the assesse shall not be regarded as machinery 0r plant previously used if (a) the same was not used in India at any time prior to its installation by the assesse (b) the machinery or plant is imported into India (c) no depreciation has been allowed on the machinery or plant to any person or for any period prior to its date of installation, in India.

x) The provisions of :

a) section 80IA(5), which requires that the profits of the eligible business should be regarded as the only business of the assesse for the purpose of claiming deduction;

b) section 80IA(7) relating to obtaining an audit report for the purpose of claiming deduction;

c) section 80IA(8) dealing with transfer of goods or services from an eligible unit to non-eligible unit and vice vesa been  undertaken at market value / arm’s length price;

d) section 80IA (9) restricting claiming benefits on the profits of the eligible business under any other provisions of ITA, if deduction has been claimed under the said section;

e) 80IA(10) dealing with power of the assessing officer to restrict the benefit in case of shifting profits and

f) section 80IA(11) dealing with the powers of Central Government to notify that the benefits of the section not to be granted to any class of industrial undertaking or enterprise,

shall also be applicable.   

“Eligible Business”

i) The start-up should be involved in business of innovation, development/deployment of commercialization of new products, processes or services driven by technology or intellectual property;

ii) The Startup must aim to develop and commercialize:

- a new product or service or process; or

- a significantly improved existing product or service or process that will create or add value for customers or workflow.

iii) The Startup must not merely be engaged in:

- developing products or services or processes which do not have potential for commercialization; or

- undifferentiated products or services or processes; or

- products or services or processes with no or limited incremental value for customers or workflow.

Note: It has been clarified that minimum alternate tax provisions would apply.

Capital Gain Exemption in respect of LTCG proceeds invested in specified start-up fund (Insertion of new section 54EE)–

Where an assessee has invested long term capital gains proceeds in units of specified start-up fund, as may be notified by the Central Government, within a period of six months, can available an exemption on the LTCG from tax. The quantum of deduction is restricted up to INR 50 lakh. Further, the exemption granted will be withdrawn if the units are transferred within a period of three years from the date of its acquisition or if the assesse takes any loan or advance against the units within a period of three years.

Capital Gain Exemption in respect of LTCG gains arising out of transfer of residential property invested in the shares of start-up Company (Amendment in Section 54GB) –

LTCG arising on account of transfer of a residential property shall not be charged to tax if such capital gains are invested in subscription of shares of a company which qualifies to be an eligible start-up subject to the condition that

- the individual or HUF holds more than fifty per cent shares of the company;

- such company utilizes the amount invested in shares to purchase new asset before due date of filing of return by the investor.

The expression “new asset” would now also include computers or computer software in case of technology driven start-ups so certified by the Inter-Ministerial Board of Certification

Apart from the above other beneficial regimes that are available include:

Tax on income of certain domestic companies (Insertion of new section 115BA):

Certain domestic companies at their option can opt for being subjected to tax at the rate of 25% from the assessment year beginning on or after the 1^st April 2017 f the following conditions are fulfilled:

i) The company has been registered and set up on or after the 1^st March 2016

ii) The company should be engaged in the business of production or manufacture of article or thing and research in relation to or distribution of such article or thing that is manufactured or produced

iii) The income has to be computed :

- without providing deduction under section 10AA, section 32(1)(iia) – accelerated depreciation, section 32AC – deduction for investment in new plant and machinery, 32AD – deduction for investment in new plant and machinery for setting up industrial undertaking in the state of Andhra Pradesh, Telangana or West Bengal, 33AB – deduction for depositing amounts in tea, coffee or rubber development account, 33ABA – deduction for amount deposited as sit restoration fund, section 35(1)(ii)/(iia)/(iii)/(2AA)/(2AB) – deduction for expenditure on scientific research, section 35AC – expenditure on eligible projects or schemes, section 35AD – deduction of capital expenditure on specified business, section 35CCC – expenditure on agricultural extension project, section 35CCD- expenditure on skill development project or any other provisions of chapter VIA under heading C other than provisions of section 80JJA

- Without setting off of any brought forward losses which are attributable to any of the above sections

- Deprecation to be computed in prescribed manner

Further, the company will have to notify in prescribed manner whether it wants to opt for the beneficial provisions before the due date of filing the tax return.

Tax on Income from patents (Insertion of new section 115BBF):

The newly inserted section gives an option to eligible assesssee to offer income by way of royalty to tax at the rate of 10% where the patent has been developed and registered in India. The eligible assesse has to exercise the option of being taxed at the rate of 10% in the prescribed manner on or before the due date of filing the return of income. Where the eligible assesse has opted to be taxed at the rate of 10%, no other deduction or expenditure shall be allowed against the royalty income.

Other beneficial propositions

i) INR 500 crore earmarked for SC/ST and women entrepreneurs under the Start-up India scheme;

ii) Establish a Fund of Funds which intends to raise Rs 2500 crore annually for four years to finance the start-ups;

iii) Payment of service tax on quarterly basis and facility of payment of service tax on receipt basis is being extended to a One Person Company (‘OPC’) with effect from 1^st April, 2016;

iv) Updating the Companies Act to ensure conducive environment for start-ups ensuring speedy registration;

v) Faster exit for start-ups – Insolvency for simple structure start-ups in 90 days

vi) Relaxed norms of public procurement for start-ups in MSME category that get 20 per cent preference in government sourcing

vii) Launching a Mobile App having backend integration with Ministry of Corporate Affairs and Registrar of Firms for seamless information exchange and processing of the registration applications.

viii) Promoting awareness and adoption of IPRs by Start-ups and facilitate them in protecting and commercializing the IPRs by providing access to high quality Intellectual Property services and resources, including fast-track examination of patent applications and rebate in fees

These welcome amendments/introductions of existing/new sections shall definitely lead to a major transformation in Young minds from being job seekers to try and become job creators.