The Start-up India program was launched by the government of India with the main objective to transform India into a job-creating country rather than job-seeking one. Start-up India was launched on 16th of January 2016 in India.
In the 3rd week of November 2018, DPIIT recognized a total of 14,036 start-ups in India and as of June 2019, this number increased to 19,247 as reported by the Minister of Commerce and Industry, Mr Piyush Goyal.
In this union budget, our Finance Minister further liberalized the tax benefit given to boost the start-up in India and to achieve at least 50,000 recognized startups by 2024. Let us now see what tax benefits the government are providing as per this budget:
The angel tax exemption has been given to Category II AIFs (Alternative Investment Funds) that was earlier available to Category I AIFs as per the provisions of Section 56(2)(viib) of the Income Tax Act. Further, taking a cue from the budget speech the start-ups has to provide certain declaration and information as notified by the Central Government to get an exemption from Angel Tax. And any failure in complying with the terms and conditions notified will result in levy of the Angel Tax on the start-up.
The Finance Minister in her budget speech also said that there will be e-verification of the investor and source of funds to address the problem of explained monies. However, one needs to wait whether this e-verification system will be able to sort out the concerns of the start-up community.
Taking start-ups into consideration, the Government of India has already relaxed carry forward and set off of losses provisions under section 80-IAC of the Income Tax Act, 1961 (“Act”). According to this section, every shareholder can claim the carry forward of tax losses provided that they have voting rights in the year in which that loss is incurred and carry forward year.
As per the budget of 2019, they have further relaxed these conditions and permitted start-ups to claim tax holiday, carry forward and set off of losses even if a shareholder(s) have 51 per cent of shares in the start-up.
Capital gain tax exemption on re-investment
The long term capital gains are exempted by an individual or HUFs provided that they have reinvested the same in the start-ups. The key condition of provision consists:
a). This exemption is available in case of capital gains that are arising from the transfer of residential property before 31st March 2019.
b). Re-investment of the proceeding by the start-up to acquire specified assets (e.g. plant & machinery) and in case of technology-driven start-up (computer and computer software) that too within one year of shares issuance to the individual or HUF. Provided that such transferor must hold more than 50% equity shares of the start-up.
c). The new assets purchased or equity shares by the start-up should not be sold/transferred for a period of 5 years, from the date of acquisition or issued.
The above condition has been relaxed by the Finance Bill 2019.
a). The sunset clause has been extended from 31st March 2019 to 31st March 2021;
b). The shareholding requirement has been reduced to 25% from 50%;
c). A holding period of 3 years has been permitted in case of assets being computer and computer software;
However, the Finance Minister in her speech also proposed special administrative arrangements to address the grievances of the start-ups for pending assessments. In addition to this, she also promised that there will be no enquiry or verification by the tax officers without any prior approval of the supervisor.
If the above proposals made by the Finance Minister gets approved in the coming months than it will take the Start-up India program to its fruition.