A complete guide on Tax Exemptions Given By Indian Government to Startups

The Indian government’s policies post the Union Budget of 2016-17 shows growing support for startups in India. The taxation policies went through a drastic change with the Union Budget under the ‘StartUp India’ Policy reveal a wide range of exemptions and concessions. Which of these should you, the entrepreneur, pay attention to?

Highlights of the startup tax in India are below. Rest assured, these policies will get entrepreneurs chasing down their startup lawyers to decide the best way to get the best out of the policies:

• 100% tax exemption for the first 3 years

Finance Minister Arun Jaitley announced in the 2016-17 Union Budget of a deduction of 100% of the profits and gains acquired by eligible startups from a business involving deployment, commercialization, innovation or development of new products or services driven by intellectual property or technology.

In an attempt to give budding entrepreneurial aspirators a needed boost, the Indian Government has done away with taxing them for the first three years of operation. The decision made in the Budget session was that startups should not incur taxes on profits made in their first three years except for ‘Minimum Alternate Tax’ or MAT. This is calculated in ‘book profit’.

• No more ‘Angel Investment Tax’

In order to provide better relief, the ‘Angel Investment Tax’ was gotten rid of. Under this tax, angel investors (family and friends not registered as VC funds) raised from venture capital firms created to back such ventures, will not receive taxes on said investments. Liberty to issue shares to investors at rates higher than fair value minus taxation problems have been awarded to entrepreneurs.

Restrictive terms do however exist here. Only startups fulfilling the conditions highlighted by the Department of Industrial Policy and Promotion (DIPP) are eligible for the startup tax exemption. In order to gain this concession, startups need to obtain a certificate starting the eligibility from the ‘inter-ministerial board of certification’.

• The creation of a ‘Fund of Funds’

In an attempt to help startups during initial stages via providing them the necessary financial boost, the government is setting up a fund with an initial amount of INR 2.5k crore and a total sum of INR 10k crore over a 4 year period.

The fund will be placed under the ‘Fund of Funds (FoF)’ that won’t invest directly in the startups. They will be directed through SEBI registered venture funds as per the action plan.

Professionals from various backgrounds will form a board that will manage this fund. LIC India is one of the investors in this fund that will support a range of sectors such as agriculture and health.

• Capital Gains Tax exemptions

The Indian government has recently made provisions for a 20% capital gains tax exemption. Capital gains tax is tax charged on profits of capital assets being sold. This is being touted as a highly lucrative startup and was long-pending. Prior to this provision, most Indian startup investments were sent through Mauritius due to capital gains tax on investment from there was waived.

• Various other allocations to boost startups

Other important allocations and adjustments made in the area to boost startups include:

1. Allocation of INR 500 crore for women entrepreneurs and SC/ST under Startup India.
2. Lowering long-term capital gains for the unlisted firm to two years
3. Amendment in the Motor Vehicles Act to allow entrepreneurship in road transport.
4. Setting up of provisions that support entrepreneurs belonging to scheduled tribes and castes.

Such policies were proposed in the last Union Budget under the ‘StartupIndia’ scheme and are made with the purpose of driving impetus to future entrepreneurs and ventures. This is a subsidiary of the ‘MakeInIndia’ scheme thanks to it creating more jobs in the country ensuring the youth need not look overseas for jobs. These are points to keep in mind as an entrepreneur or one considering to go the journey solo sometime soon.

https://www.pi.team/blog/2017/05/15/gst-impact-software-service-providers/

Let us know how your business is getting affected by Tax/GST. Please share your experience in the comments section below. We are working with leading chartered accountants (CA) and certified public accountants (CPA). We will happy to help you with tax and GST consulting. Just email us.