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Startup India: Eligibility, Tax Exemptions and Incentives

Startup India Eligibility, Tax Exemptions and Incentives

Startup India is a flagship initiative of the Government of India, intended to catalyse startup culture and build a strong and inclusive ecosystem for innovation and entrepreneurship in India.

Launched on 16th January, 2016, the Startup India Initiative has rolled out several programs with the objective of supporting entrepreneurs, building a robust startup ecosystem and transforming India into a country of job creators instead of job seekers.

These programs are managed by a dedicated Startup India Team, which reports to The Department for Promotion of Industry and Internal Trade (DPIIT)

Eligibility Criteria For Startup Recognition

  • The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership
  • Turnover should be less than INR 100 Crores in any of the previous financial years
  • An entity shall be considered as a startup up to 10 years from the date of its incorporation
  • The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth.
  • An entity formed by splitting up or reconsutrctuon of an existing business shall not be considered a “Startup”

 

Process of Recognition as Startup

The process of recognition of an eligible entity as startup shall be as under: —

(i) A Startup shall make an online application over the mobile app or portal set up by the DPIIT.

(ii) The application shall be accompanied by—

(a) a copy of Certificate of Incorporation or Registration, as the case may be, and

(b) a write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.

(iii) The DPIIT may, after calling for such documents or information and making such enquires, as it may deem fit, —

(a) recognise the eligible entity as Startup; or

(b) reject the application by providing reasons.

 

Startup Recognition by DPIIT for all eligible entities (Companies, LLPs, and Registered Partnerships) is available through National Single Window System(nsws.gov.in). To apply, create an account on NSWS and add form ‘Registration as a Startup’. On NSWS, Startup can also apply for host of business approval from Central and State Government including labour laws and company incorporations. For a quick guide on DPIIT Startup Recognition please click here.

 

What Are The Tax Exemptions For Startups?

1. A Tax Holiday of 3 Years –  Startups incorporated between April 1, 2016, and March 31, 2022, are eligible for a three-year tax holiday. During this period, they can enjoy a 100% tax rebate on profits for a total of three years within a block of seven years. The annual turnover should not exceed ₹25 crores in any financial year.

2.Exemption on Long-term Capital Gains –  For eligible startups, a new section (54 EE) in the Income Tax Act allows exemption from tax on long-term capital gains. If a startup invests a part of its long-term capital gain in a fund notified by the Central Government within six months of asset transfer, it can avail of this benefit. The maximum investment allowed in the specified asset is ₹50 lakh, and the amount must remain invested for 3 years

3. Tax Exemption under Section 56 of the Income Tax Act (Angel Tax)

There are provisions for tax exemptions on investments made in startups above their fair market value (FMV). This is often referred to as “Angel Tax” under Section 56(2)(viib) of the Income Tax Act. To be eligible for this exemption, startups must meet certain conditions:

  • The startup should be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).
  • The aggregate amount of paid-up share capital and share premium after the proposed issue of shares, if any, does not exceed INR 25 crore
  • Investments into eligible startups by listed companies with a net worth of more than INR 100 Crore or turnover more than INR 250 Crore shall be exempt under Section 56 (2) VIIB of Income Tax Act.

4. Tax Exemption Under Section 54GB – Under Section 54GB of the Income Tax Act, individuals and Hindu Undivided Families (HUFs) can claim exemption on long-term capital gains tax if they invest the net consideration received from the sale of a residential property into the equity shares of an eligible startup

5. Set-off of Carry Forward Losses Allowed – The carry forward of losses in respect of eligible start-ups is allowed if all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of the previous year in which such loss is to be carried forward.

The restriction of holding of 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in the case of eligible startups.

6. 80 IAC Tax exemption – Post getting recognition a Startup may apply for Tax exemption under section 80 IAC of the Income Tax Act. Post getting clearance for Tax exemption, the Startup can avail 100% tax holiday on profit and gains for any 3 consecutive financial years out of its first ten years since incorporation.

Eligibility Criteria for applying to Income Tax exemption (80IAC):

  • The entity should be a recognized Startup
  • Only Private limited or a Limited Liability Partnership is eligible for Tax exemption under Section 80IAC
  • The Startup should have been incorporated after 1st April, 2016

 

What Factors Are Considered By The Investors To Invest In Startups?

Different investors use different criteria to judge an investment. The importance of these factors would wary depending on the stage of investment, sector of startup, management team etc. Listed below are typical investment criteria used by investors:

1. Market Landscape: Refers to the addressable market which the startup is catering to.

Factors: Market size, obtainable market-share, adoption rate, historical and forecasted growth rates, macroeconomic drivers, demand supply

2. Scalability and Sustainability: Startups should showcase the potential upscale in the near future, a sustainable and stable business plan.

Factors: Barriers to entry, imitation costs, growth rate, expansion plans

3. Objective and Problem Solving: The offering of the startup should be differentiated to solve a unique customer problem or to meet customer need. Ideas or products that are patented showcase deemed potential in the startups.

4. Customers & Suppliers: Laying out your customers and suppliers, helps investors understand your business better.

Factors: Customer relationships, stickiness to the product, vendor terms, existing vendors

5. Competitive Analysis: A true picture of competition and other players in the market working on similar things should be highlighted. There can never be an apple to apple comparison, but highlighting the service or product offerings of similar players in the industry is important

Factors: Number of players in the market, market share, obtainable share in the near future, product mapping to highlight similarities or differences between competitor offerings

6. Sales and Marketing: No matter how good your product or service maybe, but if does not find any end use, there is no good.

Factors: Sales forecast, targeted audiences, marketing plan for the target, conversion and retention ratio etc.

7. Financial Assessment: A detailed business model that showcases the cash inflows over the years, investments required, key milestones, break-even point and growth rates should be made out well. Assumptions used at this stage should also be reasonable and clearly mentioned.

8. Exit Avenues: A startup showcasing potential future acquirers or alliance partners becomes a valuable decision parameter for the investor  

9. Management and Team: The execution and passion of founder and the management team to drive the company are equally crucial in addition to the all the factors mentioned above

 

How Do Investors Earn Returns From Investing In Startups?

Investors realize their return on investment from startups through various means of exit. Ideally, the VC firm and the entrepreneur should discuss the various exit options at the beginning of investment negotiations.

A well performing, high-growth startup that also has excellent management and organisational processes is more likely of being exit-ready earlier than other startups.

Venture Capital and Private Equity funds must exit all their investments before the end of the fund’s life. The common exit methods are:

1. Mergers and Acquisitions: The investor may decide to sell the portfolio company to another company in the market. For ex: The $140mn acquisition of RedBus by South African Internet and media giant Naspers and integrating it with its India arm Ibibo group, presented an exit option for its investors, Seedfund, Inventus Capital Partners and Helion Venture Partners.

2. IPO: Initial Public Offering is the first time that the stock of a private company is offered to the public. Issued by private companies seeking capital to expand, it is one of the preferred options for investors looking to exit a startup organisation.

3. Exit to Financial Investors: Investors may sell their investment to other venture capital or private equity firms

4. Distressed Sale: Under financially stressed times for a startup company, the investors may decide to sell the business to another company or a financial institution

5. Buybacks: Founders of the startup may also buyback their investment from the fund.

 

Frequently Asked Questions

1.  Can a foreign company register under Startup India hub?

Any entity having atleast one registered office in India is welcome to register on the hub as location preferences, for the time being are only created for Indian states. However, we are working on international relations and will soon be able to enable registration for stakeholders from the global ecosystem.

2. Would a One Person Company (OPC) be eligible to avail benefits under the Startup India initiative?

Yes. One Person Companies are eligible to avail benefits under the Startup India initiative.

3. Can a foreigner enter into partnership under the LLP Act and get that LLP registered with Startup India?

Yes, a foreign national can enter into partnership under the LLP Act and get that LLP registered on our website. It can even get recognised by the DIPP.

4. What is the time-frame for obtaining certificate of recognition as a ‘Startup’ in case an entity already exists?

The certificate of recognition is issued typically within 2 working days upon successful submission of the application.

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