Definition of a Startup and Income Tax Provisions in Budget 2016-17
The word Startup is defined by Government of India through notification Notification NO. GSR 180(E) [ F.NO.5(91)/2015-BE.I], DATED 17-2-2016.
DEFINITION OF A STARTUP
As per the notification issued an entity will be considered a Startup:
- For the first five years of incorporation /Registration,
- Turnover has not exceeded Rs. 25 crore for any of the financial year and
- It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
Further condition is that entity should not be formed by splitting up or reconstruction of a business already in existence.
To obtain tax benefits a Startup shall obtain certificate of an eligible business from the Inter-Ministerial Board of Certification consisting of:
- Joint Secretary, Department of Industrial Policy and Promotion,
- Representative of Department of Science and Technology, and
- Representative of Department of Biotechnology.
Explanation provided for different terms used in the definition of a Startup are explained below:
Entity: A Private Limited Company or a registered Partnership Firm or a Limited Liability Partnership is considered as an entity. Individual or proprietorship firms are not covered under this definition.
Turnover: As defined under Companies Act, 2013. As per Companies Act 2013 “turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year.
Entity is considered to be working for purpose mentioned above in point 3, if it aims 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.
Provided that the mere act of 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 would not be covered under this definition.
Process of recognition as a startup will be through mobile app/portal of the DIPP (Department of Industrial Policy and Promotion), an application should be submitted with any of the followings documents:
- A recommendation (with regard to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion, from any Incubator established in a postgraduate college in India; or
- A letter of support by any incubator which is funded (in relation to the project) from Government of India or any State Government as part of any specified scheme to promote innovation; or
- A recommendation (with regard to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion, from any Incubator recognized by Government of India; or
- Aletter of funding of not less than 20 per cent in equity by any Incubation Fund/Angel Fund/Private Equity Fund/Accelerator/Angel Network duly registered with Securities and Exchange Board of India that endorses innovative nature of the business. Department of Industrial Policy and Promotion may include any such fund in a negative list for such reasons as it may deem fit; or
- A letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation; or
- A patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of business being promoted.
Department of Industrial Policy and Promotion may, until such mobile app/portal is launched make alternative arrangement of recognizing a 'startup'. Once such application with relevant document is uploaded a real-time recognition number will be issued to the startup. If on subsequent verification, such recognition is found to be obtained without uploading the document or uploading any other document or a forged document, the concerned applicant shall be liable to a fine which shall be fifty per cent of paid up capital of the startup but shall not be less than Rupees 25,000.
Income Tax Exemption for Startup as per Budget 2016-17
Finance Minister has announced deduction of 100% profits for 3 years out of 5 years. A Startup can take advantage of deduction of profits from eligible business.
Following provision is inserted to provide the benefits:
41. After section 80-IAB of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2017, namely:—
‘80-IAC. (1) Where the gross total income of an assessee, being an eligible start-up, includes any profits and gains derived from eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent. of the profits and gains derived from such business for three consecutive assessment years.
(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any three consecutive assessment years out of five years beginning from the year in which the eligible start-up is incorporated.
(3) This section applies to a start-up which fulfils the following conditions, namely:—
(i) it is not formed by splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of a start-up which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as referred to in section 33B, in the circumstances and within the period specified in that section;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Explanation 1.— For the purposes of this clause, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant 50 previously used for any purpose, if all the following conditions are fulfilled, namely:—
(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;
(b) such machinery or plant is imported into India;
(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.
Explanation 2.—Where in the case of a start-up, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent. Of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with.
(4) The provisions of sub-section (5) and sub-sections (7) to (11) of section 80-IA shall apply to the start-ups for the purpose of allowing deductions under sub-section (1).
Explanation.—For the purposes of this section,—
(i) “eligible business” means a business which involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property;
(ii) “eligible start-up” means a company engaged in eligible business which fulfils the following conditions, namely:—
(a) it is incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2019;
(b) the total turnover of its business does not exceed twenty-five crore rupees in any of the
previous years beginning on or after the 1st day of April, 2016 and ending on the 31st day 0f March, 2021; and
(c) it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government.’