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Startups play a major role in any economy, they may be small in size but they do create a number of Jobs, more jobs means an improved economy. They also contribute to innovation and competition. Startups act as catalyst, once a startup is established, the process of industrialization and generate demands for various other units and hence result in overall development. According to the NASSCOM report of 2015 India is home to almost 3100 startups and are just behind US and UK. The PM has launched a Special Startup Campaign , Government is also creating policies that are startup friendly in order to provide boost to the Startups. The Department for Industrial Policy and Promotion (DIPP) or its Department of Promotion for Industry and Internal Trade (DPIIT) as it is called now, under the Ministry of Commerce, vide its notification dated 19th February 2019 has revolutionized the world of Startups by introducing the new definition of Startups and modified tax structures. This has been done in consonance with the Make in India Campaign.
SCOPE OF THE NOTIFICATION
Present Notification shall apply irrespective of the dates on shares which are issued by the Start up from the date of its incorporation, except for the shares issued in respect of which an addition under section 56(2) (viib) of the Act has been made in an assessment order made under the Act before the date of issue of the notification. The Present Notification shall be applicable only in respect of applicability of the provisions of section 56(2) (viib) of the Act to the Startup and shall not grant any exemption in respect of applicability of other provisions of the Act.
Major Highlights of the Notification
An entity shall be considered as a Startup upto a period of 10 years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
The turnover limit has been increased from the current Rs 25 crore to now Rs 100 crore.
CERTIFICATION FOR THE PURPOSES OF SECTION 80-IAC (100% EXEMPTION OF TAX) OF THE INCOME TAX ACT (“ACT”)
A Startup being a private limited company or limited liability partnership, which fulfills the conditions specified in sub-clause (i) and sub-clause (ii) of the Explanation to section 80-IAC of the Act, can, for obtaining a certificate for the purposes of section 80-IAC of the Act, make an application in Form-1 of the current Notification along with documents specified therein to the Board and the Board may, after calling for such documents or information and making such enquires, as it may deem fit, grant the certificate referred to in sub-clause (c) of clause of the Explanation to section 80- IAC of the Act or reject the application by providing reasons.
EXEMPTION FOR THE PURPOSE OF SECTION 56(2) (VIIB) (WHICH PROVIDES FOR TAXATION OF FUNDS RECEIVED BY AN ENTITY) OF THE ACT
A Startup shall also be eligible for notification under 56(2) (viib) of the Act and consequent exemption from the provisions of that clause, if it fulfills the following conditions:
- It has been recognized as Startup by DPIIT under para 2(iii)(a) of the current notification or as per any earlier notification on this subject;
- Aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue of share, if any, does not exceed, 25 crore rupees:
However, in computing the aggregate amount of paid up share capital, the amount of paid up share capital and share premium of 25 crore rupees in respect of shares issued to a non resident or a venture capital company/fund shall not be included.
Furthermore, that considerations received by such startup for shares issued or proposed to be issued to a specified company shall also be exempt and shall not be included in computing the aggregate amount of paid up share capital and share premium of 25 crore rupees.
- It has not invested in any of the following assets
(a) building or land appurtenant thereto, being a residential house, other than that used by the Startup for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
(b) land or building, or both, not being a residential house, other than that occupied by the Startup for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business;
(c) Loans and advances, other than loans or advances extended in the ordinary course of business by the Startup where the lending of money is substantial part of its business;
(d) capital contribution made to any other entity;
(e) shares and securities;
(f) a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds ten lakh rupees, other than that held by the Startup for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;
(g) jewellery other than that held by the Startup as stock-in-trade in the ordinary course of business;
(h) any other asset, whether in the nature of capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to section 56(2) (vii) of the Act.
The Startup shall not invest in any of the assets specified in the sub-clauses (a) to (h) for the period of seven years from the end of the latest financial year in which shares are issued at premium.
A startup fulfilling conditions shall file duly signed declaration in Form 2 to DIPP that it fulfills the conditions. On receipt of such declaration, the DPIIT shall forward the same to the CBDT.
In case if it is found that any certificate has been obtained on the basis of false information, the Board reserves the right to revoke such certificate or approval. Where the certificate or approval has been revoked under sub-para (1), such certificate or approval shall be deemed never to have been issued or granted by the Board.
In case the Startup which has furnished declaration in Form-2 invests in any of the assets specified in para 4(iii) of the present notification before the end of seven years from the end of the latest financial year in which the shares are issued at premium, the exemption provided under section 56(2)(viib) of the Act shall be revoked with retrospective effect.
This latest notification has been able to tackle most of the issues raised in the past and made exemptions wider. It has simplified the entire process. Distribution of loans and advance to other entities are also limited. This means investments have to chosen carefully in order to claim benefits. This step is vital to keep a check on diversion of funds and generation of black money through complicated entity structures, which was extensive in the past.
It takes care of a majority of issues raised by the experts and the entrepreneurs on Angel Tax. The limit on investments in certain asset class will also ensure the exemption is not exploited in any manner.
Now, the ball has been passed to Startups to get them recognized with the DPIIT, if not already done and start filing declarations in Form 2 of the notification to save themselves from Income Tax Notices and Angel Tax.
Author: Mr. Shubham Borkar, Senior Associate – Litigation and Business Development and Lakshay Kewalramani –Intern, at Khurana & Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at email@example.com or at www.linkedin.com/in/shubhamborkar.