What are the Benefits Available for Start-Ups under the Income Tax Act

Table of Contents:

1. Deduction under Section 80-IAC
2. Deferment of payment of tax on ESOPs
3. Exemption under Section 54GB
4. Set-off and carry forward of losses
5. Relaxation from provisions of Section 56(2)(viib)

Start-up India is a flagship initiative of the Government of India, intended to build a strong eco-system for nurturing innovation and start-ups in the country that will drive sustainable economic growth and generate large-scale employment opportunities. The Government, through this initiative, aims to empower start-ups to grow through innovation and design.

The action plan aimed to promote bank financing for start-ups, simplify the incorporation of the start-up process, reduce the regulatory burden, focus on their core business, keep the compliance cost low, and grant various tax exemptions and other benefits.

The results of such initiatives and benefits to boost entrepreneurship in India have been shown by the fact that in the year 2021, 16 start-ups have joined the unicorn club (valuation of more than $1 billion) in just the first six months. India is now an emerging unicorn hotspot, with the club expected to expand to 150 unicorns over the next three years as per the reports from Praxis Global Alliance and 256 networks.

To support the initiative of the Government, Income-tax Act provides various benefits to a start-up that fulfills the conditions prescribed in this behalf. Following are the benefits which an eligible start-up can avail:

1. Deduction under Section 80-IAC

Section 80-IAC allows a deduction to a start-up incorporated between 01-04-2016 and 31-03-2022, provided its turnover does not exceed Rs. 100 crores in the previous year for which deduction under section is claimed. The deduction can be claimed subject to fulfillment of certain conditions, such as the start-up should be engaged in innovation, development, or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation.

The deduction can be claimed for 100% of profits and gains for three consecutive assessment years out of the ten years beginning from the year of incorporation. The amount deductible under this provision shall be computed, deeming that the eligible business is the only source of income of assessee during the previous year in which deduction is to be allowed.

2. Deferment of payment of tax on ESOPs

When an employer allots shares to an employee under the ESOP scheme, free of cost or at a concessional rate, it is taxable as perquisite. The value of such perquisite shall be the fair market value of the shares on the date of exercising ESOPs as reduced by the amount recovered from the employee. The perquisites arising under the ESOP scheme shall be taxable in the hands of employees in the year in which shares are allotted to the employees. Nothing shall be taxable when shares are just vested but not allotted.

However, if the employer is an eligible start-up, fulfilling the conditions prescribed under section 80-IAC, the tax shall not be payable or deductible on the perquisite arising from ESOPs in the year of allotment of shares. The employer shall be liable for deduction or payment of tax within 14 days from the earliest of the following events:

• • From the expiry of 48 months from the end of the assessment year in which shares are allotted under ESOP Scheme;
  • From the date on which assessee ceases to be the employee of the organization; or
  • From the date of sale of shares allotted under ESOP.

Tax is required to be deducted or paid at the rates applicable during the year of allotment or transfer of shares by the employer.

3. Exemption under Section 54GB

Section 54GB allows exemption on capital gains arising from transfer of residential property (a house or a plot of land) owned by an Individual or HUF subject to fulfillment of various conditions such as:

• • Net consideration arising out of such transfer is utilised for subscription in the equity shares of an eligible start-up fulfilling prescribed conditions; and
  • Such eligible start-up has utilised this amount for purchase of new asset within one year from the date of subscription in equity shares by assessee.

4. Set-off and carry forward of losses

In the case of a closely held company, Section 79 imposes certain conditions to set off the carried forward losses. Where substantial change has happened in the voting power of a company, the carried forward losses cannot be set off by such a company. However, in the case of an eligible start-up, such losses can be carried forward on the satisfaction of any of the two conditions specified below:

Condition 1: Continued 51% shareholding

In the year of set-off of losses, at least 51% of voting power is beneficially held by the same persons who held them as on the last day of the year in which loss was incurred; or

Condition 2: Continued 100% shareholders with the same voting rights

100% of shareholders, on the last day of the previous year in which loss was incurred, should continue to hold the same shares on the last day of the previous year in which loss is to be set-off. Further, such losses should have been incurred during seven years beginning from the year of incorporation of the company.

5. Relaxation from provisions of Section 56(2)(viib)

Section 56(2)(viib) provides that if unquoted shares are issued at a premium by a closely held company, the excess of premium over the fair market value of the shares shall be taxable as income from other sources in the hands of the company. However, where an eligible start-up fulfills the conditions prescribed in Notification No. GSR 127 (E) [F.NO.5 (4)/2018-SI], dated 19-2-2019, provisions of this section will not apply.