Tax planning startups

AY 2021-22
Tax Planning
for
New Business
(Startups)
Classroom Deliberations
CA. Dr. Prithvi Ranjan Parhi
1
© CA. Dr. Prithvi Ranjan Parhi

Income Tax Exemption on profits u/s
80-IAC of Income Tax Act:
• A Department of Industrial Policy and Promotion DIPP
recognized Startup shall be eligible to apply to the Inter-
Ministerial Board for full deduction on the profits and gains
from business.
• Provided the following conditions are fulfilled:
• A private limited company or a limited liability partnership,
• Incorporated on or after 1st April 2016 but before 1st April
2022, and
• Start-up is 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.
© CA. Dr. Prithvi Ranjan Parhi 2

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
• An entity shall be considered as a startup up to 10 years from the date
of its incorporation
• Turnover should be less than INR 100 Crores in any of the previous
financial years
• The company remains a startup if the turnover per year does not cross
the Rs 100 crore mark in any of the 10 years. Once the company crosses
the mark, it no longer remains eligible to be called a startup.
• The firm should have approval from the Department of Industrial Policy
and Promotion (DIPP)
• 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 reconstruction of an existing
business shall not be considered a “Startup”

Benefit:
• 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 tax holiday for 3
consecutive financial years out of its first ten
years since incorporation
• In order to get Tax exemption under section
80 IAC of the Income Tax Act, the startup
may Register on the “Startup India portal”.

Procedure for registration
• The interested entities are required to create a
login id on Startup India portal using the
following details:
• Application for exemption under section 80IAC
can be made by logging in the Startup India
Portal through this login credentials.

Documents/ Info
1. Memorandum of association (for Pvt Ltd) or LLP Deed (for
LLP)
2. Board Resolution (if any)
3. Annual Accounts & Income Tax returns of the startup for the
last three financial years. (The Balance Sheet and the Profit
and Loss Statement must be CA Certified)
4. If your startup was incorporated on 1st April 2018 or later,
Income Tax Returns (ITR) is not mandatory. For startups
incorporated earlier, ITR is mandatory.
5. Startup Video Link.
6. Pitch deck

Startup Video Link.
• The video should cover the following aspects:
1. The video should ideally be of 2-3 minutes and be no longer than 5 minutes
2. showcase the working of the product(s)prototype/proof-of-concept developed
by startup
3. If startup is a product or software-based startup then showcasing a
demonstration/ prototype/ walk-through of the product(s)/software product(s)
developed by startup is compulsory.
4. If startup provide software or technology services such as website
development, application development, developing white-label software
products for clients, then please showcase a demonstration/prototype/walk-
through of the product(s) developed for key clients
5. Also showcase the market traction that your product/service has generated
through either online customer reviews, client testimonials (video/text are
acceptable), or any other similar appreciation/feedback received
• Note: Upload the video on a third-party video hosting platform such as Youtube
or Vimeo. In case you are uploading the video on Google Drive please make
sure that it is NOT access restricted.

Pitch deck –
• Pitch deck shall include the following details:
1. Information about the product/service offering of your startup
2. Brief about how is your startup innovative and/or scalable (Uniqueness/USP of the startup
that differentiates from its competitors in the market)
3. Director details and their educational qualification, professional experience, and formal role
in the startup/current designation (if any)
4. Shareholding pattern as on the date of filling this application
5. Directors and Shareholders’ citizenship details
6. Team details – current role, education, and professional experience
7. Details about adherence to the specific government approvals required by the startups such
as FSSAI registration, guidelines set by Bureau of Indian Standards
8. Revenue model i.e. details of how the startup generates revenue
9. Funding received from private investors or Angel/VC funds (Yes/No); if yes, please add
names and details of the investors
10. IF any support (monetary/non-monetary) is received from Central or State Government
Ministries/Departments/PSUs/Incubators
11. Details of any public or private sector awards won by the startup
12. Number of people directly employed with your startup
13. Number of customers/clients – Paying customers/users with a copy of at least one
Contract/Work-Order/MoU or the number PlayStore/AppleStore downloads in case of mobile
applications along with a screenshot of the app listing on these platforms
14. Link to your startup’s website
15. Screenshots/images of your product/website
• Note: Pitchdeck uploaded must be in a PDF format

Benefits shall be available to an
eligible start-up or its shareholders
• Exemption from levy of angel tax under section 56(2)(viib)
• Deductions under section 80-IAC of the income tax Act,
• Liberalized regime of section 79 to carry forward and set-
off the losses
• Exemption under section 54GB to the shareholder for
making investment in a startup
• Access to the dedicated cell created by the CBDT to
address the problems of startups

Angel tax under section 56(2)(viib)
• Angel tax is the tax charged on the closely
held company when it issues shares to a
resident person at a price which is more than
its fair market value.
• When this provision is triggered, the
aggregate consideration received from issue
of shares as exceeds its fair market value is
charged to tax under the head ‘Income from
other sources’ under section 56(2)(viib).

Tax Exemption under Section 56 of the Income Tax Act
(Angel Tax)
• Post getting recognition a Startup may apply for
Angel Tax Exemption.
• A start-up shall be eligible for claiming exemption
from levy of angel tax under section 56(2)(viib) if
following conditions are satisfied:
– The entity should be a recognized Startup
– Aggregate amount of paid up share capital and share
premium of the Startup after the proposed issue of
share, if any, does not exceed INR 25 Crore

Application for 80-IAC
• For Claiming under section 80-IAC , A recognized
startup is required to file Form 1 along with the
specified documents to the Inter-Ministerial Board
of Certification.
• The board may call for certain documents or
information and may make such enquiries, as it
deems fit, to recognize the entity as an eligible
startup and grant a certificate for claiming
exemption under section 80-IAC.
• The board may reject the application by providing
the reasons thereof.

Investment in Startups
• The provisions of section 54GB of the Income
Tax Act exempts the capital gain arising from
transfer of a long term capital assets being a
‘residential property’, if the amount is
invested in subscription of the equity shares of
the eligible company.

Eligible company’ –
• The company should have been incorporated in India.
• The company should have been incorporated during the previous year in
which the capital gain has arisen to the subsequent financial year up to
the due date of furnishing of the income tax return.
• The company is engaged in the business of manufacturing of an article
or a thing.
• The company in which the assessee has more than 50% share capital or
more than 50% voting rights after the subscription in equity shares by
the assessee.
• The company should qualify to be a medium or small enterprise under
the Micro, Small and Medium Enterprises Act, 2006 or the same is an
eligible start-up.

Conditions to be satisfied to claim section
54GB exemption
• The claimant is required to satisfy following conditions in order to
claim exemption under section 54GB of the Income Tax Act –
1. The capital gain has arisen on transfer of a long term capital asset.
The long term capital asset should be a residential property (being
a house or a plot of land).
2. Only individual or a Hindu Undivided Family (HUF) are eligible for
exemption under section 54GB.
3. The claimant is required to utilize the net consideration before the
due date of furnishing the income tax return. The said net
consideration is to be utilized for subscription in the equity shares
of an eligible company.

Exemption from tax on Long-term capital gains:
• A new section 54 EE has been inserted in the Income
Tax Act for the eligible startups to exempt their tax on a
long-term capital gain if such a long-term capital gain or
a part thereof is invested in a fund notified by Central
Government within a period of six months from the
date of transfer of the asset.
• The maximum amount that can be invested in the long-
term specified asset is Rs 50 lakh.
• Such amount shall be remain invested in the specified
fund for a period of 3 years.
• If withdrawn before 3 years, then exemption will be
revoked in the year in which money is withdrawn.
17

Tax exemption on investments above the fair
market value
• The government has exempted the tax being levied
on investments above the fair market value in
eligible startups.
• Such investments include investments made by
resident angel investors, family or funds which are
not registered as venture capital funds.
• Also, the investments made by incubators above fair
market value is exempt.
18

Tax exemption to Individual/HUF on investment of long-term
capital gain in equity shares of Eligible Startups u/s 54GB.
• The existing provisions u/s 54GB allows the exemption from tax on
long-term capital gains on the sale of a residential property if such
gains are invested in the small or medium enterprises as defined
under the Micro, Small and Medium Enterprises Act, 2006. But now
this section has been amended to include exemption on capital gains
invested in eligible start-ups also.
• Thus, if an individual or HUF sells a residential property and invests the
capital gains to subscribe the 50% or more equity shares of the eligible
startups, then tax on long term capital will be exempt provided that
such shares are not sold or transferred within 5 years from the date of
its acquisition.The startups shall also use the amount invested to
purchase assets and should not transfer asset purchased within 5
years from the date of its purchase.
• This exemption will boost the investment in eligible startups and will
promote their growth and expansion.
19

Set off of carry forward losses and capital gains allowed in
case of a change in Shareholding pattern.
• 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
previous year in which such loss is to be carry
forward.
• The restriction of holding of 51 per cent of voting
rights to be remaining unchanged u/s 79 has been
relaxed in case of eligible startups.
20

Other Issues for Startups
1. TDS Compliances
2. Advance Tax Compliances
3. Avoiding Cash Transactions
4. Timely Filing of Return
5. Indirect Tax Compliances
6. RoC Compliances
7. Renewal of licenses
8. Timely payment of Statutory dues

Thanks
CA. Dr. Prithvi Ranjan Parhi
Mail: prithvi.baps@gmail.com
22

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