Startups and MSMEs have caught the Government’s attention as potential sources of economic growth and employment
generation in India.
The Prime Minister rolled out Startup India Action Plan in January this year,
indicating that the Government is serious towards creating an enabling
environment for this sector.
Eurion Constellation published an article series
on some of its key announcements:
The current year’s budget has made its recommendations and
some implementation deadlines have passed. So, now is the time to evaluate whether
the startup sector is really on the path to the promised land. In this series,
we will cover the important new announcements and concrete policy steps taken,
beginning with tax sops.
The not-so-good news is that the much expected exemption from“angel tax” did not come through. No, it is not so named in the I-T Act.
Under section 56(2)(viib), if an unlisted private company receives funding from
a domestic investor such that it includes share premium, the premium part is
taxable as Income from Other Sources. This applies only to angels who are not
part of any fund. Share premium received from venture capital funding is also excluded.
Three-year Tax Holiday
Sticking to its promise, the Government introduced 80-IAC in
the budget, which provides for a deduction of 100% of the profits of an eligible startup in 3 consecutive years out 5 beginning from the year of
One of the key criteria is that the date of incorporation
should be on or after April 1, 2016 but before April 1, 2019. The manner of
providing deductions will be governed by sub-section (5) and sub-sections (7)
to (11) of section 80-IA. In addition, Minimum Alternate Tax (MAT) provisions
will also apply, which implies 20% tax rate instead of regular 33%. Therefore,
on the ground your tax liability is significantly reduced, but not waived off
Tax Rate for
Budget 2016 has introduced section 115BA, which provides for
a tax rate of 25% + Surcharge (Agg. 26.75%) for manufacturing units set up on
or after March 1, 2016. Deduction for depreciation u/s 32 will be allowed.
However, no deductions will be admissible u/s 10AA, 32(1)(iia), 32AC, 32AD, 33AB,
33ABA, subsections of section 35, 35AC, 35AD, 35CCC, 35CCD and Chapter VI-A
(Heading C). Moreover, set-off of carry forward losses will not be additionally
New Corporate Tax Rate
for Smaller Entities
The Finance Ministry has indicated that it intends to bring
down the corporate tax rate to 25% over the next couple of years. This move
will involve a rationalization of the tax structure by withdrawing some
exemptions. This year Arun Jaitley has already given relief to small enterprises
whose turnover did not exceed INR 5 cr in the year 2014-15. The applicable tax
rate for the year 2016-17 will be 29% + Surcharge (Agg. 31.03%).
Long Term Capital
The startup world has been clamoring for equalization in
capital gains tax norms between listed and unlisted companies. As per the existing
> 12 months
> 36 months
LTCG Tax Rate
Exempt u/s 10(38), if STT* paid
Shares: 20% with indexation
No STT: 10% without indexation
Property: 20% with indexation
No STT: 20% with indexation
STCG Tax Rate
15%, if STT paid
Regular slab rate
* Securities Transaction Tax
While Budget 2016 did not include unlisted securities in
section 10(38), it did lower the long-term holding period from 36 to 24 months.
This will reduce the tax liability in the hands of the startup investors. At
this time, this is all they will need to contend with.
However, foreign investors can rejoice as their tax
liability is reduced to half. The Finance Ministry has widened the meaning of
section 112(c) to include private company investments in the definition of “securities.”
Therefore, LTCG arising in this respect will now be charged at 10% without
indexation instead of 20% currently. Basically, this is now at par with listed
securities on which no STT is paid.
Nearly all tax provisions come packaged with mandatory conditions,
provisions and explanations, which impact the actual outcome of each case. It
is advisable to seek expert opinion to avoid missed opportunities or
lengthy and expensive legal process due errors in judgment.
Amendment to Section
Currently, u/s 54GB capital gain on sale of a residential property,
by an individual or HUF, will not be taxable if the net consideration is invested
in the shares of a small or medium enterprise under the Micro, Small and Medium
Enterprises Act, 2006. The entity should be a manufacturing unit in which the assessee
will gain at least 50% voting rights after the subscription to shares. The
company must buy new plant and machinery within a year of such subscription.
Budget 2016 has now brought eligible startups under
this section. In addition, purchase of computer and computer software will also
qualify. The startups will need to wait a little bit more as the amendments will
take effect from next year (April 1, 2017) and therefore, the old provisions
will still apply in 2016-17.
New section 54EE
Insertion of new section 54EE is also a prospective one
(applicable form year 2017-18). Capital gain on sale of any long term asset will
not be taxable if invested in the units of a specified fund (to be notified)
within 6 months. The fund mentioned is likely to be the Fund of Funds that the
Government has planned to facilitate startup funding.
Patent Related Benefits
Effective April 1, 2017, newly inserted section 115BBF provides
that worldwide royalty income generated from patents developed and registered in India will be chargeable at a special rate of 10%. The section requires that no
expenditure with respect to such income will be allowed. This provision is
likely to benefits the technology based companies, which form the single largest
segment of the startup ecosystem in India.
Under the current provisions, an employer is required to pay
minimum 12% of basic salaries of the employees as employer’s contribution to
EPF. Budget 2016 has announced that the Government will pay employer’s
contribution to the extent of 8.33% for all new employees for first three years.
The remaining contribution will be paid by the employer. This move is designed
to reduce employee cost burden for startups and growing organizations.