To encourage and support Indian startups, the government has established a number of initiatives, such as Startup India. One of the main objectives of this initiative is to create an environment that supports and encourages new business ventures across the country. Let us look into the tax benefits available to these startups and how they can use these programs to hasten their growth.
What Is a Startup
A startup is a young business established by one or more entrepreneurs with the goal of creating an original good or service and marketing it. During the early stages, its entrepreneurial founders frequently provide funding.
A founder or co-founder who has a solution to a problem usually starts a business. To develop and validate their business models, the founder of a startup will start by conducting problem and solution interviews and building a minimum viable product (MVP) or a prototype. It may take a while to get things going (up to three years, according to some estimates), so ongoing work is necessary. Given the high failure rates and ambiguous results, maintaining effort over the long term is particularly difficult and needed.
Criteria for a Business to be Considered a Startup in India
The following criteria must be satisfied for a business to be considered a startup in India under the Startup India policy:
- The assessor is a company or limited liability partnership (LLP) engaged in an eligible business (an eligible start-up business is one that innovates, develops, or improves products, processes, or services, or uses a scalable business model with a high potential for creating wealth or jobs).
- The aforementioned business, or LLP, was established after March 31, 2016, but before April 1, 2021.
- The company or LLP’s annual business turnover should not have exceeded Rs. 25 crores in the prior year, which was pertinent to the assessment year for which a deduction is requested under Section 80-IAC.
- It has an Inter-Ministerial Board of Certification certificate stating that it is an eligible business, as published in the Official Gazette by the Central Government.
- The aforementioned company or LLP was not created by the division or reconstruction of an already existing company. The startup, however, that results from the assessors reestablishment, reconstruction, or revival of any such undertaking, as mentioned in Section 33B, is exempt from this requirement.
- It is not created by the transfer of equipment or plants that were previously used for any purpose to a new business [with a few exceptions].
- It is not created by the division or reconstruction of an already existing business; however, this restriction shall not apply to a startup that results from the establishment, reconstruction, or revival of any such undertaking as described in Section 33B by the Assessors, under the conditions and within the timeframe specified in that Section.
- It is not created by the transfer of equipment or property to a new business.
Taxes Paid by Startups
In India, a new start-up must pay the following taxes:
- Income Tax: A new business venture that is not a sole proprietorship must obtain a Permanent Account Number, assuming that the sole proprietor must already have one.
- GST: If the total taxable service revenue of the establishment is expected to exceed Rs. 20 lakhs, since this number is PAN-based, obtaining a PAN number is necessary.
- TAN : Tax Account Number for depositing TDS withheld from suppliers of goods and services, employees out of their pay, commission and/or brokerage, and property rent exceeding Rs. 15,000 per month, among other things.
Tax Exemptions and Benefits for Startups in India
Startups are eligible for the following tax exemptions under the Startup India Program.
- A startup that was incorporated after April 1, 2016, according to Section 80-IAC, is qualified for a 3-year period of 100% tax relief on profits. Additionally, the annual turnover cannot, up until March 31, 2021, exceed Rs. 25 crores.
- Startups are required to pay the applicable surcharge and cess in addition to the Minimum Alternate Tax [MAT] at a rate of 18.5%.
- There are exemptions from capital gains. The government’s special funds will invest in long-term capital gains (LTCG). The exemptions will be in effect for three years, and the investment can reach INR 50 lakh.
- The business may use the invested money to purchase assets before the deadline for filing the return if the individual owns 50% of the stock.
- Domestic corporations with revenue of less than INR 5 crore in fiscal year 2014-15 will be subject to 29% tax, plus a surcharge and another cess.It will be protected by Section VI-A.
- The finance minister has also suggested various taxes for newly established domestic manufacturing businesses that were established on or after March 1, 2016. Such businesses will pay a tax rate of 25% plus a cess and a surcharge. If the company does not claim any profit or investment incentives, the tax is proposed under certain conditions.
Additional Advantages Are Available for Startups:
- Simple and convenient registration processes for startups.
- Self-certification of compliance with environmental and labour laws.
- Easy access to capital through alternative investment vehicles.
- Simple 90-day company wind-down under the 2016 Insolvency & Bankruptcy Code.
Other Provisions
In addition to these tax advantages, the government has passed several laws to aid and assist the nation’s entrepreneurs. Here are a few of these.
- Funds up to 500 crores have been set aside to support women business owners as well as entrepreneurs from Scheduled Castes and Tribes.
- Long-term capital gains are reduced from three to two years.
- Amendment of the Motor Vehicle Act to promote entrepreneurship
- Presumptive tax relief programs are now available to businesses with a turnover under 2 crore, whereas they were previously only available to companies with a turnover under 1 crore.
- For the first three years, there will be an Employee Provident Fund provision.
FAQs on Tax Benefits for Startups in India
How much tax do startups pay in India
For any financial year in which the deduction is claimed, the annual turnover cannot exceed Rs. 25 crores. The applicable surcharge and cess, as well as the Minimum Alternate Tax [MAT] of 18.5%, are due from startups.
What impact does taxation have on a startup business
Whether taxes are paid directly to the government or indirectly through businesses will determine how they affect a business. Workers will pay more tax on their income as a result of an increase in income tax. Customers, therefore, have less money to spend on goods and services.
Are startups exempt from GST
With the introduction of the GST Composition Scheme, an optional program, the new tax system will allow startups and small businesses with annual sales of up to Rs 1 crore to pay less in taxes. As a result, the burden of taxes, which are still in their infancy, will automatically be lessened.
Are startup costs expensed or capitalized
Although defining what constitutes a start-up cost can be somewhat subjective, start-up expenses should always be recorded as they are incurred. Startup expenses typically cover any expenditures made before a business starts to turn a profit.
What impact does income tax have on small startup businesses
Taxation lowers the profit margin, which makes it less likely that capital investments in equipment, salaries, and technology will increase. Due to the significant revenue lost to taxes, saving rates are also reduced, which also affects investment rates.
To encourage entrepreneurship in India, Prime Minister Narendra Modi launched the Startup India campaign in 2016. The action plan’s goal was to encourage bank financing for startups, streamline the incorporation process and provide tax exemptions and other benefits to startups. However, startups can only take advantage of all the benefits and exemptions if they meet the requirements of an “Eligible Startup.”
Indian government officials have realized that assisting entrepreneurs with their tax-related problems is the best way to encourage innovation. All of the aforementioned rules assist business owners in obtaining tax breaks, raising money and ultimately establishing profitable, self-sustaining enterprises.
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