Start-up companies are subjected to a whole lot of taxes, most of which are not even known to a rookie who has just entered the playing field. But with Annveshan’s expertise in the conceptual framework for financial accounting, nothing is too obscure for long.
The Indian government proclaimed the Startup India campaign in 2016 to boost entrepreneurship in India, simplifying the incorporation of the startup process and grant of various tax exemptions to startups.
But these benefits and exemptions are available to only those who come under the criteria of an ‘Eligible Startup’ – which are as follows:
- The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership.
- Turnover should not exceed INR 100 Crores for any of the financial years since incorporation.
Shall be considered as a startup up to 10 years from the date of its registration. - The Startup should be working towards innovation/ improvement of existing products, services, and processes and should have the potential to generate employment and create wealth.
- An entity formed by splitting up or reconstructing an existing business can not be considered a “Startup”
Now that the eligibility criterion is in place, here’s a list of all the curated tax benefits available to an eligible start-up.
Income Tax Holiday for Start-ups
Eligible start-ups can opt to get income tax exemption for three consecutive years within ten years of incorporation. However, in order for the tax reduction to be granted, the following requirements must be met:
- The eligible start-up should be formed between April 2016 and March 2022.
- It should hold a certificate of the eligible business from the Inter-Ministerial Board of Certification (IMB)
- It should not exceed the turnover of INR 100 Cr in the year in which the tax exemption is secured.
- It is also fitting to heed that an eligible start-up can be both a company or a limited liability partnership. Likely to be associated with innovation, development of goods and services or an expandable business modal with high possibility of wealth and job creation.
No Tax on Share Issuance to Investors at a Premium
Most start-ups find it difficult to find equilibrium in their profit and loss ratio during the initial years. Unaddressed, this can lead to their downfall.
To combat this situation, start-ups within seven years of incorporation are eligible to carry forward their losses and set them in subsequent years against taxable profits.
Furthermore, if a start-up can issue shares to the investors at a price that is higher than fair market value (FMV), the excess amount received beyond FMV is not taxable. Albeit, the total post-share issuance should not exceed 25 crores.
Tax Deferment on Exercise of Employee Stock Options (ESOPs)
ESOPs are an influential tool employed by businesses to attract and retain talent and help employees participate in the growth journey of the business.
At present, ESOPs are taxed at two stages in the hands of the employees:
- The difference between fair market value and the exercise price is taxed on the date of exercise as a part of the salary.
- The difference between the sale price and fair market value is taxed as capital gains on the date of exercise.
In a nutshell, there is a tax payout by the employees immediately upon exercise of the ESOPs. This could be a challenging scenario in the case of employees, as at that stage sufficient funds may not be available.
To incentivise start-ups to hire and employ talent by granting ESOPs, an amendment was made by Finance Act, 2020 wherein every recognized start-up can file for tax deductions on ESOP, however, in a limited period.
Capital Gains on Sale of Shares
When an entrepreneur sells his shareholding, the period of holding of such shares is an important factor in determining its taxability.
1. Unlisted shares:
Unlisted shares that are held for more than 24 months qualify as the Long term capital assets whereas those held for less, are
Short-term capital assets, both are taxed independently.
Long-term capital assets are eligible for a variety of tax benefits that are applicable for domestic and foreign investors but short-term capital assets are taxed regularly.
2. Listed shares:
Listed shares qualify as Long term capital assets if kept for more than twelve months and are eligible for Tax exemptions.
If the listed share is sold before twelve months the gains are taxed regularly just like unlisted shares.
Key Takeaway
With evident growth seen in the last few years, it would be fair to say that Indian Start-Ups are making headway in the right direction.
Let the expertise of Annveshan help you wade through the murky waters of the taxation process with ease.
Annveshan and You
Annveshan tax policy team brings together the knowledge and experience of our professionals and subject matter experts in the critical area of Indian tax policy and international accounting standards.
We have a thorough understanding of financial statements, balance sheets, conceptual accounting, international financial reporting standards, and regulatory rules that will help to boost the business and capital.
The proper guidelines adapt as the company expands and result in the highest potential turnover, earnings, faster cash flows, and a stronger balance sheet. As a result of such strategies, tax costs are depleted, and regulatory benefits are increased.
