Benefits of Start up Registration [CS Hera Siddiqui]

1. IPR

a) Fast tracking of start-up patent applications

b) Panel of facilitators to assist in IP applications- 902 facilitators

c) Rebate on filing of applications- 80% rebate


Startups are entitled to avail exemption on:

a) Prior Turnover

b) Prior experience

c) Earnest money deposit

3. Self certification under Labor and Environmental Laws

a) To reduce the regulatory burden on startups, thereby allowing them to focus on their core business and keep compliance costs low.

b) Startups are allowed to self-certify their compliance under 6 Labor and 3 Environment Laws for a period of 3 to 5 years from the date of incorporation.

c) In respect of 3 Environment Laws, units operating under 36 white category industries do not require clearance under 3 Environment related Acts for 3 years

4. Faster exits for Startups

MCA has notified startups as “FAST TRACK FIRMS” enabling them to wind up operations within 90 days (180 days for other companies). Startups with simple debt structures may be wound up within a period of 90 days from making an application for winding up on a fast track basis.

5. Tax exemptions for 3 years

The recognized startups that are granted an Inter-Ministrial Board Certificate are exempted from Income-tax for a period of 3 consecutive years out of 10 years since incorporation.

a) 3 year tax holiday in a block of seven years

The Startup incorporated between April 1, 2016, till 31st March 2021 was eligible for this scheme. Budget 2021 has extended the eligibility to 31s March 2022. Such startups will be eligible for getting 100% tax rebate on profit for a period of three years in a block of seven years provided that annual turnover does not exceed Rs.25 crores in any financial year. This will help the startups to meet their working capital requirements during their initial years of operation.

b) 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 the 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 If withdrawn before 3 years, then the exemption will be revoked in the year in which money is withdrawn.

c) 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 investment made by incubators above fair market value is exempt.

d) 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.

e) 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 the previous year in which such loss is to be carried forward. The restriction of holding of 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in the case of eligible startups.

6. Exemption for the purpose of clause (VIIB) of sub section (2) of section 56 of the Act

A recognized startup is eligible for exemptions from the provisions of section 56 (2) (viib) of the Income Tax Act.

Angel tax under section 56(2)(viib) of the Act is applicable to moneys received against equity shares issued by a start-up private limited company and issue price is in excess of fair market value. However, exemption available from angel tax to a DPIIT-recognized start-up private limited company applies where aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue of share, if any, does not exceed, twenty five crore rupees.

7. Revamping the incorporation process

Government of India has revamped the incorporation process  wherein the number of procedures to incorporate a company in India has reduced to 3 as against 10 days earlier.

8. Deferring TDS or tax payment in respect of income pertaining to Employee Stock Option Plan (ESOP) of startups

The newly introduced deference of tax payment on ESOPs will help start-ups attract and retain high-quality employees. In order to ease the burden of taxes by the employees of the eligible start-ups or TDS by the startup employer. TDS or tax payment has been deferred by 5 years or till the employee leave the company or sell their shares, whichever is earlier.

Start-ups should mention tax implications to all new employees before giving them an option to get ESOPs as there will be considerable tax consequences for an employee.

There are many employees or individuals who wanted to become a part of a start-up but are not aware of the implications of tax.

Treatment of tax depends upon various factors such as:

  1. Type of option issued

  2. Event on which such option is granted or exercised

  3. The time of resigning

ESOPs are taxed at 2 instances in the hands of employee –

  1. at the time of exercise – as a perquisite.

  2. at the time of sale by an employee – as a capital gain

Exercise price  FMV on exercise date sale price

At the time of exercise – as a perquisite- when shares are allotted to the employee after he has exercised his option on completion of the vesting period

– When the employee has exercised the option — the difference between the FMV on exercise date and exercise price is taxed as perquisite employees as per Section 17 of the Income Tax Act, 1961.

– The employer (i.e., Start-up) is liable to deduct TDS on this perquisite depending on the tax bracket in which the employee falls, and deposit the same with the government before the 7th of the next month.

– This amount is shown in the employee’s Form 16 and included as part of the total income of Salary in the tax return.

At the times of sale by an employee – as a capital gain when the employee opts to sell the allotted shares under the ESOP. 

-When an employee sells his ‘exercised shares,’ he will have to pay capital gains tax on the profit that he makes from the share sale.

-The difference between the sale price and FMV on the exercise date is taxed as capital Gain.

Here capital gain would be the difference between sale consideration and cost of acquisition. Where “Cost of acquisition” would be a perquisite value plus amount actually paid by the employee.

Capital gains are of two types:

  • Short Term Capital Gain (STCG)

  • Long Term Capital Gain (LTCG)

Tax implication on STCG: STCG arises when shares are sold within 24 months of exercising

Now, the tax liability arises within 14 days from any of the following events, whichever is the earliest:

  1. After the expiry of 48 months from the end of the relevant assessment year; or

  2. From the date of the sale of such ESOP shares by the assessee; or

  3. from the date of the taxpayer ceases to be an employee of the ESOP allotting employer. 

9. Fund of funds or startups

To provide equity funding support for development and growth of innovation driven enterprises, the government has set aside a corpus fund of INR 10,000 CR managed by SIDBI. The fund is in the nature of fund of funds, which means that the government participates in the capital of SEBI registered Venture Funds, who invest twice the amount in startups.

10. Seed Fund scheme

This scheme aims to provide financial assistance to start ups for proof of concept, market entry and commercialization. This would enable these startups to graduate to a level where they will be able to raise investments from angel investors or venture capitalists or seek loans from commercial banks or financial institutions. The seed fund will be disbursed to eligible startups through eligible incubators across India.

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