The Indian Government is all set to improve the start-up ecosystem of the country and thus a plethora of initiatives have been initiated over the past few years. In this context, now more than ever before it has become immensely important to re-evaluate the Indian start-up environment from a variety of regulatory and legal perspective.
Recent reforms brought in by the Government:
The Government of India in order to provide a push to the whole startup ecosystem has come up with the Start-up India Scheme. The scheme grants the new start-ups tax holiday for up to three years and the government has also created a fund worth INR 2500 Crores for start-ups with a credit guarantee fund of INR 500 Crores. The initiative initially launched in 2016 has been a huge success ever since.
The Indian entrepreneurs for quite some time has been complaining about the Income Tax provisions relating seed funding infamously known as the Angel Tax. The section 56(2)(viib) of the Income Tax Act, 1961 states that where a company other than a company in which the public has substantial interest, issues shares and receives consideration more than the fair market value of the shares, such aggregate consideration shall be chargeable to income tax under the head Other Income. This tax provision has been seen as the biggest hurdle in the Indian start-up community and consequently, the government had come up with certain relief for the start-ups in respect to Angel Tax provisions.
First and foremost addressing the elephant in the room, what are the conditions to satisfy to be recognised as a start-up as per Indian Tax laws to get the relief from Angel Tax. Primarily there are three conditions laid down in this regards, first an entity will be recognised as start-up up to ten years from incorporation, secondly the turnover of the entity for any year should not exceed INR 100 Crores and lastly the entity must be engaged in a business working towards innovation, development or improvement of products or services or any process or such business model has the potential of generating high employment or wealth creation. In order to be recognised as a start-up the entity must make an application to the Department for Promotion of Industry and Internal Trade under the Ministry of Commerce and Industry. The exemption towards Start-ups for Angel Tax shall be applicable only up to an aggregate paid-up share capital including share premium post such issue not exceeding the threshold limit of INR 25 Crores. However, much to the relief of the start-ups the threshold limit on share capital does not include shares issued to a non-resident, venture capital or venture capital fund registered as Category I AIFs or such other specified companies.
Further, the tax holiday as provided by the Startup India Scheme is covered under section 80 IAC of the Income Tax Act, 1961. As per the provisions, a start-up can available 100% tax exemption on profits earned for a period of consecutive three years out of five years since incorporation, provided that the turnover of the start-up does not exceed INR 25 Crores. In order to avail the benefit of this tax exemption the start-up must obtain a certificate from Inter-Ministerial Board and the start-up must be incorporated in between 1st April 2016 to 1st April 2019.
The start-ups have to adhere to certain stringent limitations on how they can invest these funds, so received from the issue of shares. The primary problem arising here is that there is a restriction on investing of such funds, and in a very normal scenario of surplus funds available with the start-ups, they will not be allowed to invest the same in any securities or probably shares of another entity. This is one of the notable hindrances in the operations of the start-ups in an otherwise much progressive and welcoming start-up environment created by the government.
The Author is associated with Mamta Binani & Associates, Company Secretaries.
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