The Economic Survey (2015-16) highlighted the fact that there are 19,400 technology enabled start-ups which attracted investments of more than USD 3.5 Billion (approx INR 21,000 crores [1 USD= INR 60]) in the first half of 2015 itself.
Within one year, the number of startups have grown by 40%, creating 80,000-85,000 jobs in 2015. Recognizing this immense potential, Government officially launched Start-up India Action Plan on 16 January 2016 which proposed a set of relaxations for start-ups entities and introduction of self-certification under certain laws. Last week, portal for start-up and mobile app was made live (www.startupindia.gov.in), which provides:
Following this initiative, certain start-up specific amendments are proposed to be brought into the legislation through the Budget 2016. As in Indian tax system, tax costs around 30-35% of direct impact on cash flows. The key proposed amendments are as follows:
- Reduced tax rate for newly incorporated domestic companies
Companies set-up after 1 March 2016 engaged in manufacturing have been given an option to be taxed at a corporate tax rate of 25%, provided they do not claim certain prescribed tax incentives and meet certain conditions.
- Reduced tax rate for existing domestic companies
The corporate tax rate is proposed to be made at 29% for the companies whose total turnover in Financial Year (FY) 2014-15 does not exceed INR 5 crores. Existing SME’s companies who has clocked revenue upto INR 5 crore in FY 2014-15 can claim the benefit of reduced tax rate at the time of filing return of income.
- Tax Holiday
Under this proposed tax holiday, 100% of profits and gains are exempted for eligible startups in eligible business. The tax holiday starts from the Financial Year 2016-17 onwards. Claim for tax holiday is to be made in any 3 consecutive years out of 5 years block from the date of incorporation.
Eligible start-ups” means
- Incorporated on or after 1 April 2016 but before 1 April 2019
- Total turnover not exceeding INR 2.5 crore in any financial year between 1 April 2016 and 31 March 2021
- Obtained a certificate of “eligible business” from the Inter-Ministerial Board of Certification setup by DIPP
“Eligible business” means
- business which involves innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property
The definition of eligible startup is open ended and inclusive.
However it is pertinent to note that Minimum Alternate Tax (MAT) will still be applicable, it means it is not a 100% tax holiday, a tax of 18.5% is required to be paid on profit earned which can be set off against future tax liability. Further this tax holiday is applicable only for continuous 3 years out of 5 year block from date of incorporation, accordingly it is very vital to take a decision to claim tax holiday in the year when start up turns profitable.
- Single tax rate for of income from patent
In order to encourage indigenous research & development activities and to make India a global R & D hub, single tax rate system is introduced for income by way of royalty from patent developed and registered in India by person resident in India. Tax rate will be 10% on gross amount ( no deduction for the expenditure will be allowed).
- Capital gain exemption for investment in startups
Any long term capital gain derived from sale of residential property by Individual or HUF (Hindu Undivided Family), if invested in eligible startup will be exempted from tax, subject to certain conditions. Similar benefit is given for investment made in small and medium companies out of proceeds from above long term capital gain.
Amount of capital gain exemption will be calculated as:
Total Capital Gain = sale value-cost of acquisition of residential property
Amount of Net Consideration =sale value-selling expenses
- Payment of service tax on receipt basis for One person company
Benefits of quarterly payment of service tax and payment of service tax on receipt basis (as also applicable in case of individuals/ partnership firms) whose aggregate value of services provided is up to INR 50 lakhs in the previous financial year is also made applicable to One person company. Accordingly One person company can claim these benefits.
The above proposals are made in Finance Bill 2016. This Bill would be required to be passed by both houses of the Parliament, then should receive asset of the President to become law.
With the above proposed amendments made by the Government, it is now to be seen how the aspiring entrepreneurs take benefit of the above and contribute to nation development.
(The author can be reached at [email protected])