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Union Budget 2016 – Impact on startup’s taxation


Union Budget 2016 – Impact on startup’s taxation, Check Union Budget 2016 – Impact on Indian start-up eco system, A few days after the government of India’s Start-up India stand up India to the delight of the startup ecosystem has brought some interesting provisions in the income tax act which are noteworthy to the startups. Just have a look at these.

Union Budget 2016 – Impact on startup’s taxation

Union Budget 2016 - Impact on startup's taxation

1. 100% deduction of profits for 3 years under section 80-IAC:

Proposed section 80-IAC allows 100 percent deduction of profits provided it is an “eligible start-up” having an “eligible business”.

A. Eligible business means

  • A business which involves innovation development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

B. Eligible start-up means

A company engaged in eligible business which satisfies the following conditions

  1. It is incorporated on or after the 1st April,2016 but before 1st April, 2019
  2. Total turnover of its business does not exceed Rs 25 crore in any of the previous years from financial year 2016-17 to 2020-21.
  3. It holds certificate of eligible business from the Inter-Ministerial Board of Certification

C. Deduction under this section can be claimed by the assessee for any three consecutive assessment years out of five years beginning from the year in which the eligible start-up is incorporated.

D. Further this section would apply to a start-up which fulfils the following conditions

1. It is not formed by splitting up, or the reconstruction, of a business already in existence (This condition is not applicable if the start-up is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as referred in section 33B in the circumstances and within the period specified in that section.)

2. It is not formed by the transfer of machinery or plant to a new business previously used for any purpose. This condition would not be applicable to a plant and machinery which was used outside India by any person other than the assessee, provided the below stated conditions are satisfied

  1. It is imported by the assessee into India
  2. It was not used by the assessee in India at any point of time before the date of installation
  3. No depreciation was allowed on it to any person before the date of installation.

Further this condition would not be applicable if the value of such used plant and machinery does not exceed 20% of the total value of the plant and machinery used in the business of the assessee.

Union Budget 2016 – Impact on Indian start-up eco system

2. Lower rate of tax @ 25%: – Section 115BA:

On satisfying certain conditions, start-ups having manufacture or production of article or thing as their activity of business, can choose for reduced rate of tax 25% (plus surcharge & cess as applicable). Conditions to be fulfilled are:

  1. It should be registered on or after 1st March 2016
  2. Should have manufacturing articles/things as its business
  3. Should not claim any other benefits such as additional depreciation, accelerated depreciation, investment allowance, expenditure on scientific research and deductions under chapter – VIA’s part C other than 80JJAA.

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3. Exemption of Long term Capital Gain for investing them in specified funds – Section 54EE:

Capital gains arising from the transfer of a long-term capital asset are exempted provided the proceeds of gain are invested in the notified fund to be set by the government. To boost the investment in startups government is going to set up a fund with an initial plan of raising Rs 2500 crores per annum for 4 years. Conditions to be fulfilled:

1. Such gains on transfer of capital assets should be invested in the notified funds (long term specified assets) within 6 months from the date of such transfer takes place.

2. Amount eligible as deduction:

  • If the amount of investment > Amount of capital gain, then entire capital gain is exempted
  • If the amount of investment < capital gain amount , then capital gains in proportion to specified assets will be exempted.

3. Maximum ceiling limit for the investment (maximum amount that can be exempted) is Rs 50 Lakhs.

4. Lock in period: The investment kept in these long term specified assets should be minimum held for 3 years. If the investment is sold within 3 years from the date of such investment then the amount of capital gains exempted previously will be taxed as long term capital gains.

5. The investors are not allowed to secure any loan or advance on the security of such specified investments.If the assessee does so, then it would be treated as deemed transfer and taxable.

4. Exemption of Long term Capital Gain (arising on sale of residential property) if invested in shares of eligible start-ups / Micro small and medium enterprises-Section 54GB:

  • Capital gains arising on transfer of residential property will be exempted under section 54 GB provided   the gains are invested in the shares of an eligible start-ups. And such amount invested by the assessee should be used by the company to purchase a new asset.
  • Definition of the new asset has been amended so as to include computer or computer software in case of technology driven start-ups as certified by the Inter-Ministerial Board of Certification notified by the Central Government in the official Gazette.
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