Indian entrepreneurs may save thousands or even more in taxes if recognized by the Department for Promotion of Industry and Internal Trade (DPIIT). The provision that allows recognized startups to get a 100% tax exemption for three consecutive years during which they produce profits is Section 80-IAC of the Income Tax Act.
Recent government initiatives to enhance tax incentives offer opportunities for firms, investors, and stakeholders. A new era of innovation and advancement has been ushered in by programs like Startup India Registration, which were started under the inspiring leadership of Prime Minister Narendra Modi.
The article examines how Indian businesses, ranging from SMEs to early-stage investors, might profit the most from tax planning for startups in India.
Tax Deduction Benefits for Indian Startups
To encourage their expansion and innovation, Indian startups have been utilizing a variety of government incentives. Let's examine how these programs are helping SMEs and early-stage startup investors:
The Startup India Initiative:
The Startup India program, introduced with a visionary purpose by Prime Minister Narendra Modi, aims to create an environment that is advantageous to business growth. Established in 2016, Startup India provides non-monetary and tax benefits to business owners. The Startup India initiative offers tax benefits such as self-certification, incentives, and expedited patent review.
Tax Credits for Research and Development (R&D)
The government recognizes the importance of innovation for startups by offering R&D tax credits. Under Section 35(2AB) of the Income Tax Act, enterprises can claim a 150% weighted deduction for expenses connected to qualifying in-house R&D. This deduction, which applies to capital and revenue expenses, enables business owners to support technological advancement and conduct research and development.
Deductions for Expenses
During their first several years of business, startups frequently suffer a variety of expenses. Startups can reduce taxable revenue by claiming deductions from the government for specific costs. Under certain provisions of the Income Tax Act, including Section 80C for investments in designated instruments, Section 80D for health insurance premiums, and Section 80E for interest on school loans, startups are eligible for deductions. Startups benefit greatly from these discounts in the early phases of their development.
Tax Holidays for Qualified Industries
To further encourage growth in particular industries, qualified startups can take advantage of a tax break for a predetermined time. Entrepreneurs in specific fields, including manufacturing, software development, biotechnology, and renewable energy, are eligible for government tax holiday benefits.
Goods and Services Tax (GST) Compliance
For startups, navigating GST compliance can be challenging. Businesses in the majority of states, however, are exempt from GST registration if their yearly revenue is less than Rs. 40 lakhs for the supply of goods and Rs. 20 lakhs for the supply of services.
In states that fall under special categories, the annual revenue requirement for GST registration is Rs. 20 lakhs for commodities and Rs. 10 lakhs for services.
Furthermore, startups can benefit from various GST schemes and GST exemptions for Indian startups, including the Composition Scheme and the Quarterly Return Filing Scheme, which ease compliance requirements and minimize administrative expenses.
Transfer Pricing Compliance
Compliance with transfer pricing is essential for businesses operating internationally. The Indian government implemented transfer pricing laws that comply with international norms to stop tax evasion and guarantee equitable taxation of cross-border transactions.
Start-ups doing international transactions must follow transfer pricing documentation and reporting requirements to maintain accountability and transparency in business practices.
Employee Stock Option Plans (ESOPs)
Employers may effectively recruit and retain talent by implementing ESOPs. Under the Income Tax Act, ESOPs offered by entrepreneurs are taxed when individuals exercise or sell their shares rather than when they are granted. To align their interests with the firm's long-term success, employees might postpone paying taxes until they realize the benefits of their shares.
Step-by-Step Guide to Section 80 IAC Tax Benefits
To be eligible for the deduction under Section 80-IAC, the qualified assessee must apply for the Inter-Ministerial Board of Certification certificate. The following are the steps to request the certificate:
Step 1: You have to log onto the Startup India website first. Next, you must apply for the DPIIT recognition certificate by following the instructions on the screen to register with Startup India.
Step 2: Select "claim tax exemption" and fill out the form with the following details:
- Startup name
- Type of business (private limited company or limited liability partnership)
- Location and address
- Contact information (entity's PAN, email address, and phone number)
- Number of incorporations or registrations
- The incorporation date
- DIPP number
Step 3: If a startup uses 80IAC deductions, it must submit the required documentation in PDF format.
- Memorandum of association of a PLC
- Deed of limited liability partnership (LLP)
- Resolution of the Board (if any)
- Financial records for the previous three years or each year from the company's inception
- A balance sheet and profit and loss statements that the CA has approved
- Filed income tax returns for the preceding three years or since the date of incorporation
- Give a link to the startup's PDF pitch deck and video pitch.
If a startup obtains an angel tax exemption certificate, it must provide that certificate along with the previously stated evidence.
After filing the section 80 IAC tax exemption form, you must wait for confirmation. The department will analyze the files and data you supplied as part of the process and deliver an appropriate outcome.
Revocation of Exemption under Section 80-IAC
In a scenario where any certification directed to Clause 3 as complies with Section 80-IAC of the Income Tax Act, 1961, has been taken via incorrect details or by suppressing any material fact, the certified entity will be subject to prosecution under the provisions of the Income Tax Act, 1961, according to the DPIIT Notification in Clause 8.
The initiatives taken by the Indian government demonstrate its sincere commitment to creating a robust startup ecosystem in the nation. The government has committed to supporting struggling entrepreneurs and facilitating their success by establishing Startup India and providing tax exemptions and advantages in Budget 2016.
These actions are intended to promote the growth and innovation of startups by facilitating the establishment of new businesses, evaluating patents at a lower cost, and permitting companies to depart promptly.
Want to know how to obtain these benefits for your Startup? Contact Just Start for further details.
FAQs
What are the indian startup tax benefits under Section 80 IAC?
In 2016, a new provision was inserted into the Income Tax Act to support the Startup India initiative. This provision allows qualifying businesses to deduct 100% of the applicable tax for three consecutive years.
What types of businesses fall under section 80 IAC?
According to section 80 IAC of the Income Tax Act, a company is deemed eligible if it innovates, develops, implements, or markets novel goods, procedures, or services fueled by technology or intellectual property.
How to save tax for startups?
You can deduct any capital expenditures you incur for your company. This implies you can lower your taxable income yearly by deducting a portion of the expense. These deductions can reduce your tax burden as a new business owner and help you save money on taxes.
