TAX ASPECTS OF START UP INDIA, STAND UP INDIA
India is the land of opportunities and as far as the
opportunities are concerned India never lags behind. In today’s era things are
changed and now opportunities are there but the thing is how to grab it. No
doubt, we all know that Indians have a specific talent in every specific field
but to utilize that talent a boost is always needed from the behind, and to
encourage them our Prime Minister Shri Narendra Modi initiated for many schemes
where the Republic Of India can utilize it for their benefit so there will be
less unemployment in country, among all of schemes there is a scheme “START UP
INDIA, STAND UP INDIA” as this campaign was first announced by our Prime
Minister Shri Narendra Modi on 15th August 2015 at Red Fort. As this
campaign is based on an action plan aimed at promoting bank finance for
starting up the ventures and to boost entrepreneurship and encourage those
start-ups with an aim of job creation also. The Stand up India initiative is
also aimed to boost entrepreneurship among SC’s / ST’s and towards women
communities also. As it is also focused on to restrict the roles of States in
policy domains and to get rid of various licence hindrances like land
permission, environmental clearances, foreign investment proposals. As this
event was launched on 16th January 2016 by our Finance Minister Shri
Arun Jaitley and top investors, CEO’s, start up founders took part in the
campaign. This programme will be connected through entire IIT’s, IIM’s, NIT’s
and central universities of our nation.
The tax aspect
of “Start up India and Stand up India” as Shri Narendra Modi exempted tax for 3
years from the capital gains of the start-ups. According to him profits earned
by the start-ups will be exempted from the tax for three years of business. Tax
will be exempted only when the investment is above the fair market value. So to
boost finance 20% on the capital gains made by the investments by the
entrepreneurs after selling their own assets as well as the government’s
recognised venture capitals will also be exempted. There is a provision in the
Income Tax act, if a start up receives equity funding which exceeds the market
value of a firm then those excess considerations will be taxable in the hands
of the receipts. Here the start-ups would be eligible for tax benefits only
when it has obtained a certificate from the Inter-Ministerial Board. So the
process of seeking these certificates would be made completely online and would
be time bound.
Outcomes of tax
exemption are:-
1. Tax exemption on capital gains – An objective of tax exemption on capital gains
is to promote investment in the start-ups by mobilizing the capital gains
arising from the sell of capital assets, as because of the high risk nature thee
start-ups are not able to associate with the investment in the initial stage.
It is therefore important that suitable incentives are provided to the
investors for investing in the start up ecosystem. An exemption will be
favouring to those persons who have capital gains during the year and if they
have invested such capital gains in the funds recognised by the Government.
This will augment the fund and available to various VC’s , AIF’s for the investment
in the start-ups. In addition to this existing capital gain tax exemption for
investment in newly formed manufacturing MSME’s by the individuals and shall be
extended to all the start ups. Now those entity needs to purchase a new assets
with the capital gain received to avail such exemption. For instance investment
made on computer or computer software shall be considered as a purchase of new
assets in order to promote technology driven start-ups.
2. Tax exemption to start ups for 3 Years :- An objective
behind exempting tax for three years is to promote the growth of start-ups and
address working capital requirements . As we all know innovation is the essence
of every start-up. Young minds kindle new ideas everyday to think beyond
conventional strategies of the running corporate world. In the initial years,
budding an entrepreneurs struggle to evaluate the feasibility of their business
ideas. Significant capital investment is made in embracing ever changing
technology also it contains limited alternative sources of finance available to
the small and growing entrepreneurs and leading to constrained cash funds. With
a view to stimulate the development of start-ups in India and provide them a
competition it is imperative that the profits of start up initiatives are
exempted from the income tax for a period of three years. This fiscal exemption
shall facilitate the growth of business and meet the working capital
requirements during the initial years of operation; this exemption shall be
available subject to non distribution of dividend by the start up.
3. Tax exemption on investment above fair market value:- Its objective is to encourage
seed capital investment in start-ups. Under this exemption there is a provision
under Income Tax 1961 which says where a start up receives any consideration
for issuing a shares which exceeds a fair market value of such share such
excess consideration is taxable in the hands of recipient as an income from the
other sources. Though in the context of start ups where an idea is
conceptualization or in a development stage then it’s often difficult to
determine the fair market value of such share. But in general many cases are
like there where fair market is value is significantly lower than the value at
which the capital investment is done and this results to the tax gets levied
which is mentioned under section -56(2)(vii)(b) of the Income tax act 1961. But
currently the investment by venture capital funds in start-ups are exempted
from the operation of this provision and the same shall be extended to
investment made by incubators in the start-ups.
CONCLUSION-
I would like to conclude my article here by mentioning that
the government showing the very positive intent in the action plans. Though it
is critical that the settled up a team of investors, lawyers, accountants,
angels, founders who will ensure that the final policies of start-ups are
flawless as possible and to maintaining the right balance between
accountability, transparency and doing business. Additionally I am eager to see
how the Inter Ministerial Board is being set up to give a necessary
certification to the tax benefits. Finally there seems to be some dichotomy on
how an amount of Rupees 250000000/- i.e. Rs. Twenty five crore is being
treated.
BY- UTKARSH KUMAR
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