Three years Tax Exemption for Start-ups: Analysis

1. Introduction

For a period of three years, the start-up is entitled for a 100 percent profit tax rebate. Start-ups that are recognized under the Start-up India initiative are now eligible for tax incentives in three of the first ten years.

Within seven years of incorporation, start-ups formed between April 1, 2016 and March 31, 2021 are eligible for a three-year tax vacation. The deadline for applying for this tax rebate for entrepreneurs has been extended until March 31, 2022, as part of Budget 2021. As a result, as long as their yearly turnover does not exceed INR 25 crores, qualified entrepreneurs will earn a 100 percent tax credit on whatever profit they make for the next three years. A start-up tax relief like this will make it simpler for businesses to satisfy their working capital needs and maintain smooth cash flows.

• Eligibility Criteria for applying to Income Tax exemption (80IAC):

The following are the conditions that required for claiming exemptions under Section 80 IAC of the Income Tax Act.

• The entity should be a recognized Start-up
• Only Private limited or a Limited Liability Partnership is eligible for Tax exemption under Section 80IAC
• The Start-up should have been incorporated after 1st April, 2016

Procedure for Claiming Section 80IAC Exemption for Start-ups

An eligible Start-up shall make an online application to DPIIT (Department for Promotion of Industry and Internal Trade) with the following: – 

• a copy of Certificate of Incorporation or Registration
• a write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation. 

The Inter-Ministerial Board of Certification constituted by DPIIT after review of application may call for such documents or information and making such enquires, as it may deem fit and finally shall recognise the eligible entity as Start-up or reject the application by providing reasons. After getting recognition a Start-up under Start-up India Action Plan, the business entity can apply for Tax exemption under Section 80 IAC of the Income Tax Act.

• Analysing Tax Exemption under Section 80 IAC

The tax holiday under Section 80 IAC seems to be lucrative incentive for the start-ups in the beginning. However, if we critically examine the same on the scales of implementation, it becomes uncertain and illusionary provision for the start-ups. Experts have questioned the Implementation of this incentive on the following categories: –

1. Does Every Start-up receive the exemption?
   • It is important to note that not every start-up is eligible to get a tax exemption under this initiative. In order to receive such tax benefit, the Start-up has to fulfil the conditions specified in Section 80 IAC for claiming the Deduction.
   • The Central Board of Direct Taxes has time again reiterated that deductions are subject to strict fulfilment of the conditions under Section 80 IAC. Further as per the DPITT’s Notification the turnover limit for eligibility for deduction under section 80-IAC of the Act is Rs 25 crore. It is important to note that such limit is important as the start-ups which do not exceed such Rs 25 crore mark are the only entities that are eligible under this exemption. Hence only small companies who fulfil the requirements are eligible for deduction under the provision.[1]
   • This deduction cannot be claimed if the start-up is founded by splitting up or reconstructing an existing firm. Furthermore, it shall not be founded by the transfer of machinery or plant previously utilized for any purpose to a new enterprise.
2. How beneficial is this Tax Exemption?
   • According to statistics on the start-up India webpage, the DPIIT has recognized 55,654 start-ups, with just 396 of them receiving benefits under Section 80-IAC of the Income Tax Act.[2]
   • Further out of 15,798 startups recognised under the flagship scheme as of February 7, only 94 have been certified by the Department for Promotion of Industry and Internal Trade (DPIIT) for income tax exemption under Section 80IAC of the Income Tax Act. [3]
   • This incentive is not granted to even 1% of the DPIIT-recognized start-ups. The number of start-ups recognized by the DPIIT and those allowed a deduction under section 80-IAC of the Income Tax Act are vastly different.
3. Is the Screening Process for grant of Exemption rigorous?
   • In order to provide tax exemption, the start-ups are scrutinised for innovativeness and potential for job creation. However, this “rigorous screening” has translated only into a minuscule proportion of total recognised start-ups being exempted for tax purpose by Authority.[4]
4. Is the Time limit of 3 years for the Exemption sufficient?
   • A start-up is acknowledged as such for Govt policies for 10 years from date of its incorporation or till it surpasses the INR 100 crore turnover cap, whichever is sooner.
   • Many businesses argue they can’t enjoy the tax breaks since projects require at least 5 to 7 years to break-even. This is the case in New York where 100 % benefit for the first 10 years are provided to the start-ups.[5] It is pertinent that tax holiday duration is rationalised to 10 years from date of incorporation rather than the existing 3 years in order for the start-up to completely establish itself.
5. Is the Exemption illusionary?
   • It is pertinent to note that the Tax holiday under Section 80IAC is not considered a 100% Tax rebate as it sounds. This tax holiday becomes illusory for Limited Liability Partnerships (LLPs) which are liable to Alternate Minimum Tax(AMT) and for Private Limited Companies (PLCs) which are exposed to Minimum Alternate Tax(MAT). For such businesses, there is no exemption from AMT/MAT for start-ups.
   • Hence to make the tax holiday a reality for start-ups, the provisions of Sections 115JB (MAT) and Section 115JC (AMT) of the Income Tax Act has to be revised to exempt start-ups from MAT and AMT for 10 years from the date of incorporation.

Conclusion

It can be inferred that even though the three-year Tax holiday under Section 80 IAC is one of the lucrative incentives of Start-up India, the Government has to look into its implementation. Hence in respect of the impending difficulties a need for more rapid policy implementation from the government is imminent. As a result, the government should take a more liberal approach to allowing qualifying start-ups to benefit from tax exemptions.

[1] https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/small-startups-with-turnover-up-to-rs-25-cr-to-get-promised-tax-holiday-cbdt/articleshow/70789686.cms?from=mdr

[2] https://indianexpress.com/article/business/startups/startup-india-in-34-months-only-94-of-15798-govt-recognised-ventures-got-tax-exemptions-5593695/

[3] https://indianexpress.com/article/business/startups/startup-india-in-34-months-only-94-of-15798-govt-recognised-ventures-got-tax-exemptions-5593695/

[4] Ibid

[5] Unlocking the potential: The fintech opportunity for Sydney, KPMG, October 2014, Available at https://assets.kpmg/content/dam/kpmg/pdf/2014/10/fintech-opportunity-sydney-oct-2014-summary.pdf