In 2016, the Startup India scheme was launched by Prime Minister Narendra Modi to promote startup culture in the country. Through DPIIT registration, startups that cleared the criteria for Startup India eligibility could apply for the scheme, through which they would have access to benefits such as various tax exemptions, tax holidays, and other financial incentives. These benefits are not available to all startups. Only those that abide by the criteria for Startup India eligibility can avail these benefits. So before applying for these exemptions, it is important to understand the Startup India eligibility criteria.
Startup India Eligibility
According to the Startup India Action plan, which governs the Startup India eligibility criteria, the following conditions must be fulfilled for a startup to be eligible for the scheme:
- The startup must not have completed a period of ten years from the date of incorporation/registration.
- The startup must be a private limited company or registered as a partnership firm or a limited liability partnership.
- The startup must have an annual turnover not exceeding Rs. 100 crores for any of the financial years since incorporation/registration.
- The startup must be working towards innovation, development, or improvement of products or processes, or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
- The startup must not be formed by splitting up or reconstructing a business already in existence.
If a startup meets these requirements, they will be an eligible startup under the criteria for Startup India eligibility.
Benefits for Those Qualifying Under Startup India Eligibility
The Startup India scheme presents many benefits for the startups that qualify under the criteria for Startup India eligibility. These are as follows:
- Three year tax holiday in a block of seven years: Only startups incorporated between April 1st, 2016 and 31st, March 2022 are eligible for this benefit. The Startup India eligibility period was extended by one year, from 2021 to 2022, in the Union Budget for 2021.
Eligible startups will receive a 100% tax rebate on profits for three years in a block of seven years, as long as the annual turnover of the startup does not exceed Rs. 25 crores in any financial year. This tax holiday will help startups meet their working capital requirements by reducing ancillary expenses.
- Exemption from tax on long-term capital gains: The newly added Section 54(EE) of the Income Tax Act establishes another benefit for the startups that pass the Startup India eligibility criteria. It exempts their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by the Central Government within a period of six months from the date of transfer of the asset.
The maximum amount that can be invested in the long-term specified asset is Rs. 50 lakhs. Such amount shall be invested in the specified fund for a period of 3 years. If it is withdrawn before 3 years, the exemption will be revoked in the year in which money is withdrawn.
- Tax exemption on investments above the fair market value: The government has exempted the tax being levied on investments above the fair market value in startups that pass the Startup India eligibility criteria. Such investments include investments made by resident angel investors, family or funds which are not registered as venture capital funds. Also, the investments made by incubators above fair market value are exempt.
- Tax exemption to Individual/Hindu United Families: Under Section 54(GB) of the Income Tax Act, individuals and HUFs that invest long-term capital gains in equity shares of startups that pass the Startup India eligibility criteria are exempt from taxation. This further incentivises investments in Indian startup culture.
This Section initially only included micro, small and medium enterprises, but its ambit has been widened through the Startup India scheme to also include startups that pass the Startup India eligibility criteria.
- Set off of carry forward losses and capital gains: In case the shareholding pattern undergoes a change, startups that clear the Startup India eligibility criteria are allowed to carry forward their losses.
This is only allowed if all the shareholders of the company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of the previous year in which such loss is to be carried forward.
- Self-certification: All companies are required to comply with labour and environmental laws. Failure to comply with these laws results in penalties for the company. However, it is difficult for startups to comply with these guidelines as they would have to sacrifice their growth at an early stage for it.
To solve this, another benefit for startups clearing the Startup India eligibility criteria is that startups are allowed to self-certify their compliance with nine labour and environmental laws for a period of 3 years. This reduces their liability as far as these laws are concerned, and this benefit of the Startup scheme helps facilitate early growth.
- Networking opportunities – Another important benefit for those who pass the Startup India eligibility criteria is that it provides entrepreneurs with networking opportunities. Fests are conducted semi-annually where conversations between startups and investors are facilitated by the scheme to help the former acquire funding for their company.
An additional benefit of the Startup scheme in this regard is that it allows startups to get guidance from experienced parties, and it allows them to observe how other startups are doing in similar conditions.
How to register under the Startup India Scheme
Registration for the Startup India Scheme has been made quick and easy to incentivise registrations. First, go to the Shram Suvidha Portal. Register for an account there and click on the link that says “Is Any of Your Establishments a Startup?” This will lead to another page with detailed instructions on registering a startup for the benefit of the Startup scheme.
As long as your startup meets the Startup India eligibility criteria, there should be no issues with the registration process.
Startups are a very important part of the current Indian economic landscape. Through DPIIT registration, startups that meet the Startup India eligibility criteria can avail benefits to grow faster and give back to the Indian economy quicker.