Tax secrets:- DPIIT Recognition Startup Success
Introduction
In the dynamic landscape of the Indian economy, the term "startup" resonates with innovation, entrepreneurship, and economic growth. The success of numerous startups evolving into unicorns has captured the attention of both the common man and policymakers. To foster this spirit, the Indian Government launched the Startup India Initiative on January 16, 2016, aiming to nurture a thriving ecosystem for startups.
Start-up India Initiative
Launched on January 16, 2016, the Start-up India Initiative focuses on promoting entrepreneurship and supporting the growth of startups in India. It has implemented several programs to build a strong ecosystem for startups, overseen by the Department of Promotion of Industry and Internal Trade (DPIIT), aiming to transform India into a country where entrepreneurs and startups thrive, creating jobs and contributing to economic growth.
What Is DPIIT?
DPIIT, the Department of Promotion of Industry and Internal Trade, is a Central Government department under the Ministry of Commerce and Industry. It is responsible for promoting internal trade, including retail trade, and facilitating ease of doing business. DPIIT also handles policies for the promotion and benefit of startups.
Why Should a Startup Be Recognized by DPIIT?
Recognition by DPIIT is crucial for startups to avail benefits under the Income Tax Act. DPIIT, through Notification No. GSR 127(E), Dated 19-2-2019, sets conditions for an entity to be recognized as an 'Eligible Startup' and claim benefits. Recognition by DPIIT is mandatory for claiming tax exemptions and reliefs.
Tax Benefit to Startup/Investors
Various tax benefits are available to eligible startups recognized by DPIIT, including exemption from angel tax, deductions under Section 80-IAC, a liberalized regime of Section 79 for carrying forward losses, and deductions under Section 54GB for investors. The eligibility for these benefits varies for different forms of entities.
Analysis of Section 80IAC under Income Tax Act
The tax holiday under Section 80IAC is a significant provision. A brief analysis includes criteria such as incorporation after April 1, 2016, total turnover not exceeding Rs 100 Crore, and a scalable business model. Startups can avail 100% tax holiday for any consecutive 3 years out of 10 years. To claim benefits, startups must register on the Startup India Portal and submit required documents.
Is Exemption Illusory?
Tax holiday may seem illusory for private companies or LLP startups if Minimum Alternate Tax (MAT) under Section 115JB or 115JC applies, as there is no exemption for startups from MAT. Section 115JB's applicability remains a challenge, and Chapter VIA-Part C deductions are allowed for computing book profit for MAT purposes.
Comparing Section 115BAB and 80IAC
Section 115BAB, prescribing a lower tax regime for manufacturing companies, may be more beneficial than Section 80IAC. Companies opting for 115BAB are not required to pay MAT, making it advantageous compared to 80IAC for startups engaged in manufacturing.
Conclusion
The choice between Section 115BAB and 80IAC depends on the nature of the startup's business and its profitability considerations. It is essential to weigh the options carefully, considering factors such as manufacturing engagement and the intent to benefit from angel taxation. While forming a private limited company is advisable for fundraising, it may not always be the most beneficial option.
