Who is defined as a start-up?
An entity shall be considered a start-up:
- Up to a period of seven years from the date of incorporation or registration, if incorporated as a private limited company or registered as a partnership firm or a limited liability partnership in India. For the Biotechnology sector, the period is extended to ten years from the date of its incorporation/registration.
- Turnover for any financial year since incorporation/registration has not exceeded Rs 25 crores.
- It is working toward innovation, development, or improvement of products or processes or services or if it is a scalable business model with a high potential for employment generation or wealth creation. Provided that the entity formed by splitting up or reconstruction of an existing business shall not be considered a start-up.
Earlier the term for the eligibility of the start-up was five years from the date of incorporation/registration. After April 11, 2018, the term was extended to seven years for Private Limited Companies and Limited Liability Partnerships and Ten years for the Biotechnology Sector.
Tax Benefit for Start-up
The Start-up can obtain tax benefits by obtaining a certificate of an eligible business from the Inter-Ministerial Board of Certificates comprising of the following members:
- Additional Secretary, Department of Industrial Policy and Promotion, Convener
- Representative of Ministry of Corporate Affairs, Member
- Representative of Ministry of Electronics and Information Technology, Member
- Representative of Department of Biotechnology, Member
- Representative of Department of Science and Technology, Member
- Representative of Central Board of Direct Taxes, Member
- Representative of Reserve Bank of India, Member
- Representative of Securities and Exchange Board of India, Member.
Certification for the purpose of Section 80-IAC of the Income Tax Act 1961: A start-up being a Private Limited Company or Limited Liability Partnership incorporated on or after April 01, 2016, but before April 01, 2021, may for obtain a certificate for the purpose of Section 80-IAC of the Income Tax Act 1961make an application to the Inter-Ministerial Board of Certification Board and the Board may after calling for all documents or information and making such enquires may grant the certificate or reject the application after providing reasons.
(While computing the total income of the assessee Section 80 IAC gives 100% deduction of profits and gains derived from eligible business for three consecutive assessment years from the year the startup is incorporated/registered).
Approval for the purpose of clause (viib) of sub-section (2) of section 56 of the Income Tax Act 1961: A start-up being a private limited company and qualifying the above-given definition, shall be eligible to apply for approval for the purposes of clause (viib) of sub-section (2) of section 56 of the Income Tax Act 1961, if the following conditions are met:
- The aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares does not exceed ten crore rupees.
- The investor / proposed investor, who proposed to subscribe to the issue of shares of the start-up has-
- The average returned income of twenty-five lakh rupees or more for the preceding three financial years; or
- The net worth of two crore rupees or more as of the last date of the preceding financial year, and
- The start-up has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11UA of the Income Tax Rules 1962.
The Application for approval shall be made to the Inter-Ministerial Board of Certification Board along with the submission of the documents specified. The Board may after calling for all documents or information and making such enquires may grant the approval specifying the relevant details, including details of investors, amount of premium on which the shares are to be issued, and the latest date by which the shares are to be issued or decline to grant the said approval after providing reasons.
1. GSR 180 (E) Published on 17th February 2016
2. GSR 364 (E) Published on 11th April 2018