TAX HOLIDAY FOR STARTUPS (SECTION 80 IAC OF INCOME TAX ACT)

Startups in India:

In the dynamic landscape of entrepreneurship, startups are the catalysts of innovation, job creation, and economic growth. Recognizing the pivotal role they play in shaping the future, the Indian government has provided favourable tax treatment, designed to alleviate the financial burden on entrepreneurs and incentivize innovation

DPIIT (Department for Promotion of Industry and Internal Trade) -recognized startups in India have the option to save lacs, even crores in Taxes! Section 80 IAC of the Income Tax Act, is the provision that allows recognized startups to get a 100% tax exemption. This can be said to be one of the most important benefits of Startup India registration.

Section 80 IAC:

Section 80IAC of the Income Tax Act 1961 is a special section in respect of the eligible startups. It came into effect on 1st April 2017. Section 80-IAC is a benefit offered by Central government to eligible startups by way of providing tax deduction of an amount equal to 100 percent of the profits and gains derived from eligible business.

The aim of this provision is to decrease the evasion of taxes. As a result, this tax benefit encourages young entrepreneurs of India to become honest taxpayers.

Eligible startups as per Section 80IAC:

• Incorporated as a Private Limited Company or Registered as a Limited Liability Partnership.
• It holds a certificate of eligible business from the Inter-Ministerial Board of Certification.
• It is incorporated on or after 01-04-2016 but before 01-04-2025.
• Should have an annual turnover not exceeding Rs. 100 crore in the previous year relevant to the assessment year for which deduction is claimed.

Eligible business as per Section 80IAC:

Eligible business for the purpose of Section 80 IAC means a business carried out by an eligible start-up engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation.

Quantum of exemption that can be availed by Startups:

100% of profit derived from eligible business for a block of three consecutive financial years of choice out of the first ten years beginning from the year of incorporation.

Who can apply for 80 IAC tax exemption?

The 80IAC tax exemption criteria depends on factors like DPIIT Recognition, age of the startup, and its overall business turnover. Those businesses meeting the criteria of eligible startups engaged in eligible business can apply if all the necessary conditions are met.

Conditions relating to formation and transfer of plant and machinery:

1. The startup must not be formed by the transfer of existing plant and machinery already in use.

Exceptions:

Imported second hand plant & machinery (not used by the assessee) upon satisfaction of the below conditions:

• The plant and machinery is imported.
• Not used in India at any time before installation by the entity.
• No depreciation has been claimed in India by the assessee or any other person before installation by the entity.
• The value of second hand plant and machinery does not exceed 20% of the total value of the plant and machinery used in the business.

2. The startup must not be formed by splitting up or reconstruction of an existing business.

Exceptions:

Reconstructed businesses can claim 80IAC exemption if they fall under section 33B of the Income Tax Act. This section allows a reconstructed industrial undertaking to claim 80IAC Tax exemption if it was discontinued because of damage or destruction caused by:

• Natural calamities
• Riots / civil disturbances
• Accidental fire/explosion
• An act of the enemy

Eligibility Summary for applying for 80 IAC Exemption:

• Either a company or an LLP
• Startup Recognition by the DPIIT
• Incorporated after 1st April, 2016
• Not Exceeded 10 years since Incorporation
• New and Original Entity
• Operates with New Plant and Machinery
• Turnover not exceeding Rs.100 crores
• Objective of employment generation or wealth creation
• Must deal in innovative products, services, or processes

Process to claim 80 IAC tax exemption:

Step 1: Log in to Startup India portal - https://startupindia.gov.in/

The first step in claiming a tax deduction is to create your Startup India login. Then, you need to apply for DPIIT recognition certificate. You can do so, by following the steps of the Startup India registration process.

Step 2: Fill in the details

After logging in to the portal and selecting ‘claim tax exemption’ you need to fill in the form.

• Name of Startup;
• Date of Incorporation;
• Incorporation/registration number;
• Address and Business location;
• Nature of Business (whether LLP or PLC);
• DIPP number; and
• Contact Details (namely Phone No., E-mail ID, and PAN number of entity).

Step 3: Submit documents required for 80 IAC tax exemption

Apart from the information mentioned above, a startup opting for 80IAC deductions needs to submit the following documents in a PDF format:

• Memorandum of Association (if PLC)
• Limited Liability Partnership Deed (if LLP)
• Board Resolution (if any)
• Balance sheet and profit and loss account of the entity for the immediately preceding 3 financial years (the financial statements should be certified by a Chartered Accountant).
• Income Tax Returns for either the past 3 years or from the date of incorporation;
• Start-up video link and pitch deck.

Applicability of MAT for Startups covered under Section 80 IAC:

The imposition of MAT provisions outlined in section 115JB of the Income Tax Act poses challenges for eligible start-ups, as these provisions take precedence over other tax regulations. Consequently, start-ups are compelled to pay taxes at a rate of 15%, along with surcharges and health and education cess, on their profits.

However, complying with section 115JB results in the entirety of taxes paid under MAT provisions being blocked during years when exemption under section 80IAC is claimed. This payment is converted into MAT credit, which can only be utilized to offset the disparity between the tax calculated under normal provisions and the tax payable under section 115JB in subsequent years.

Unfortunately, this MAT credit can only be redeemed in years where the tax calculated under normal provisions exceeds the tax calculated under MAT provisions. Furthermore, such credit can only be carried forward for a maximum of 15 years. If, within this timeframe, the start-up doesn't incur tax payable under normal provisions higher than the tax calculated under MAT provisions, the MAT credit becomes redundant.

As a result, the tax holiday for start-ups could lose its practical benefits in such scenarios, rendering it illusory for those affected.

Conclusion:

In conclusion, Section 80-IAC of the Income Tax Act, 1961, provides a crucial tax incentive for domestic startups, promoting innovation and fostering a supportive environment for their growth. However, the eligibility for this deduction hinges on startups undergoing meticulous audits by chartered accountants. These audits ensure financial transparency and accountability, aligning with the government's aim to cultivate a trustworthy ecosystem. The role of chartered accountants in verifying financial integrity thus emerges as pivotal, bridging the gap between tax incentives and responsible fiscal practices.