Starting-up India

To encourage entrepreneurship, increase the inflow of foreign capital and develop the overall economy, the Government of India (GoI) via Department of Industrial Policy and Promotions (DIPP), Ministry of Commerce and Industry (and other Departments) as well as many States are pursuing forward policies, improving administration and legislating supportive laws and provisions thereunder (some as discussed below).

‘Startup India’ (Action Plan) is the stated flagship initiative of the GoI for the above said purposes which was announced early last year (16 January 2016) and is expressed as being based on the following three ‘pillars’ –

  • Simplification and Hand-holding
  • Funding Support and Incentives
  • Industry-Academia Partnership and Incubation

 

Startups

The beneficiaries of the said Action Plan are entities classified as ‘Startups(see Notification dated 17 February 2016 as issued by the Department of Industrial Policy and Promotions (DIPP), Ministry of Commerce and Industry, GoI) upon them satisfying the prescribed criteria, some of which are listed as follows –

  • Entity is in the form of a Private Limited Company (as defined in the Companies Act 2013), or a registered Partnership Firm (registered under section 59 of the Partnership Act 1932) or a Limited Liability Partnership (under the Limited Liability Partnership Act 2002)
  • Entity has not been so incorporated/registered for more than 5 years
  • Turnover (as defined under the Companies Act 2013) for any of the financial years has not exceeded Rs.25 crores
  • Entity is working towards innovation, development, deployment or commercialisalion of new products, processes or services driven by technology or intellectual property (as explained by the said Notification)
  • Entity must not have been formed by the splitting up or reconstruction of a business already in existence
  • Certificate of an eligible business from the lnter-Ministerial Board of Certification necessary in order to obtain tax benefits
  • Entity shall cease to be a startup on completion of 5 years from the date of its incorporation/registration or if its turnover for any previons year exceeds Rs.25 crores

MinusTax’ legal, Taxation, Revenue and Company law professionals via the e-medium (i.e. email, skype, whatsapp etc) provide the complete spectrum of services that include —

  • Incorporation/Registration of Entities and Persons
  • Drafting Legal Documents/Agreements/Applications etc.
  • e-Filing Documents, e-Forms and Information
  • (Legal) Representation before Registering and Adjudicatory Authorities
  • Reply/Appeal/Objections against denial/cancellation/non-renewal of Registration/Incorporation
  • Advisory, Litigation Strategy and Compliance Services for Company Law, Income Tax, GST and allied matters
  • Other Ancillary Services


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Entity Registration/Incorporation

There are many entity types to choose from, each with its inherent advantages and disadvantages in different circumstances. The choice for an entity type for a Startup may therefore be guided by many relevant factors, including the hierarchy of priorities of the concerned Startup and/or of its Founder(s).

Some of these factors could potentially include the following —

  • Efficiency and Ease of Doing Business (administration, operations, control)
  • Power, Rights and Interests of Founder(s)
  • Obligations/Liabilities imposed by Investors, Creditors, Regulatory Authorities, Law
  • Taxation Benefits and Obligations
  • Source/Application/Ease of Raising Capital, Revenue, Debt
  • Resource limitations
  • Applicable Laws and Governmental Policy, Scheme etc.

Private Limited Company

The Ministry of Corporate Affairs (MCA) has recently introduced ‘Simplified Proforma for Incorporating Company Electronically’ (SPICe) to simplify and speed up the Company incorporation/registration (subject to some exceptions and conditions) process through an online application eForm INC – 32, in addition to the Memorandum of Association (eForm INC – 33) and Article of Association (eForm INC – 34).

> Register/Incorporate ‘Private Limited Company’


Limited Liability Partnership (LLP)

Limited Liability Partnership (LLP) is a hybrid form of ‘Partnership’ entity which incorporates the ‘limited liability’ benefit of a Company along with reduced compliance obligations, relatively less complex structure and flexibility of a ‘Partnership’ (subject to the Indian Partnership Act 1932) entity in general.

> Register/Incorporate LLP


Other Business/Professional Entities

  • One Person Company (OPC)
  • Wholly Owned Subsidiary (WOS)
  • Joint Venture Company
  • Small Company/MSME
  • Private (Business/Commercial) Trust
  • Registered Society/Co-operative Society
  • Non-Banking Financial Company (NBFC)

 

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Taxation Benefits

The Income Tax Act 1961 (the Act) offers benefits to newly set-up or commenced businesses or professions (as well as non-profit entities), potentially available even where the concerned person (assessee) may not classify as a ‘Startup’ under the above said Action Plan. Some of these benefits (including under the Draft Model GST Law) have been briefly mentioned below —

Set-up Date and Income Tax Liability

Direct (income) taxation under the Income Tax Act 1961 (the Act) applies to ‘income’ with respect to the “previous year (the financial year immediately preceding the ‘assessment year’). For a business or profession newly set up, or a source of income newly coming into existence in the said financial year, the previous year is the period beginning with the ‘date of setting up’ of the business or profession (or as the case may be, the date on which the source of income newly comes into existence) and ending with the said close of the financial year.


Amortisation of certain Preliminary Expenses

Section 35D of the Act allows an assessee (Indian company or a person other than a company who is resident in India) the deduction (subject to prescribed conditions and applicable limits) of an amount equal to 1/5th of the specified expenditure incurred before the business commences (or as the case may be, the previous year in which the extension of the undertaking is completed or the new unit commences production or operation) over 5 successive previous years, beginning from the previous in which the business commences etc.

Such specified expenditure may include expenditure in connection with —

  • Preparation of feasibility or project report
  • Conducting surveys and engineering services relating to the business
  • Legal fees and expenses for drafting agreements or incorporation etc.


Income Tax on Presumptive Basis

Special provisions for computing profits and gains of eligible assessees undertaking eligible business/profession on a presumptive basis is available under section 44AD/ADA of the Act. These provisions ‘deem’ the amounts of such profits or gains at a fixed rate (6 percent for eligible businesses in respect of the amount of total turnover or gross receipts received by an account payee cheque/bank draft or use of electronic clearing system through a bank account during the previous year etc.) irrespective of the actual amount for the levy of income tax. Further, such assessees may declare a lower sum but would need to maintain prescribed books of accounts and get them audited.


Expenditure on Scientific Research

Section 35 of the Act allows a deduction from income under the head ‘profits and gains of business or profession’, expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business and certain certified pre-commencement expenditures on scientific research. The said provision also a deduction for sums (subject to prescribed criteria and limits) paid to notified and approved Research Associations, Universities, Colleges, Company etc.


Capital Gain on transfer of Residential Property invested in Eligible Startup

Capital Gains (gains) arising to an eligible assessee (Individual or HUF) from the transfer of a long-term capital asset (residential property) owned, would be potentially exempt from income tax under section 54GB of the Act, if such gains are invested in an ‘eligible start-up(as defined under section 80-IAC of the Act) and prescribed conditions are satisfied.


Carry forward and Set-off of Business Losses

Net result of losses incurred for any assessment year under the head “Profits and Gains of Business or Profession(not being a loss sustained in a ‘speculation’ business) to an assessee can be set-off against income under any other head of income (except ‘Salaries’), if any. Losses are partly or wholly not so set-off due to the absence or shortfall of such other income(s), can be carried forward to the following assessment year (maximum of 8 succeeding the assessment year for which the loss was first computed) to be set off against the assessable profits and gains (if any) of any business or profession carried on by such assesse and assessable for that assessment year(s).

  • The Finance Bill 2017 (as passed by the Lower House of Parliament ‘Lok Sabha’) amends section 79 of the Act (applying to the Assessment Year 2018-19 onwards);
  • Where a change in Shareholding has taken place in a previous year in the case of a Company (not being a Company in which the public are substantially interested and being an ‘eligible start-up’ as referred to in section 80 -IAC of the Act), loss shall be carried forward and set off against the income of the previous year; and
  • All the Shareholders of such Company which held Shares carrying ‘voting power’ on the last day of the year or years in which the loss was incurred (during the period of 7 years beginning from the year in which such Company was incorporated) continue to hold those shares on the last day of such previous year.


Deduction for Eligible Startups pursuing Eligible Business

For computing the ‘total income’ of an assessee (‘eligible start-up’ as defined) for levying income tax under the Act, section 80-IAC of the Act allows a deduction from its ‘gross total income’ of an amount equal to 100 percent of the profits and gains derived from an ‘eligible business(as defined thereunder) for any 3 consecutive assessment years out of 7 years beginning from the year in which the eligible start-up is incorporated.

Eligible business” has been defined to mean a business which involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.

Eligible start-up” has been defined to mean a Company or a Limited Liability Partnership (LLP) engaged in eligible business which fulfils the other prescribed conditions (incorporated on or after the 1 April 2016 but before 1 April 2019, the total turnover of its business does not exceed Rs.25 crores in any of the previous years beginning on or after the 1 April 2016 and ending 31 March 2021 etc).


Tax Exemption on Investments in Startup Shares above Fair Market Value

Section 56(2)(viib) of the Act via Notification dated 14 June 2016 as issued by the Ministry of Finance, GoI exempts from income tax under the head ‘Income from Other Sources’, a ‘Startup’ Company (as determined by Notification dated 17 February 2016 and not being one in which the public are substantially interested) which receives in any previous year from any resident person, any consideration for issue of Shares in excess of their fair market value and above their face value.


Corporate Income Tax Rate

For ‘Domestic Companies’, a lower income tax rate (excluding applicable Surcharge and Cess) of 25 percent (instead of 30 percent) will apply on its ‘total income’ for Financial Year 2017-18 onwards (as per Finance Bill 2017 as passed by the Lower House of Parliament ‘Lok Sabha’), where its total turnover or the gross receipt in the relevant previous year 2015-16* does not exceed Rs.50 crores.

*CBDT clarification expected to allow lower tax rate for Companies even where turnover threshold exceeded in succeeding previous years including 2017-18.


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Composition Levy

‘Composition Levy’ (the Scheme) is expressed as an alternative method for levy of tax* under the recently passed Central Goods and Services Tax Act 2017 (CGST Act), designed for small taxpayers with turnover within the prescribed limit and subject to other conditions (see below). The Scheme seeks to reduce the burden of regulatory compliance, impose lower rates of taxation and provide incentives to the said small businesses etc. engaged in the supply of taxable goods.

> Read more on ‘Supply’


Important Features of the Scheme

  • Available to a ‘registered’ person (not a ‘casual taxable person’ nor a ‘non-resident taxable person’ and subject to such prescribed conditions and restrictions including applicable ‘Composition Rules‘);
  • Aggregate turnover’ in the preceding financial year does not exceed Rs.50 lacs**;
  • Such eligible person may opt to pay in lieu of the tax otherwise payable, an amount calculated at such rate as may be prescribed, but not exceeding ––
    (a) 1 percent of the turnover in State or turnover in Union territory in case of a manufacturer,
    (b) 2.5 percent of the turnover in State or turnover in Union territory in case of persons engaged in making supplies referred to in Schedule II, paragraph 6(b)^ thereunder, and
    (c) 0.5 percent of the turnover in State or turnover in Union territory in case of other suppliers.

**The Government may by notification, increase the said limit of Rs.50 lacs to a higher amount, not exceeding Rs.1 crores, as may be recommended by the GST Council.

> Read more on GST ‘Registration’


Other Conditions and Restrictions

The registered person is eligible to opt for the Scheme if such person is ––

  • Not engaged in the supply of services (other than supplies referred to in clause (b) of paragraph 6 of Schedule II^);
  • Not engaged in making any supply of goods which are not leviable to tax under the Union Bill/Act;
  • Not engaged in making any ‘inter-State’ outward supplies of goods;
  • Not engaged in making any supply of goods through an ‘electronic commerce operator’ (required to collect tax at source under section 52); and
  • Not a manufacturer of such goods as may be notified by the Government on the recommendations of the GST Council.

Where more than one registered persons are having the same Permanent Account Number ‘PAN’ (issued under the Income Tax Act 1961), the registered person cannot be eligible to opt for the Scheme unless all such registered persons opt to pay tax accordingly.

^‘Composite supply’ by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.


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