TAXATION LAW

PROJECT
ON
EFFECT OF SPECIALIZED TAXATION SLABS UNDER
START-UP INDIA

SUBMITTED TO:
Dr. ALOK VERMA
AMITY LAW SCHOOL

SUBMITTED BY:

ALAN C GEORGE
A3256117268
L L.B. (SEMESTER 5th)
SECTION ‘D’
 ACKNOWLEDGEMENT

The success and final outcome of this project required a lot of guidance and
assistance from many people and I am extremely fortunate to have got this all
along the completion of my project work. Whatever I have done is only due to
such guidance and assistance and I would not forget to thank them.
I owe my profound gratitude to our project guide Dr.AlokVerma, who took keen
interest on our project work and guided us all along, till the completion of our
project work by providing all the necessary information for developing a good
system.
I am thankful to and fortunate enough to get constant encouragement, support and
guidance which helped me in successfully completing this project work.

Alan C George
Income Tax Rules & Regulations for Startups in India
When the government had announced the Budget for FY 2016-17, they had also announced various tax
incentives that were related to the levy of Income tax on startups. These were then enhanced further in
2017-18, to make it easier for startups to function. Here, we will understand the various Income tax rules
and regulations that apply to startups in India, as of 2019.

Major relaxation for companies on Corporate Tax

Currently, the lower rate of 25 % is only applicable to companies having an annual turnover up to 250
Crore. The proposal is to widen this to include all companies having an annual turnover up to INR 400
Cr. This will cover 99.3% of the companies. Now only 0.7% of companies will remain outside this rate.

While the personal tax slabs remain the same as proposed in the interim budget, the government has
provided relaxation to corporate taxation for businesses. Earlier companies with a turnover of less than
250 Cr could avail 25% corporate tax and those with revenue higher than 250 Cr paid 30% tax. This year
the FM declares to increase the turnover limit to 400 Cr. This is a relief for Startups and small businesses.

The government had declared to decrease corporate tax rate to 25% in the Union Budget of 2017. This
was applicable only to organisations who had turnovers less than Rs.50 crore during FY 2015-16. Under
the Union Budget 2018, Finance Minister Mr. Arun Jaitley announced that this particular decreased rate
of 25% will be applicable even to companies that have had turnovers of up to Rs.250 crore during FY
2016-17. The government made this change to help all companies that fall under the micro, small, and
medium enterprises. This is particularly because approximately 99% of these organisations’ employees
file tax returns.

According to the Budget 2018, 7,000 organisations out of 7 lakh organisations that file returns will be
retained in the 30% tax rate slab. These 7,000 companies will be companies who have turnovers higher
than Rs.250 crore.

It is anticipated that the revenue that has been sacrificed due to this particular move of extending the 25%
decrease rate is Rs.7,000 crore for the financial year 2018-19. This significant move by the Finance
Minister is a great economic reform that will enhance the overall tax system of the country. This will also
help in enhancing the competitive edge of the nation.

This reduced corporate income tax rate for the majority of companies will enable them to offer more and
more employment opportunities.

How is income tax computed for startups?

It is crucial to understand that Income tax is levied on the earnings and not the sales revenue of a startup.
This is fairly good news for startups as operational costs can often make it harder for small companies to
have a great profit margin.
The earnings of a startup are calculated on the basis of sales revenue minus expenses and depreciation.
This means that any expenses that are incurred that help with the sale of goods or services and any
reduction in the value of the assets that have been used in the business are subtracted from the total value
of the items or services that have been sold. The remaining figure is the total profit earned during the year
and this is the taxable amount.

Apart from this, since it can be challenging for smaller companies to keep track of the expenses, sales,
depreciation and invoices, the government has also introduced the Presumptive Scheme of Taxation.

As per this scheme, the income can either be disclosed as 50% of the total value of the services that have
been provided, or as 8% of the total goods that have been sold by the business. It is important to note that
this scheme is applicable only to HUFs and individual proprietors, and not to companies.

Understanding income tax for startups

The first step is to compute the income, which can be carried out via the means listed above. The second
step is then to understand the tax liability. There is a specific schedule of taxes that businesses and
individuals need to refer to in order to know their tax liability, as explained below:

Schedule of Income Tax Rates

Type of business entity The applicable income tax

Taxes apply as per the income tax slab

Proprietorship or individual
rates

Partnership/ LLP firm 30% of the income

Indian company 25% of the income

It is crucial to file income tax returns before the due date using the forms mentioned below:

Income that has been computed under the presumptive

ITR 4
taxation scheme

Income computed by calculating the revenue, expense and

ITR 3/ ITR 5/ ITR 6/ ITR7
depreciation
What tax incentives apply for startups?

While announcing the Budget in 2016, the government had announced some incentives that apply for
startups. Since then, these incentives have been revised to make them more inclusive and encourage
startup operations in India.

One of the main ones is the 100% tax rebate as per Section 80 IAC for the startups that are considered
eligible for the same. Additionally, startups can enjoy this 100% rebate for three consecutive years. The
company can choose the 3 years that it wants the rebate on.

However, it is important to note that if a company wants to claim these benefits, they have to comply with
the following rules:

 They must maintain separate account books for their eligible businesses

 They must ask a Chartered Accountant to audit their books

 They must use form 10CCB to furnish their audit report along with their ITR

What startups are eligible for these tax incentives?

India is a country that is filled with startups, but that does not mean that every single startup can enjoy
these rebates. They must fall under the bracket of an “eligible” startup.

In order to be an eligible startup, the following conditions must be met:

 The company needs to be incorporated either as a Company or as an LLP

 The company must be incorporated anytime between 1 April 2016 and 1 April 2021 (as per the
Finance Act of 2018)

 The company must not have a total turnover that exceeds Rs 25 crores

 The company has to be certified by the Inter-Ministerial Board of Certification as an eligible

business. An eligible business is generally defined as one that involves development, innovation,
deployment, or the commercialization of products, services, or processes that are either driven by
intellectual property or technology

 The company cannot be one that has recently been formed by splitting up an existing company or
business

If your startup meets these requirements, you can certainly avail the benefits that have been introduced to
facilitate Start Up India.
These tax incentives and rules have been introduced by the Government of India in order to facilitate
entrepreneurship in the country. With such high potential, India has always been a great marketplace,
and it is time for young citizens to capitalize on the same.

By pursuing their own businesses and offering innovative solutions, they not only stand a chance to earn
far greater revenues than they would if they were in a standard job, but also improve the general job
market of the country.

If you have recently launched your business, you should identify the three years that you want to remain
tax free with care. This can be a huge financial boon for you.

Major Reforms on Angel Tax Issues for Startups

To resolve the so-called ‘angel tax’ issue, the startups and their investors who file requisite declarations
and provide information in their returns will not be subjected to any kind of scrutiny in respect of
valuations of share premiums. The issue of establishing the identity of the investor and source of his
funds will be resolved by putting in place a mechanism of e-verification. With this, funds raised by
startups will not require any kind of scrutiny from the Income Tax Department.

In addition, special administrative arrangements shall be made by the Central Board of Direct Taxes
(CBDT) for pending assessments of startups and redressal of their grievances. It will be ensured that no
inquiry or verification in such cases can be carried out by the Assessing Officer without obtaining
approval of his supervisory officer.

At present, startups are not required to justify the fair market value of their shares issued to certain
investors including Category-I Alternative Investment Funds (AIF). The proposal is to extend this benefit
to Category-II Alternative Investment Funds also. Therefore, the valuation of shares issued to these funds
shall be beyond the scope of income tax scrutiny. There is also a proposal to relax some of the conditions
for carrying forward and set off of losses in the case of startups. Their is also proposal to extend the
period of exemption of capital gains arising from the sale of residential house for investment in startups
up to 31.3.2021 and relax certain conditions of this exemption.

This is a most welcome move for the Indian startup community. After almost a year of fighting over angel
tax, the angel investor community has been in low sentiments. According to DataLabs by Inc42, angel
investments touched a low in India in 2018. Starting from 106 in 2014, the number of angel investors
deals in India grew at the highest with over 653 in 2016 and came down tumbling in 2017 by 22% and
stood at 512. In 2018, the number of unique angel investors that participated in Indian technology startup
funding was 416 — a 42% drop compared to 2016 and a 30% drop compared to 2017. The new changes
will certainly boost morale and will increase startup investments in the country.
Understanding Angel Tax for Startups in India
Ever since the Modi government started with the plan of Startup India, we have seen an incredible surge
of new companies coming up from different parts of the country.

In recent years, Indian companies have seen incredible investments. The investor community across the
world has come up with serious investments in the Indian market because of the sheer size of the market
that is up for grabs in the second most populous country in the world.

High net worth individuals, foreign funds, angel investors, venture capitalists, almost every possible
individual or a company that is capable of investing has played a role in investing in various Indian
startups.

However, while the government promotes the development of startups in India, the government has
continued to impose the angel tax on startups.

The tax was introduced in 2012, but the government had promised to exempt companies from it. This
finally happened in February 2019, when the Indian government made some amendments to the angel tax,
giving a much-needed breather to startups.

Since the angel tax has been a hot topic in the industry of late, let us discuss a few things about this to get
a better understanding of it.

What is an angel investment?

An angel investment is an investment made by an angel investor. An Angel investor, more often than not,
invests only in startups or new companies that are yet to get great recognition. Such investors identify
promising startups and invest heavily in them in return of ownership, equity or convertible debt.

What is angel tax?

Angel tax in India is a unique tax where a startup has to pay a certain percentage of the angel investment
they receive to the Government of India, under specified conditions.

This startup tax states that the receiver of the investment needs to pay a certain tax if they get an
investment higher than the Fair Market Value (FMV). The concept behind this is that the extra amount is
seen as an income, and hence, the receiver has to pay taxes according to the income tax laws.

What is the problem with angel tax?

The fundamental problem with this tax is that it is imposed only if a resident investor makes the
investment. This is not allowing Indians to invest freely and furthermore, startups are feeling the heat
immensely.

Investments from non-resident investors and venture capitalist funds do not fall under the ambit of angel
tax.
How much is the angel tax?

Angel tax is charged at the maximum marginal rate of 30%. This large percentage affects the investor as
well as the receiver as they are losing almost one-third of the investment in taxes.

If you get an investment of Rs 100 crore from an investor, but your company deserves an investment of
only up to Rs 50 crore according to the FMV then the remaining Rs 50 crore is considered as an income.
30% of that Rs 50 crore is Rs15 crore, which is a massive chunk of the initial investment.

Why are startups opposing it?

A few reasons why startups are opposing angel tax are:

 The process that companies use to calculate their market value differs a lot from the method the
government uses to calculate the same. Many factors do not come into play when the government
evaluates the market value of a company, resulting in a lower value. However, angel investors
invest looking at the true potential of the startup and hence come up with huge investments. This
clash in the process results in substantial price variations, which later leads to the payment of
huge taxes

 Angel tax inevitably wipes away a significant chunk of the investment, which small companies
get after a lot of rounds of funding. Moreover, it has affected the industry a lot, discouraging
investors from investing big in smaller companies

 Angel tax invariably shunts the growth of the startup, leaving the young entrepreneurs dispirited

After facing a lot of backlash from the startup and investment community, the Indian Government has
finally made some changes to the laws to make it a bit friendlier to investors and entrepreneurs.

What changes did the government make to angel tax?

The government has made the following changes:

 A company will be considered a startup for its first 10 years from the date of its registration.
Earlier, this was set at seven years. This allows the startup to get an exemption from the income
tax laws for three more years

 The entity will remain a startup if it does not experience a turnover of more than Rs 100 crore in
any of the financial years, which earlier was set at Rs 25 crore. This allows startups to grow even
more

 The income-tax department issued a notice of exempting startups from angel tax, provided they
meet certain conditions

What are the conditions to get exempt from angel tax?

A few of the conditions that qualify a company for exemption from angel tax are:
  The paid-up capital and the share premium of the startup must not exceed the bracket of Rs 10
crore, post issuing the shares

 The startup cannot estimate the market value on their own but seek the help of certified merchant
bankers

 The investor should have a minimum net worth of Rs 2 crore. Moreover, the investor’s income in
each of the last three years should not be less than Rs 50 lakh. If an individual meets these
requirements, only then can he or she qualify as an angel investor.

What lies ahead for startups in India?

Even though this news comes as a relief to young entrepreneurs, the startup ecosystem still has a lot of
issues, especially with the Article 68, which adds a huge tax liability for startups if they cannot disclose
the source of funding.

The unexplained fund receipts push young entities into various financial troubles. Young entrepreneurs go
through many pains to get funding, and the least the government can do is not add more hindrances to
their growth by adding more taxes on their funds.