Detailed analysis of start-up in India

Introduction

India has become a hub for startups due to its supportive policies and fast-growing economy. To encourage entrepreneurship, the Indian government has introduced several initiatives, including the Startup India program, to make it easier for startups to incorporate and operate in the country. In this article, we will explore the procedure to incorporate a startup company in India and its benefits.

1. Understanding the Concept of Startup

In India, a startup is defined as an entity that has been incorporated or registered in India for less than ten years and has an annual turnover of less than INR 100 crores. Additionally, the company must be working towards innovation, development, deployment, or commercialization of new products, processes, or services driven by technology or intellectual property.

2. Procedure to Incorporate a Startup Company in India

The procedure to incorporate a startup company in India is as follows:

Step 1: Obtain Digital Signature Certificate (DSC) and Director Identification Number (DIN)

The first step is to obtain a DSC and DIN for the proposed directors of the company. These can be obtained online by submitting an application to the Ministry of Corporate Affairs (MCA).

Step 2: Reserve Company Name

The next step is to reserve the proposed company name by filing an application with the MCA. The name should be unique and not similar to any existing company.

Step 3: Drafting of Memorandum and Articles of Association

The Memorandum and Articles of Association of the company should be drafted and filed with the MCA.

Step 4: Incorporation of Company

Once the name is approved and the Memorandum and Articles of Association are filed, the company can be incorporated by filing an application for incorporation with the MCA. The application should include details of the proposed directors, shareholders, and registered office of the company.

Step 5: Obtain Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN)After incorporation, the company should apply for a PAN and TAN from the Income Tax Department.

Step 6: Register for Goods and Services Tax (GST)

If the company's turnover is more than INR 20 lakhs( for Service) and 40 Lacs (for Goods), it should register for GST with the GST Department.

Step 7: Register at DPIT for Unique Startup Registration.

• Visit the DPIIT website at https://dpiit.gov.in/.
• Click on the "Startup India" tab on the home page.

On the Startup India page, click on the "Register Startup" button.

• It will be redirected to a registration page where We need to enter business details such as company name, address, PAN number, and other relevant information like.
• Once you have entered all the required details, click on the "Submit" button.
• After submission, you will receive an acknowledgment email with a reference number.
• DPIIT will verify your application and, if approved, will issue a certificate of recognition as a startup.

3. Benefits of Incorporating a Startup Company in India

Incorporating a startup company in India comes with several benefits, including:

• Access to Funding: The Indian government has introduced several schemes and funds to support startups, including the Startup India Seed Fund Scheme, which provides financial assistance to startups.
• Tax Benefits: Startups in India are eligible for various tax benefits, including a three-year tax holiday, exemption from capital gains tax, and reduced tax rates for small businesses.
• Limited Liability: Incorporating a company offers limited liability protection to its directors and shareholders, limiting their personal liability in case of any legal or financial liabilities.
• Branding and Recognition: By incorporating a company, startups can establish their brand and gain recognition in the market.

4. Analysis of tax benefits in India for startup companies

1. Section 80-IAC - Tax holiday for eligible startups
2. Section 56(2)(viib) - Angel Tax Exemption
3. Section 54GB -Capital Gain Tax Exemption on investment in eligible startups
4. Section 10(12A) and 80G - Tax exemption for donations to eligible startups
5. Section 80JJAA -Tax deduction for employment generation in eligible startups
6. Section 35AD - Tax deduction for investment in eligible startups
7. Section 10(23FB) - Tax exemption on income from eligible startups

I. Section 80-IAC - Tax holiday for eligible startups Eligibility criteria for startups to claim tax holiday Duration of tax holiday period Percentage of profits eligible for tax exemption

a. Eligibility criteria for startups to claim tax holiday

• The startup must be incorporated as a company or registered as a partnership firm or LLP after April 1, 2016, and before April 1, 2024.
• The turnover of the startup should not exceed Rs. 100 crores in any of the previous years beginning from the date of incorporation/registration.
• The startup should be engaged in an eligible business, which means a business involving innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

b. Duration of tax holiday period

• Eligible startups can claim a tax holiday for a period of 3 consecutive years out of 10 years beginning from the year of incorporation/registration.
• The startup can choose any 3 years for claiming the tax holiday benefit, but the chosen years must be consecutive.

c. Percentage of profits eligible for tax exemption

• The entire amount of profit and gains derived from an eligible business during the tax holiday period is eligible for a deduction of 100%.
• The tax holiday benefit is available only on profits and gains derived from eligible* business activities. Other income such as rental income, capital gains, and income from other sources are not eligible for this tax holiday benefit.

(*eligible business" 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)

II. Section 56(2)(viib) - Angel Tax Exemption Explanation of Angel Tax Eligibility criteria for startups to claim Angel Tax exemption The amount of funding eligible for exemption

a. Explanation of Angel Tax

• Angel Tax is a tax levied on the excess amount of capital raised by a company through the issuance of shares to investors, which is higher than the fair market value of the shares.
• Angel Tax was introduced to curb the practice of money laundering through the issuance of shares at a premium to shell companies.
• However, many startups found themselves at the receiving end of this tax as the fair market value of their shares was often lower than the amount paid by investors.

b. Eligibility criteria for startups to claim Angel Tax exemption

• The startup must be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) as an eligible startup.
• The startup must not have more than Rs. 25 crore of aggregate paid-up share capital.
• The startup must not have more than Rs. 100 crore of turnover in any of the previous financial years.
• The startup must have been incorporated for less than 10 years.

c. The amount of funding eligible for exemption

• The entire amount of funding received by the startup from any resident angel investor, family office or funds which are registered with the Securities and Exchange Board of India (SEBI) is eligible for exemption from Angel Tax.
• The exemption is available only if the amount of funding does not exceed the fair market value of the shares as determined by a merchant banker or a chartered accountant.

III. Section 54GB - Capital Gain Tax Exemption on investment in eligible startups Eligibility criteria for individuals to claim capital gain tax exemption Amount of investment eligible for tax exemption Time limit for investment in eligible startups

a. Eligibility criteria for individuals to claim capital gain tax exemption

• The individual should be a resident of India.
• The capital gains should arise from the transfer of a long-term capital asset.
• The individual should invest the amount of capital gains in the equity shares of an eligible startup.

b. Amount of investment eligible for tax exemption

• The amount of capital gains invested in the equity shares of an eligible startup is eligible for exemption from long-term capital gains tax.
• The maximum amount eligible for exemption is Rs. 50 lakhs.

c. Time limit for investment in eligible startups

• The investment in eligible startups must be made within 6 months from the date of transfer of the long-term capital asset.
• The eligible startup must use the investment for purchase of new plant and machinery or equipment.
• The eligible startup must not invest the amount in any other asset for a period of 5 years from the date of investment.

IV. Section 10(12A) and 80G - Tax exemption for donations to eligible startups Eligibility criteria for startups to claim tax exemption on donations Tax benefits for donors contributing to eligible startups

a. Eligibility criteria for startups to claim tax exemption on donations

• The startup must be registered as a trust or a non-profit organization under Section 12A of the Income Tax Act.
• The startup must be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) as an eligible startup.
• The startup must be engaged in eligible activities such as innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

b. Tax benefits for donors contributing to eligible startups

• Donors contributing to eligible startups can claim tax exemption under Section 80G of the Income Tax Act.
• The tax deduction available to the donor is 50% or 100% of the amount donated, subject to certain conditions.
• The maximum deduction that can be claimed by the donor is limited to 10% of the donor's gross total income.

V. Section 80JJAA - Tax deduction for employment generation in eligible startups Eligibility criteria for startups to claim tax deduction Percentage of eligible deduction on incremental employment

a. Eligibility criteria for startups to claim tax deduction

• The startup should be engaged in eligible businesses such as manufacturing, production or services.
• The startup should be incorporated on or after October 1, 2016 but before April 1, 2024.
• The startup should employ a minimum of 10 employees in a previous year.
• The startup should not have claimed a deduction under this section in any of the 3 previous years.

b. Percentage of eligible deduction on incremental employment

• The startup can claim a deduction of 30% of the additional wages paid to employees in a previous year for a period of 3 years.
• The additional wages paid must be to new employees, i.e. employees who have not been employed in any other establishment during the previous year.
• The deduction is subject to a maximum limit of Rs. 30,000 per employee per year.
• The startup must file a return of income to claim the deduction under this section.

VI. Section 35AD - Tax deduction for investment in eligible startups Eligibility criteria for startups to claim tax deduction Percentage of eligible deduction on investment in eligible startups

a. Eligibility criteria for startups to claim tax deduction

• The startup should be engaged in eligible businesses such as developing or maintaining infrastructure, setting up or operating a cold chain facility, or any other business notified by the government.
• The startup should not have been formed by splitting up, or reconstructing, an existing business.
• The startup should have commenced operations on or after April 1, 2012.
• The startup should not have claimed a deduction under this section in any of the previous years.

b. Percentage of eligible deduction on investment in eligible startups

• The startup can claim a deduction of 100% of the capital expenditure incurred for the eligible business.
• The deduction is available for a period of 5 consecutive assessment years, starting from the year in which the eligible business begins operations.
• The deduction is subject to certain conditions and limitations.

VII. Section 10(23FB) - Tax exemption on income from eligible startups Eligibility criteria for startups to claim tax exemption on their income Duration of the tax exemption period

a. Eligibility criteria for startups to claim tax exemption on their income

• The startup should be engaged in eligible businesses such as developing or deploying innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
• The startup should be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) as an eligible startup.
• The startup should not have been formed by splitting up, or reconstructing, an existing business.
• The startup should have been incorporated on or after April 1, 2016 but before April 1, 2024.
• The total turnover of the startup should not exceed Rs. 100 crore in any previous year.

b. Duration of the tax exemption period

• The exemption is available for a period of 3 consecutive assessment years, starting from the year in which the startup is recognized as an eligible startup by DPIIT.
• The exemption is available on the income of the startup from the eligible business.

Conclusion

Incorporating a startup company in India is a straightforward process, and the benefits are numerous. The Indian government's supportive policies and initiatives, coupled with a fast-growing economy, make it an ideal destination for entrepreneurs. By following the above procedure, startups can incorporate their companies and avail of the various benefits offered by the government.