Introduction
Startup India is an initiative by the Government of India to boost the startup ecosystem in the country. The main aim of the program is to create an environment conducive to the growth and development of startups in India. One of the key components of the program is Section 80IAC of the Income Tax Act which provides tax incentives for startups. Section 80IAC of the Income Tax Act provides tax benefits to eligible startups for their first three years of operations. These tax benefits include a 100% tax exemption on profits earned by the startup during its first three years, provided the startup meets certain criteria. In order to be eligible for the tax exemption, the startup must be registered as a private limited company and must have raised funding of at least Rs.25 lakhs in the first 5 years of operation. Additionally, the startup must be engaged in the development of a new product or service and must have a turnover of not more than Rs.25 crore. The impact of Section 80IAC of the Income Tax Act on startups has been immense. By providing tax incentives, the government has provided a much needed boost to the startup ecosystem in India. Startups are now able to invest more money in their operations and are able to use the funds to develop new products and services. Moreover, by providing tax incentives, the government has encouraged more investors to invest in startups. This has resulted in a surge in venture capital investments in startups, thereby providing much needed capital to the startup ecosystem. Overall, the impact of Section 80IAC of the Income Tax Act on startups has been positive. It has provided a much needed boost to the startup ecosystem in India and has encouraged more investors to invest in startups. This has resulted in a surge in venture capital investments in startups, thereby providing much needed capital to the startup ecosystem.
Section 80-IAC of the Income Tax-100% tax deduction
Section 80-IAC shall be inserted after section 80-IAB by the Finance Act, 2016, w.e.f. 1-4-2017
"80-IAC. (1) Where the gross total income of an assessee, being an eligible start-up, includes any profits and gains derived from eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent of the profits and gains derived from such business for three consecutive assessment years.
(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any three consecutive assessment years out of five years beginning from the year in which the eligible start-up is incorporated.
(3) This section applies to a start-up which fulfils the following conditions, namely:-
(i) it is not formed by splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of a start-up which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as referred to in section 33B, in the circumstances and within the period specified in that section;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
(4) The provisions of sub-section (5) and sub-sections (7) to (11) of section 80-IA shall apply to the start-ups for the purpose of allowing deductions under sub-section (1).”
Section 80-IAC of the Income Tax Act provides for a deduction of 100% of the profits and gains from any eligible business of a start-up for 3 consecutive assessment years out of 7 years. The business must have been set up between April 1, 2016 and March 31, 2021 and should have had a turnover of less than Rs. 25 crore in the financial year in which the deduction is claimed. This deduction is available to all startups registered in India. The deduction is allowed only to the extent of the total income of the business and is not available for any loss incurred. This deduction is not available for any business where the investment in plant and machinery exceeds Rs. 25 crore.
Clause 3 of the DPIIT Notification dated 19th February 2019, clarifies that in order to avail the benefits of Section 80-IAC of the Income Tax Act, a business must be certified as an eligible start-up by the Inter-Ministerial Board of Certification, set up by the Department for Promotion of Industry and Internal Trade (DPIIT).
Procedure
For obtaining a certificate for the purpose of Section 80-IAC of the Act, make an application in prescribed Form-1 along with documents specified therein to the Inter Ministerial Board of Certification and the board may, after calling for such documents or information and making such enquiries, as it may deem fit–
(i) grant the certificate referred to in sub-clause (c) of clause (ii) of the Explanation to Section 80-IAC of the Income Tax Act; or
(ii) reject the application by providing reasons
Revocation
The DPIIT Notification in Clause 8 thereof cautions that in the event that it is found that any certification referred to Clause 3 as regards Section 80-IAC of the Income Tax Act, 1961 has been obtained by false or incorrect information, or by suppressing any material fact, the benefits of the said notification shall be withdrawn and the certified entity shall be liable to be proceeded against under the provisions of the Income Tax Act, 1961.
Conclusion
In conclusion, the passing of Section 80IAC of the Income Tax Act has been a major boon for startups in India. It has enabled them to reduce their tax burden and thus, increase their profits. It has also allowed them to retain more of their profits and reinvest them into their business. This provision has provided startups in India with a much-needed boost and has helped them become more competitive in the market. It has also provided them with the necessary financial support to help them grow and expand. Thus, it can be said that Section 80IAC of the Income Tax Act has been a major catalyst for the growth and success of startups in India.
The author can also be reached at fcsasharma@gmail.com
Disclaimer: The purpose of this article is to provide informational material only. It is not intended to form a contractual agreement of any kind or serve as a substitute for professional advice. Fcs Amit Kumar Sharma has taken all necessary precautions to ensure the accuracy of the information provided herein at the time of publication. We will not be liable for any direct, indirect or consequential damages that may arise as a result of the use of this article or the information contained therein.
Source: Income Tax Act-1961, Startup India
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