Several incentives have been announced by the Govt for startups and these benefits are being enhanced every year. All these incentives and all other relevant points regarding Income on Startups in India have been mentioned in this article.
The following things about Income Tax on Start-ups have been discussed in this article:-
- Manner of Computation of Income
- Income Tax on Start-ups
- Tax Incentives
Manner of Computation of Income
As the name suggests, Income Tax is always levied on Income and not on the Sales Revenue. The difference between Income and Revenue is mentioned below
If the Income Tax was levied on the Total Revenue, then the Total Tax Liability would have been much higher as compared to Income Tax which is computed on Income. As Income Tax is always levied on the Total Revenue, it will reduces the total tax liability.
For early stage start-ups, it sometimes gets very difficult to keep a track of all the Sales, Expenses, Depreciation and also keep invoices of all these. Therefore, to simplify the manner of computation of Income, the Govt has also introduced the Presumptive Scheme of Taxation wherein a person can disclose his Income as below:-
- Income = 50% of Value of Services provided (applicable for Professionals)
- Income = 8% of Total value of Goods sold (applicable for Businesses)
This Scheme of Presumptive Taxation is only applicable to Individual Proprietors, HUF’s and Partnership Firms but not applicable to Companies. The Scheme of Presumptive Taxation has been explained in detail on this link – Presumptive Taxation Scheme for Small Businesses & Professionals.
Income Tax on Start-ups
After computing the Income as per any of the above mentioned 2 methods, the next step is to compute the Tax liability. Income Tax is levied on the Income as per the below mentioned schedule of Taxes
|Schedule of Income Tax Rates|
|Type of Business Entity||Income Tax applicable|
|Proprietorship/ Individual||As per Income Tax Slab Rates|
|Partnership/ LLP Firm||30% of Income|
|Indian Company||25% of Income|
The last date for filing of Income Tax Return is 31st July/ 30th Sept and the ITR is to be filed in the below mentioned forms
|Manner of Computation of Income||ITR Form applicable|
|Income computed under Presumptive Taxation||ITR 4|
|Income computed as Revenue – Expense – Depreciation||ITR 3/ ITR 5/ ITR 6/ ITR 7|
Tax Incentives for Start-ups
The Govt has announced 100% Tax Deduction under Section 80-IAC for eligible Start-ups from payment of Income Tax. Eligible start-ups formed on or after 1st April 2016 and before 1st April 2019 can claim 100% Tax Exemption from payment of any Income Tax for any 3 consecutive years.
These 3 consecutive years for which 100% tax exemption is allowed can be chosen by the start-up at its own discretion from any of the first 10 years. (Amendment introduced vide Finance Act 2020).
This deduction would be available to the eligible start-up if the total turnover of its business does not exceed Rs. 100 Crores in any of the years beginning from the year of its incorporation.
All eligible start-ups who intent to claim the benefits of such tax incentives would be required to:-
- Maintain Separate Books of Accounts for Eligible Business
- Get their Accounts audited by a Chartered Accountant
- Furnish Audit Report in Form 10CCB along with ITR
Meaning of eligible Start-ups
The benefits of 100% Tax Deduction are not allowed to all start-ups but are only allowed to eligible start-ups. Only the start-ups which satisfy all the following mentioned criteria’s are considered as eligible start-up.
- Incorporated as a Company or LLP
- Incorporated between 1st April 2016 and 1st April 2021 (Increased from 2019 to 2021 in Finance Act 2018)
- Total turnover of the business does not exceed Rs. 100 Crores
- Certified by the Inter-Ministerial Board of Certification in respect of Eligible Business i.e. it is a business which involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.
- Should not be formed by splitting up or Reconstruction of a business already in existence.