INCOME TAX: Benefits available under Startup India Scheme

Introduction

Startup India is a flagship initiative of the Government of India, intended to build a strong ecosystem for nurturing innovation and Startups in the country. In order to meet the objectives of the initiative, Government of India announced an Action Plan that addresses all aspects of the Startup ecosystem.

Startup India campaign is based on an action plan aimed at promoting bank financing for start-up ventures to boost entrepreneurship and encourage startups with jobs creation. The campaign was first announced by Prime Minister, Narendra Modi in his 15th August, 2015 address from the Red Fort. It is focused on to restrict role of States in policy domain and to get rid of “licence raj” and hindrances like in land permissions, foreign investment proposal, environmental clearances. It was organized by Department of Industrial Policy and Promotion (DIPP). The Standup India initiative is also aimed at promoting entrepreneurship among SCs/STs, women communities. Rural India’s version of Startup India was named the Deen Dayal Upadhyay Swaniyojan Yojana. To endorse the campaign, the first magazine for startups in India, The Cofounder, was launched in 2016.

Launch

The event was inaugurated on 16th January, 2016 by the Finance Minister, Arun Jaitley. Among the attendees were around 40 top CEOs and startup founders and investors from Silicon Valley as special guests including Masayoshi Son, CEO of SoftBank, Kunal Bahl, founder Snapdeal, Ola founder Bhavish Aggarwal, Paytm founder Vijay Shekhar Sharma, Travis Kalanick, founder of Uber, Adam Neumann, CEO of WeWork, BJ Arun, CEO of July Systems, Prateek Kr. Bhowmick, Co-founder of ReviewAdda, Sachin Bansal, Co-founder of Flipkart, Naveen Tewari, Co-founder of Inmobi and others.

Government’s role

The Ministry of Human Resource Development and the Department of Science and Technology have agreed to be partner in an initiative to set up over 75 such startup support hubs in the National Institutes of Technology (NITs), the Indian Institutes of Information Technology (IIITs), the Indian Institutes of Science Education and Research (IISERs) and National Institutes of Pharmaceutical Education and Research (NIPERs).

The Reserve Bank of India said it will take steps to help improve the ‘ease of doing business’ in the country and contributed to an ecosystem that is conducive for the growth of start-up businesses.

Procedure for registering a startup in India

Step 1: Incorporate your Business

You must first incorporate your business as a Private Limited Companyor a Partnership firm or a Limited Liability Partnership. You have to follow all the normal procedures for registration of any business like obtaining the Certificate of Incorporation/Partnership registration, PAN, and other required compliances.

Step 2: Register with Startup India

Then the business must be registered as a startup. The entire process is simple and online. All you need to do is log on to the Startup India website and fill-up the form with details of your business. Next, enter the OTP which is sent to your e-mail and other details like, startup as the type of user, name and stage of the startup, etc. After entering these details, the Startup India profile is created.

Once, your profile is created on the website, startups can apply for various acceleration, incubator/mentorship programmes and other challenges on the website along with getting access to resources like Learning and Development Program, Government Schemes, State Polices for Startups and pro-bono services.

Step 3: Get DPIIT Recognition

The next step after creating the profile on the Startup India Website is to avail Department for Promotion of Industry and Internal Trade (DPIIT) Recognition. This recognition helps the startups to avail benefits like access to high-quality intellectual property services and resources, relaxation in public procurement norms, self-certification under labour and environment laws, easy winding of company, access to Fund of Funds, tax exemption for 3 consecutive years and tax exemption on investment above fair market value.

For getting DPIIT Recognition, click on the ‘Get Recognised’ button if you are a new user. If you are an existing user click on the ‘Dashboard button’ and then ‘DPIIT Recognition’.

Step 4: Recognition Application

The ‘Recognition Application Detail’ page opens. On this page click on ‘View Details’ under the Registration Details section. Fill up the ‘Startup Recognition Form’ and click on ‘Submit’.

Step 5: Documents for Registration

(i) Incorporation/Registration Certificate of your startup

(ii) Details of the Directors

(iii) Proof of concept like pitch deck/website link/video (in case of a validation/ early traction/scaling stage startup)

(iv) Patent and trademark details (Optional)

(v) PAN Number

Step 6: Recognition Number

On applying you will immediately get a recognition number for your startup. The certificate of recognition will be issued after the examination of all your documents which is usually done in 2 days after submitting the details online.

If on subsequent verification, it is found to be obtained that the required document is not uploaded/wrong document uploaded or a forged document has been uploaded then you shall be liable to a fine of 50% of your paid-up capital of the startup with a minimum fine of Rs. 25,000.

Step 7: Other Areas

Patents, trademarks and/or design registration:

If you need a patent for your innovation or a trademark for your business, you can easily approach any from the list of facilitators issued by the government. You will need to bear only the statutory fees thus getting an 80% reduction in fees.

Funding:

In order to provide funding support, the Government has set up a fund with an initial corpus of Rs. 2,500 crore and a total corpus of Rs. 10,000 crore over a period of 4 years (i.e. Rs. 2,500 crore per year). The Fund is in the nature of Fund of Funds, which means that it will not invest directly into Startups, but shall participate in the capital of SEBI registered Venture Funds.

Self Certification

Under Employment and Labour Laws: Startups can self certify under labour laws and environment laws so that their compliance costs are reduced. Self-certification is provided to reduce regulatory burden thereby allowing them to focus on their core business. Startups are allowed to self-certify their compliances under six labour laws and three environment laws for a period of 3 to 5 years from the date of incorporation.

Units operating under 36 white category industries as published on the website of the Central Pollution Control Board do not require clearance under 3 environment-related Acts for 3 years.

Documents Which Have Been Waived Off

Startup India has changed the procedure of registration since its inception. It has exempted most of the previous requirements now. Many documents which were required to be filed previously are waived off. The list of documents that are not required to be filed at the time of the registration are-

(i) Letter of Recommendations

(ii) Letter of funding

(iii) Sanction Letters

(iv) Udyog Aadhar

(v) MSME Certificate

(vi) GST Certificate

Eligibility criteria applicable for startups seeking tax exemption

An entity shall be considered a “Startup” if:

(i) It must be an entity registered/incorporated as a -

(a) Private Limited Company under the Companies Act, 2013; or

(b) Registered Partnership firm under the Indian Partnership Act, 1932; or

(ii) Age must not be more than 5 10 years. In other words, 5 10 years must not have elapsed from the date of its incorporation/registration.

(iii) If its annual turnover (as defined in the Companies Act, 2013) in any preceding financial year must not exceed Rs. 100 crore.

(iv) Startup must be working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.

(v) The Startup must aim to develop and commercialise:

(a) a new product or service or process; In other words, the product or service should be a new one or a significantly improved version of existing services or products; or

(b) a significantly improved existing product or service or process that will create or add value for customers or workflow.

(vi) The Startup must not merely be engaged in:

(a) developing products or services or processes which do not have potential for;

(b) undifferentiated products or services or processes; or commercialisation; or

workflow.

(vii) The Startup must not be formed by splitting up, or reconstruction, of a business already in existence.

(viii) The Startup has obtained certification from the Inter-Ministerial Board, setup by DIPP to validate the innovative nature of the business, and

(a) be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an incubator established in a post-graduate college in India; or

(b) be supported by an incubator which is funded (in relation to the project) from Government of India as part of any specified scheme to promote innovation; or

(c) be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an incubator recognized by Government of India; or

(d) be funded by an Incubation Fund/Angel Fund/Private Equity Fund/Accelerator/Angel Network duly registered with SEBI (DIPP may publish a ‘negative’ list of funds which are not eligible for this initiative) that endorses innovative nature of the business; or

(e) be funded by the Government of India as part of any specified scheme to promote innovation; or

(f) have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.

(ix) (a) the startup should get a recommendation letter from the recognized Incubator cell (Incubator

funded by Government of India), or

(b) be recognized by the Government of India, or

(x) Startup should not have received more than Rs 10 lakh of monetary support under any other Central or State Government scheme. This does not include prize money from competitions and grand challenges, subsidized working space, founder monthly allowance, access to labs, or access to prototyping facility;

(xi) Shareholding by Indian promoters in the startup should be at least 51% at the time of application to incubator for the scheme, as per Companies Act, 2013 and SEBI (ICDR) Regulations, 2018.

Not eligible Startup

The entity will no longer be an eligible start-up once-

(i) It completes 10 years from the date of registration

(ii) Its turnover exceeds Rs. 100 crore in any year.

(iii) A new startup engaged in the same field may not be eligible unless its product is significantly

improved than what existing players provide.

(a) Startup India Twitter handle.

(b) Official Website Start Up The first step in social change.

Audit of Accounts:

The deduction shall be allowed only if the accounts of the start-up for the relevant previous year have been audited by a chartered accountant and the assessee furnishes the audit report in the prescribed form, duly signed and verified by such accountant along with his return of income.

Transfer of goods/services between eligible business and other business of the assessee:

Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or vice versa, and if the consideration for such transfer does not correspond with the market value of the goods or services, then, the profits and gains of the eligible business shall be computed as if the transfer was made at market value. However, if, in the opinion of the Assessing Officer, such computation presents exceptional difficulties, the Assessing Officer may compute the profits on such reasonable basis as he may deem fit.

Deduction not to exceed profits of eligible business:

The deduction claimed and allowed under this section shall not exceed the profits and gains of the eligible business. Further, where deduction is claimed and allowed under this section for any assessment year no deduction in respect of such profits will be allowed under any other section under this chapter.

Assessing Officer empowered to make adjustment in case any transaction produces excessive profits to eligible business:

The Assessing Officer is empowered to make an adjustment while computing the profit and gains of the eligible business on the basis of the reasonable profit that can be derived from the transaction, in case the transaction between the assessee carrying on the eligible business under section 80-IAC and any other person is so arranged that the transaction produces excessive profits to the eligible business.

However, if the arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to the arm’s length price.

Central Government empowered to deny deduction to any class of start-up:

The section empowers the Central Government to declare any class of start-up as not being entitled to deduction under this section. The denial of exemption shall be with effect from such date as may be specified in the notification issued in Official Gazette.

Advantage of Startup India

(1) Single Window Clearance even with the help of a Mobile App and Portal

An online portal, in the shape of a mobile application, has been launched on April 1, 2015 to serve as the single platform for Startups for interacting with Government and Regulatory Institutions for all business needs and information exchange among various stakeholders. The Government has introduced a Mobile App to provide on - the - go accessibility for:

(a) Registering Startups with Ministry of Corporate Affairs and Registrar of Firms.

(b) Tracking the status of the registration application. A digital version of the final registration certificate shall be made available for downloading through the Mobile App.

(d) Collaborating with various Startup ecosystem partners (venture funds, incubators, academia, mentors etc.).

(e) Applying for various schemes being undertaken under the Startup India Action Plan.

(2) ‘Fund of Funds’ with a Corpus of Rs. 10,000 crore

For providing funding support Government has set up a fund through a ‘Fund of Funds’ with a Corpus of Rs. 10,000 crore. The Fund will be in the nature of Fund of Funds, which means that it will not invest directly into Startups, but shall participate in the capital of SEBI registered Venture Funds. Key features of the Fund of Funds are highlighted below:—

(a) The Fund of Funds shall be managed by a Board with private professionals drawn from industry bodies, academia, and successful Startups.

(b) Life Insurance Corporation (LIC) shall be a co-investor in the Fund of Funds.

(c) The Fund of Funds shall contribute to a maximum of 50% of the stated daughter fund size. In order to be able to receive the contribution, the daughter fund should have already raised the balance 50% or more of the stated fund size, as the case may be.

(d) The Fund shall ensure support to a broad mix of sectors such as manufacturing, agriculture, health, education, etc.

(3) Credit Guarantee Fund for Startups

In order to overcome traditional Indian stigma associated with failure of Startup enterprises in general and to encourage experimentation among Startup entrepreneurs through disruptive business models, credit guarantee comfort would help flow of Venture Debt from the formal Banking System. Debt funding to Startups is also perceived as high risk area and to encourage Banks and other Lenders to provide Venture Debts to Startups, Credit guarantee mechanism through National Credit Guarantee Trust Company (NCGTC)/SIDBI is being envisaged with a budgetary Corpus of INR 500 crore per year for the next four years.

Press Information Bureau

Government of India

Ministry of Commerce & Industry

26-July-2017 15:54 IST

Credit Guarantee Fund for Startups

Government is formulating a Credit Guarantee Scheme for Startups (CGSS) with a corpus contribution of INR 2000 crores that will enable Startups to raise loans without any collateral for their business purposes. The proposed scheme will provide credit guarantee upto INR 500 lakhs per case inclusive of term loan, working capital or any other instrument of assistance extended by Member Lending Institutions (MLIs) to finance an eligible borrower i.e. a Startup recognized by Department of Industrial Policy and Promotion (DIPP).

The main norms and pre-conditions of the CGSS are as follows:—

v Scheme will provide benefit to a Startup recognized by DIPP as per Gazette Notifications issued from time to time.

v For all resident Directors/Partners, Aadhaar shall be mandatory and for non-resident directors/partners, the passport number shall be a mandatory part of KYC norms.

v Member Lending Institutions (MLIs) under the scheme can be Scheduled Commercial Banks and Financial Institutions, RBI registered Non-Banking Financial Companies (NBFCs), SEBI registered AIFs, etc.

v The scheme will function under the trusteeship management of the National Credit Guarantee Trustee Company (NCGTC).

v Scheme shall provide portfolio-based credit guarantee. Each portfolio shall comprise at least 10 eligible start up loans, during a particular Financial Year.

v Coverage would be extended to the portfolio and the portfolio loss would be reckoned against the “net cash losses” during the portfolio life.

v Instruments of assistance could be in the form of Venture debt, working capital, debentures, Optionally Convertible debt, etc.

v MLIs may provide loans to up to any amount required by an eligible borrower. However, under the scheme the exposure for availing credit guarantee shall be limited to Rs. 500 lakh per eligible borrower. Such loan will be extended by MLIs without any collateral security and/or third party guarantee.

v The Management Committee (MC) shall be responsible for the overall supervision and monitoring of the Credit Guarantee Scheme for startups.

v A Risk Evaluation Committee (REC) shall also be formed to address conflict of interest issues.

This information was given by the Commerce and Industry Minister Smt. Nirmala Sitharaman in a written reply in Rajya Sabha today.

(4) Legal Support and Fast-tracking Patent Examination at Lower Costs

A fast-track system for patent examination at lower costs is being conceptualised by the government. The system will promote awareness and adoption of the Intellectual Property Rights (IPRs) by the start-up foundations. The scheme for Startup Intellectual Property Protection (SIPP) shall facilitate filing of Patents, Trademarks and Designs by innovative Startups. Various measures being taken in this regard include:

(a) Fast-tracking of Startup patent application.

(b) Panel of facilitators to assist in filing of IP applications.

(c) The Central Government shall bear the entire fees of the facilitators for any number of patents, trademarks or designs that a Startup may file, and the Startups shall bear the cost of only the statutory fees payable.

(d) Rebate on filing of application. Startups shall be provided 80% rebate in filing of patents vis-a-vis other companies.

(5) Capital Gain Exemption in respect of LTCG proceeds invested in specified start-up fund [ Section 54EE]

Section 54EE inserted by the Finance Act, 2016, with effect from 01.04.2017, for the eligible startups to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by the Central Government within a period of six months from the date of transfer of the asset.

Quantum of deduction

The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Such amount shall be remain invested in the specified fund for a period of 3 years. If withdrawn before 3 years, then the exemption will be revoked in the year in which money is withdrawn.

Tax exemption on investments above the fair market value

The government has exempted the tax being levied on investments above the fair market value in eligible startups. Such investments include investments made by resident angel investors, family or funds which are not registered as venture capital funds. Also, the investments made by incubators above fair market value is exempt.

(6) Exemption from capital gains tax from sale of residential property to Individual or HUF on investment of long-term capital gain in equity shares of Eligible Startups upto 31.03.2022 [Section 54GB]

Exemption from tax on capital gains arising out of sale of residential house or a residential plot of land if the amount of net consideration is invested in prescribed stake of equity shares of eligible Startup for utilizing the same for purchase of specified asset.

Conditions

(i) Individual or HUF holds shareholding in the eligible company more than 25% of share capital or voting rights thereof.

(ii) Date for transfer of residential property in the case of investment in eligible start-ups is on or before 31.03.2022.

(iii) Such company utilises the amount invested in shares to purchase new asset before due date of filing of return by the investor.

(iv) With effect from assessment year 2020-21, relaxing the condition restricting transfer of new asset being computer or computer software from the current five years to three years.

(v) Startups shall also use the amount invested to purchase assets and should not transfer asset purchased within 5 years from the date of its purchase.

“new asset” means new plant and machinery include computers or computer software in case of technology driven start-ups so certified by the Inter-Ministerial Board of Certification notified by the Central Government in the Official Gazette, but does not include—

(a) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;

(b) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house;

(d) any vehicle; or

(e) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.

(7) Tax Exemption in profit to start-ups for 3 consecutive assessment years out of seven years [Section 80-IAC]

The Inter-Ministerial Board of Certification is a Board set up by Department for Promotion of Industry and Internal Trade (DPIIT) which validates Startups for granting tax related benefits. A DPIIT recognized Startup is eligible to apply to the Inter-Ministerial Board for full deduction on the profits and gains from business (exemption under Section 80IAC) provided the following conditions are fulfilled.

Conditions to be fulfilled:

This incentive is available to an eligible start-up which fulfils the following conditions:—

(i) The eligible start-up is required to be incorporated on or after 01.04.2016 but before 01.04.2022.

(ii) It is incorporated as a Company or Limited Liability Partnership (LLP).

(iii) The total turnover of its business does not exceed the prescribed limit [i.e. Rs. 25 crores] in any of the previous years beginning on or after 01.04.2016 and ending on 31.03.2021 2022. The requirement of the turnover not exceeding Rs. 25 crore would apply to seven previous years commencing from the date of incorporation.

(iv) It is engaged in the eligible business which involves 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, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

(v) It is not formed by splitting up, or the reconstruction, of a business already in existence.

However, 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.

(vi) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

However, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if all the following conditions are fulfilled, namely:—

(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;

(b) such machinery or plant is imported into India;

(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of the Income-tax Act, 1961 in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.

Further, where in the case of a start-up, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed 20% of the total value of the machinery or plant used in the business, then, the condition specified that it should not be formed by transfer to a new business of plant and machinery used for any purpose shall be deemed to have been complied with.

(vii) It holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government:

Quantum of deduction

A deduction of 100% of the profits and gains derived by an eligible start-up from an eligible business is allowed for any three consecutive assessment years out of seven years (five years up to assessment year 2017-18) beginning from the year in which the eligible start up is incorporated.

Eligible business to be considered as the only source of income:

For the purpose of computing deduction under this section, the profits and gains of the eligible business shall be computed as if such eligible business were the only source of income of the assessee during the relevant previous years.

Defination of ‘Eligible Business’

Working towards

§ Innovation, development or improvement of a product, process or service and/or

§ Scalable business model with high potential of employment generation or wealth creation

(8) Compliance Regime based on Self-Certification

Regulatory formalities requiring compliance with various labour and environment laws are time consuming and difficult in nature. Often, new and small firms are unaware of nuances of the issues and can be subjected to intrusive action by regulatory agencies. In order to make compliance for Startups friendly and flexible, the process of conducting inspections shall be made more meaningful and simple. Startups shall be allowed to self-certify compliance (through the Startup mobile app) with 9 labour and environment laws.

In case of the labour laws, no inspections will be conducted for a period of 3 years. Startups may be inspected on receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior to the inspecting officer. In case of environment laws, Startups which fall under the ‘white category’ (as defined by the Central Pollution Control Board (CPCB)) would be able to self-certify compliance and only random checks would be carried out in such cases.

(9) Startup India Hub Launched

An all-India hub has been created as a single contact point for start-up foundations in India, which will help the entrepreneurs to exchange knowledge and access financial aid.

This Startup India Hub was inaugurated by Smt. Nirmala Sitharaman, Minister of State for Commerce and Industry on 19.06.2017. The Startup India Hub was operationalised on 01.04.2016, to resolve queries and provide handholding support to startups.

The Hub is an online platform for all stakeholders of the entrepreneurial ecosystem in India to discover, connect and engage with each other. The portal is hosting Startups, investors, funds, mentors, academia, incubators, accelerators, corporate, Government bodies and more. The Hub attempts to solve the problem of information asymmetry and lack of access to knowledge, tools & experts, especially in the nascent ecosystems across Tier II and III towns.

(10) Relaxed Norms of Public Procurement for Startups

Typically, whenever a tender is floated by a Government entity or by a PSU, very often the eligibility condition specifies either “prior experience” or “prior turnover”. Such a stipulation prohibits/impedes Startups from participating in such tenders.

In order to promote Startups, Government shall exempt Startups (in the manufacturing sector) from the criteria of “prior experience/turnover” without any relaxation in quality standards or technical parameters. The Startups will also have to demonstrate requisite capability to execute the project as per the requirements and should have their own manufacturing facility in India.

(11) Faster Exit for Startups

In the event of a business failure, it is critical to reallocate capital and resources to more productive avenues and accordingly a swift and simple process has been proposed for Startups to wind-up operations. This will promote entrepreneurs to experiment with new and innovative ideas, without having the fear of facing a complex and long-drawn exit process where their capital remain interminably stuck.

On appointment of the insolvency professional, the liquidator shall be responsible for the swift closure of the business, sale of assets and repayment of creditors in accordance with the distribution waterfall set out in the IBB.

(12) Tax Exemption on Investments above Fair Market Value (Removal of Angel Investment Tax)

Tax exemptions on investments above Fair Market Value (Angel tax) were introduced on 14.06.2016 for investments made in startups. The government has scrapped the so-called ‘angel investment tax’ on investors providing funding to start-ups.

Under the Income Tax Act, 1961, where a Startup (company) receives any consideration for issue of shares which exceeds the Fair Market Value (FMV) of such shares, such excess consideration is taxable in the hands of recipient as Income from Other Sources. This results into the tax being levied under section 56(2)(viib). Currently, investment by venture capital funds in Startups is exempted from operations of this provision. The same shall be extended to investment made by incubators in the Startups.

After obtaining the recognition as a ‘Start-up’ under the Start-up India Scheme, a Private Limited Company who complies certain specific conditions can apply for exemption of Angel Tax (Tax on Share Premium) under Section 56(2)(viib) of Income Tax Act.

No Action against ‘Start Up’s if its Valuation Report of Unquoted Shares is rejected by Assessing Officer

The Central Board of Direct Taxes (CBDT), clarified that no action will be taken against Start Ups if its valuation report of unquoted shares is rejected by the Assessing Officer. As per section 56(2)(viib) of the Income-tax Act, where a closely held company issues its shares at a price which is more than its fair market value, the amount received in excess of fair market value will be charged to tax in the hands of the company as income from other sources.

Clarification on assessment of start-up companies involving application of Section 56(2)(viib) of the Income Tax Act, 1961. [CBDT’s Circular No. 16/2019, dated 07.08.2019]

CBDT clarified that where the Startup Company has been recognised by the DPIIT but the case is selected under “limited scrutiny” on the single issue of applicability of section 56 (2)(viib), no verification on such issues will be done by the AOs during the proceedings under section 143(3)/ 147 of the Income Tax Act, 1961 and the contention of such recognized Startup Companies on the issue will be summarily accepted.

CBDT’s Circular No 16/2019, dated 07.08.2019

Subject : Clarification with respect to assessment of Startup Companies involving application of section 56(2)(viib) of the Income-tax Act, 1961—Reg.

Instances have come to the notice of the Board that notices u/s 143(2)/ 147 have been issued by the Assessing Officers in respect of Startup Companies, before the issue of notification of the Department for Promotion of Industry and Internal Trade (henceforth referred to as ‘DPIIT’) dated 19.02.2019 or even afterwards which are presently pending for disposal. These companies have been recognized by the DPIIT after the issue of their notification dated 19.02.2019.

2. The DPIIT vide notification no. G.S.R. 127(E), dated 19.02.2019, has laid down that the provisions of section 56(2)(viib) of the I.T. Act, 1961 shall not apply to any consideration received by a Startup Company, if the Startup Company fulfils the conditions mentioned in para 4(i) and 4(ii) of the said notification and is recognized by the DPIIT.

3. In pursuance of the above, the Central Board of Direct Taxes (CBDT) had issued notification no.13/2019/F.No. 370142/5/2018-TPL(Pt.)} dated 05th March, 2019 reiterating that the provisions of clause (viib) of subsection (2) of section 56 of the said Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the said consideration has been received from a person, being a resident, by a company which fulfils the conditions specified in para 4 of the notification dated 19.02.2019 issued by DPIIT.

4. In the light of the above, the following procedure is laid down with regard to the assessment of such startup entities involving the issue of section 56(2)(viib).

(i) Where the Startup Company has been recognised by the DPIIT but the case is selected under “limited scrutiny” on the single issue of applicability of section 56 (2)(viib), no verification on such issues will be done by the AOs during the proceedings under section 143 (3)/147 of the Income-tax Act, 1961 and the contention of such recognized Startup Companies on the issue will be summarily accepted.

(ii) Where the Startup Company has been recognized by the DPIIT but the case is selected under “limited scrutiny” with multiple issues or under “complete scrutiny” including the issue u/s 56(2)(viib), the issue of applicability of section 56(2)(viib) will not be pursued during the assessment proceedings and inquiry or verification with regard to other issues in such cases shall be carried out by the Assessing Officer, only after obtaining approval of his/her supervisory officer. Due procedure as per I.T. Act shall be followed with regard to other issues for which the case has been selected.

(iii) Where the Startup Company has not got DPIIT approval and the case is selected for scrutiny, inter alia on the grounds of applicability of section 56(2)(viib) or any other issue/s, then also inquiry or verification in such cases shall be carried out by the Assessing Officer, as per due procedure, only after obtaining approval of his/her supervisory officer.

Central Board of Direct Taxes (CBDT)’s clarified F. No. 173/14/2018-ITA.I, dated 06.02.2018

Subject : Determination of fair market value of unquoted equity shares of ‘Start Up’ companies under section 56(2)(viib) of the Income-tax Act read with Rule 11UA(2) of Income-tax Rules—Reg.

Section 56(2)(viib) of the Income-tax Act, 1961 (Act) provides that where a closely held company issues its shares at a price which is more than its fair market value, the amount received in excess of fair market value will be charged to tax in the hands of the company as income from other sources. Explanation to section 56(2)(viib) of the Act prescribes various methods for valuation of fair market value of shares of the closely held company. Among the various options for valuation of fair market value, one of the methods prescribed is based on fair market value of the unquoted equity shares as determined by a merchant banker or an accountant as per the Discounted Free Cash Flow Method.

2. It has come to the notice of the Board that in recent times, section 56(2)(viib) of the Act is being invoked in case of ‘Start Up’ companies by the Assessing Officers which has otherwise raised a genuine investment on the basis of their ‘idea’. It has been submitted that in tax-assessments, ‘Start Up’ companies invariably submit a valuation report from a merchant banker or an accountant based on Discounted Free Cash Flow Method as prescribed in Rule 11UA(2)(b) of Income-tax Rules, 1962. However, in assessments, such reports are not being accepted and rejected/modified by the Assessing Officers by treating them as based upon abnormal valuations resulting in additions being made u/s 56(2)(viib) of the Act in cases of ‘Start Up’ companies.

3. In view of the above, it has been decided that in case of ‘Start Up’ companies which fall within the definition given in Notification of DIPP, Min. of Commerce & Industry, in G.S.R. 501(E) dated 23.05.2017, if additions have been made by the Assessing Officer under section 56(2)(viib) of the Act after modifying/rejecting the valuation so furnished under Rule 11UA(2), no coercive measure to recover the outstanding demand would be taken. Further, in all such cases which are pending with the Commissioner (Appeals), necessary administrative steps should be taken for expeditious disposal of appeals, preferably by 31st March, 2018.

Startup India Seed Fund Scheme (SISFS) – Eligibility Criteria

MINISTRY OF COMMERCE AND INDUSTRY

(Department for Promotion of Industry and Internal Trade)

(STARTUP INDIA SECTION)

NOTIFICATION

New Delhi, the 21st January, 2021

S.O. 414(E).— The Central Government has approved the ‘Startup India Seed Fund Scheme (SISFS)’ to provide financial assistance to startups for proof of concept, prototype development, product trials, market entry and commercialization. SISFS shall provide financial assistance to startups via corpus of Rs. 945 Crore that will be disbursed through selected incubators across India in 2021-25.

2. The scheme is sector-agnostic and will support startups across all sectors. The scheme shall have a central common application on Startup India portal for startups and incubators on an ongoing basis.

3. SISFS will be implemented by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India.

4. The Guidelines of the above-mentioned scheme is available on the website of Startup India at https://www.startupindia.gov.in/.

5. Eligibility Criteria for Startups: The eligibility criteria for a startup to apply under the Startup India Seed Fund Scheme shall be as follows:

(1) A startup, recognized by DPIIT, incorporated not more than 2 years ago at the time of application

(2) Startup must have a business idea to develop a product or a service with market fit, viable commercialization, and scope of scaling

(3) Startup should be using technology in its core product or service, or business model, or distribution model, or methodology to solve the problem being targeted

(4) Preference would be given to startups creating innovative solutions in sectors such as social impact, waste management, water management, financial inclusion, education, agriculture, food processing, biotechnology, healthcare, energy, mobility, defence, space, railways, oil and gas, textiles, etc.

(5) Startup should not have received more than Rs 10 lakh of monetary support under any other Central or State Government scheme. This does not include prize money from competitions and grand challenges, subsidized working space, founder monthly allowance, access to labs, or access to prototyping facility

(6) Shareholding by Indian promoters in the startup should be at least 51% at the time of application to incubator for the scheme, as per Companies Act, 2013 and SEBI (ICDR) Regulations, 2018

(7) Any startup will not receive seed support more than once each as per provisions of guidelines.

6. Eligibility Criteria for Incubators: The eligibility criteria for an incubator to apply in the Startup India Seed Fund scheme are as follows:

(1) Incubator must be a legal entity:

(a) A society registered under the Societies Registration Act 1860, or

(b) A Trust registered under the Indian Trusts Act 1882, or

(d) A statutory body created through an Act of legislature

(2) Incubator should be operational for at least two years on the date of application

to the scheme

(3) Incubator must have facilities to seat at least 25 individuals

(4) Incubator must have at least 5 startups undergoing incubation physically on the

date of application

(5) Incubator must have a full-time Chief Executive Officer, experienced in business development and entrepreneurship, supported by a capable team responsible for mentoring startups in testing and validating ideas, as well as in finance, legal and human resources functions

(6) Incubator should not be disbursing seed fund to incubatees using funding from any third-party private entity

(7) Incubator must have been assisted by Central/State Government(s)

(8) In case the incubator has not been assisted by Central or State Government(s):

(a) Incubator must be operational for at least three years

(b) Must have at least 10 separate startups undergoing incubation in the incubator physically on the date of application

(9) Any additional criteria as may be decided by the Experts Advisory Committee (EAC).

7. Assistance to Incubators: Experts Advisory Committee (EAC) shall evaluate incubators for grant assistance. A Grant of up to Rs. 5 (five) crore would be provided to a selected incubator in milestone-based three (or) more installments. The exact quantum of grant and instalments for each incubator will be decided by the Experts Advisory Committee (EAC) based on its evaluation

8. Disbursement of Seed Fund to Startups by Incubators: Seed Fund to an eligible startup by the incubator shall be disbursed as follows:

(i) Up to Rs. 20 Lakhs as grant for validation of Proof of Concept, or prototype development, or product trials. The grant shall be disbursed in milestone-based installments. These milestones can be related to development of prototype, product testing, building a product ready for market launch, etc.

(ii) Up to Rs. 50 Lakhs of investment for market entry, commercialization, or scaling up through convertible debentures or debt or debt-linked instruments

(iii) Seed fund shall strictly not be used by startups for creation of any facilities and shall be utilized for the purpose it has been granted for

9. Constitution of Experts Advisory Committee: An Experts Advisory Committee (EAC) will be constituted by DPIIT, which will be responsible for the overall execution and monitoring of the Startup India Seed Fund Scheme. The EAC will evaluate and select incubators for allotment of Seed Funds, monitor progress, and take all necessary measures for efficient utilization of funds towards fulfilment of objectives of Startup India Seed Fund Scheme. The Experts Advisory Committee (EAC) will comprise of the following members:

(1) Chairman, an individual of eminence

(2) Financial Advisor, DPIIT or his representative

(3) Additional Secretary/ Joint Secretary/ Director/ Deputy Secretary, DPIIT (Convener)

(4) Representative of Department of Biotechnology (DBT)

(5) Representative of Department of Science & Technology (DST)

(6) Representative of Ministry of Electronics and Information Technology (MeiTY)

(7) Representative of Indian Council of Agricultural Research (ICAR)

(8) Representative of NITI Aayog

(9) At least three expert members nominated by Secretary, DPIIT from the startup ecosystem, investors, experts in the domain of R&D, technology development and commercialization, entrepreneurship and other relevant domains.

10. Selection of Incubators:

10.1 Online Applications will be invited from incubators across India to participate in the scheme on https://www.startupindia.gov.in or any other platform specifically designated for the purpose.

Incubators shall be selected on the basis of the following parameters:

(a) Fulfillment of eligibility criteria

(b) Quality of the team of Incubator

(d) Composition of ISMC (as defined in para 7)

(e) Incubation support provided by incubator in last three years:

(i) No. of startups incubated

(ii) No. of startups graduated, i.e. progressed from one stage of business

development cycle to the next

(iii) No. of startups that raised follow on investments

(iv) No. of startups that crossed a revenue of Rs 1 Cr in last 1 year

(v) 2-year survival rate of startups from the date of joining incubator

(f) Funding support extended to incubatees in last three years:

(i) Investment agreements signed between incubator and startups of startups invested in

(ii) No. of startups invested in

(iii) Total corpus allocated to incubatees

(iv) Total investments raised by incubatees from external sources

(g) Mentoring provided to incubatees in last three years:

(i) No. of mentors hired

(ii) Average mentoring hours allocated per startup per month

(iii) No. of IP (patents, copyrights, designs, and trademarks) registered by incubatees

(h) Other support extended to incubatees in last three years:

(i) Industry/Corporate connects

(ii) Events held for stakeholder engagements

(iii) Participation in other events

(i) Number of startups that the incubator intends to support

(j) Quantum of funds applied for, along with fund deployment plan with timelines

(k) Any other relevant parameters that decided by the EAC

10.2 The Call for Applications for incubators will be open online throughout the year

10.3 Experts Advisory Committee (EAC) will convene at least quarterly to:

(1) Evaluate the applications received during the period

(2) Select incubators for funds under the Scheme

(3) Decide the total amount of fund and number of installments in which it is to be allocated to each incubator

(4) Specify milestones to be achieved by each incubator for release of installments

10.4 EAC shall also monitor progress of incubators against sanctioned funds under the Scheme and take further actions as may be required

10.5 EAC may lay down improved guidelines for selection of incubators under the scheme from time to time

Selection of Startups

11.1 Each of the incubators applying for the Startup India Seed Fund Scheme will constitute a committee called the Incubator Seed Management Committee (ISMC), consisting of experts who can evaluate and select startups for seed support. The composition of ISMC would be as follows:

(i) Nominee of Incubator (Chairman)

(ii) Representative from State Government’s Startup Nodal Team

(iii) Representative of a Venture Capital Fund or Angel Network

(iv) A domain expert from Industry

(v) A domain expert from academia

(vi) Two successful Entrepreneurs

(vii) Any other relevant Stakeholder

The final composition and members of ISMC of each incubator shall be approved by EAC and will be a critical parameter in selection of incubators.

11.2 The startups shall be selected through an open, transparent and fair process, comprising, inter-alia:

(i) An online call for applications shall be hosted on an ongoing basis on the Startup India portal

(ii) Applicants can apply for seed fund to any three incubators selected as disbursing partners for this scheme in order of their preference

(iii) All applications received will be shared online with respective incubators for further evaluation

(iv) The applicant may be asked to submit details on team profile, problem statement, product/service overview, business model, customer profile, market size, quantum of funds needed, projected utilization plan for funds, etc.

(v) The incubators shall shortlist applicants as per eligibility criteria given in the guidelines.

(vi) Eligible applications will be evaluated by ISMC using the following criteria:

	Criteria	Details	Weightage (%)
1	Is there a need for this Idea?	Market size, what market gap is it filling, does it solve a real-world problem?	P
2	Feasibility	Feasibility and reasonability of the technical claims, methodology used/ to be used for PoC and validation, roadmap for product development	q
3	Potential Impact	Customer demographic & the technology’s effect on these, national importance (if any)	r
4	Novelty	USP of the technology, associated IP	s
5	Team	Strength of the team, Technical and business expertise	t
6	Fund Utilization Plan	Roadmap of money utilization	u
7	Additional Parameters	Any additional parameters considered appropriate by incubator	v
8	Presentation	Overall assessment	w
			100%
Weightages for criteria (p, q, r, s, t, u, v, w) may be assigned by each incubator differently

(vii) Incubator may shortlist applicants based on their evaluation for a presentation before ISMC

(viii) ISMC shall evaluate applicants based on their submissions and presentations and select startups for Seed Fund within 45 days of receipt of application

(ix) All incubators shall provide information about progress of evaluation of startups real-time to Startup India portal

(x) Selected startups shall receive seed funding under the respective incubator that selects them as beneficiaries as per their preference shared during application (for example, if incubators at Preference 1 and Preference 2 both select a startup, the funding shall be given by Preference 1 incubator. If Preference 1 incubator rejects and Preference 2 incubator selects, the funding shall be given by incubator at Preference 2, and so on.)

(xi) All applicants will be able to track the progress of their application on the Startup India portal on a real-time basis

(xii) Applicants who are rejected will also be notified through email

(xiii) An applicant, if rejected once, may apply afresh

11.3 EAC may lay down improved guidelines for selection of startups under the scheme from time to time

12. The Department shall evaluate the outcome of the scheme by the end of 2024-25, especially with reference to financial, social and economic returns.

Where assessee a newly startup company received share capital and share premium amount from several parties and furnished all necessary details such as confirmation of parties, copy of ITR, copy of bank statement of parties along with their balance sheet, share certificate, etc. so as to prove identity and creditworthiness of parties and genuineness of transactions and, further, all transactions were carried out through banking channel, impugned addition made on account such share capital and premium under section 68 was unjustified

Section 68 of the Income-tax Act, 1961 - Cash credit (Share capital and share premium) - During year, assessee company had issued 40,00,000 equity shares having face value at Rs. 10 and share premium at Rs. 90 per share and received share capital and share premium of certain amount. Assessing Officer was of view that assessee being a newly start-up company, having no experience in line of its business, failed to prove valuation of shares at Rs. 100 based on cogent reason - Accordingly, he treated share capital and premium amount received by assessee as unexplained cash credit under section 68 and, accordingly, made additions. It was noted that admittedly assessee had furnished necessary details such as confirmation of parties, copy of ITR and bank statement of parties along with their balance sheet, share certificate, etc. in support of identity and creditworthiness of parties and genuineness of transaction. Further, all transactions were carried out through banking channel. Details filed by assessee were cross verified by revenue from respective parties and no infirmity was pointed out in same. Further, assessee had received a sum as share capital from some of these parties in earlier assessment year also which was accepted by revenue. On perusal of financial statement of assessee it was also noted that intrinsic value of share of assessee was much more than value at which it had issued shares at premium. On facts, impugned addition made on account of share capital and share premium amount received by assessee was unjustified and same was to be set aside. [In favour of assessee] (Related Assessment year : 2010-11) – [DCIT(C), Aurangabad v. Mahalaxmi TMT (P) Ltd. (2021) 128 taxmann.com 396 (ITAT Pune)]

INCOME TAX

Tuesday, 7 September 2021

Benefits available under Startup India Scheme

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