Whenever startup founders talk about their product or service, you can sense a great excitement in their voice, but it dips down as soon as the focus is shifted towards legal and tax implications.
Often, the founders put taxes on the back burner as the rest of the business develops. By the time they realise its importance, penalties become too severe. Not only this, they can be deprived of some tax benefits that are available otherwise and help a business to multiply.
Here are 4 important points I wish startup founders know about income taxes so that they can plan and comply accordingly and escape from tax penalties while availing the benefits smoothly –
Only “eligible” startups can enjoy the tax holiday of 3 years, i.e. 100% tax rebate on the profit for 3 consecutive years out of a block of 7 years. “Eligible” Startups mean –
a) Incorporated as Private Limited Company or Limited Liability Partnership Firm,
b) The annual turnover of less than Rs. 25 crores in all the financial years,
c) Not formed by splitting up or reconstructing already existed business,
d) Incorporated or registered in India for less than 7 years (10 years in case of biotechnology startups) from the date of incorporation,
e) Certified by Inter-Ministerial Board,
f) Aims to work towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property
According to income tax rules, all the companies, partnership firms, and LLPs have to file the income tax returns compulsorily, even if they don’t earn any profits. As such, all the eligible startups have to submit the tax returns compulsorily.
The “ineligible” startups, i.e. startups who don’t meet the conditions mentioned above should also submit the tax returns to avail the hidden tax benefits –
a. Carry forward the losses to next years – Every startup hits the loss during initial years. This loss can become tax shield in the upcoming years when it starts generating profits. But for these losses to save taxes, it is compulsory to file the income tax returns.
b. Convenience in getting loans – Before approving loans, banks ask for the proof of income, and that’s when income tax returns come in handy. Usually, banks ask for 3 years’ income tax returns as proof of income.
Some founders create a perception that income tax and GST are related tax laws and can be claimed against each other. This is a myth. They both are different tax laws having different implications and provisions. Tax paid in one law can’t be claimed against the tax liability of other law.
It may not be feasible for the founders to avail the services of professional tax consultants for all tax matters. Hence they should keep these small points in mind to enjoy tax-tension-free entrepreneurship life.