Section 80-IAC was inserted vide Finance Act, 2016 as an exception to the Government's policy of phasing out profit-linked deduction for promoting start-ups during their initial years of operation. As per the provisions of Section 80-IAC, the Startups are allowed 100% tax holiday on their income tax for three consecutive years out of seven years from the year of its incorporation.
What is the procedure to apply for Income Tax exemption ?
- Create a Login on the Startup India Website.
- Apply for "Startup Recognition" online which is the pre-requisite for making subsequent application for tax holiday. On successful validation and approval of application, the Startup shall receive a "Certificate of Recognition" with DIPP Number.
- Now if you are a Private Limited Company or LLP incorporated after 1.4.2016, you are eligible to avail tax holiday subject to approval from IMB ( Inter-ministerial Board ) and the next milestone shall be to make an application u/s 80-IAC online from the said Login.
- The application shall be tested for uniqueness, innovation, scalability and importance of sector and other parameters by the "Technical Agency" who shall put up the case in the next meeting of the IMB. Before this stage, if some clarification is required to be sought, the application is moved for resubmission and the query is communicated through email. Each Startups gets 3 chances of resubmissions including the first application made.
- On approval from IMB in its meeting comprising of various officials, a "Certificate of Eligibility" is issued to the Startup or the application is rejected.
- The details of Startup Application viz DIPP No. and Tax benefit Certificate details is to be feed into ITR at the time of claiming exemption.
What are the Ideal documents required to be furnished along with application u/s 80-IAC
- Link to a 2-minute video covering the following aspects:
- Brief about what your startup does or is planning to do
- Showcase the working of the prototype/proof-of-concept developed by you (this can be the demo of product or application developed)
- Market traction that your product/service has generated till now (if your product/service has already been launched in the market)
- Video should be uploaded on third party video platform such as Youtube or Vimeo and link of the same should be shared in the application form. Google drive links with request for access are not valid.
- MOA/LLP Deed as applicable
- Updated financial statements (Balance Sheet, Profit & Loss statement, Income Tax Returns) for the past three years from the year of incorporation
- Pitch deck. The pitch deck must ideally cover the following:
- Information about the product/service offering of your startup
- Number of people employed by your startup, financial projections and funding raised, if any
- Credentials of Founders/Management
- Screenshots/images of your product/website and website link.
At the time of writing of this article, a total of 24657 Startups are granted Startup recognition and out of the same, only 221 Startups are granted eligibility certificate for tax exemption. The low number is justified in view of the outlook of the present Government to tackle black money as in the past such profit based incentives have utilised to devise schemes to introduce unaccounted money into the books.
It can also be presumed many Startups being in their Ideation stage or initial years of business would have been late in finalisation of annual accounts and considering the fact that the due date for tax audit was also extended to 31st October 2019, in my opinion, the numbers will soar further high in the coming months and each Startup should be encouraged to apply for this benefit as it would also mean that their Investors can expect a much greater IRR due to tax savings.
Mehul Shah is a partner of the firm Rasesh Shah and Co based out of Surat. A practising Chartered Accountant by profession, he has amongst the few to have secured an All India Rank in all the three levels of CA as well as CMA. He started with Tax Litigation at the age of 22 and has many landmark Income Tax Judgements to his credentials. His blog, during demonetisation titled "Open Letter to Arvind Kejriwal" had become viral and was read by more than 10 lakh viewers and was featured on Yahoo home page, Indiatimes, Indian Express, First Post and many other journals and blogs.
At present, he is handholding many Startups as a mentor at iKoVerk Coworking which is the largest Coworking Space in South Gujarat. He has acted as authorised representatives for many Startups and been instrumental in getting 100+ Startups recognised under the Startup India Scheme and also assist them avail 3 years tax exemption. He has authored a book on Angel tax which is available on Amazon Kindle. He loves Travelling and also writes Travel Blogs!