Startup India Vision 2024: Income Tax Rebate for Founders who Sell their Properties

Aspiring entrepreneurs often sell their residential properties to support their startup ventures and keep it moving. However, according to Income Tax Act of India, capital gain on transfer of house property results in a tax liability. Seeing this as one of the much needed reforms, the Department for Promotion of Industry and Internal Trade (DPIIT) has proposed relaxation -- as part of 'Startup India Vision 2024' -- in the income tax laws pertaining to sale of residential properties and carrying forward of losses, reported Economic Times citing sources privy to the developments.

There exist a Section 54GB (w.e.f. 1st April, 2013), wherein capital gain on transfer of residential property not to be charged in certain cases that include -- Relief from long-term capital gains tax on transfer of residential property and 2) If sale consideration invested in a manufacturing small or medium enterprise.

DPIIT has recommended amendments in Section 54GB and Section 79 (carry forward and set off of losses in case of certain companies) of the Income Tax Act in order to promote growth of budding entrepreneurs, who face difficulty in raising finances.

Prepared by the DPIIT for the new government, the proposal also includes setting up of 500 new startup incubators and accelerators by 2024, 100 innovation zones in urban local bodies and expanding CSR funding to incubators.

DPIIT also proposed to facilitate setting up of 50,000 new start-ups in the country by 2024 and creating 20 lakh direct and indirect employment opportunities.

Besides, DPIIT also suggested to deploy of entire corpus of Rs 10,000 crore Startup Fund of Funds announced in 2016 and yet to have a clarity on its disbursement after three years or so.

Everything about Govt's New Expanded Definition of 'Startup' and 'Angel Tax' Exemptions

In order to address issues faced by start-up ventures in India including angel tax woes, which led to protest by startups as well as investors in the country, government has widened the definition of startups that include increasing the time period for such ventures to be treated as startups, increasing the turnover criteria and also raising the tax exemption limit for investments made.

In a nutshell, below are the changes made for startups in India to feel breather -

An entity shall be considered a startup up to 10 years from its date of incorporation instead of the existing period of 7 years.

A company can be called as a 'Startup' even if its turnover for any of the financial years since its incorporation hasn’t exceeded ₹ 100 crore instead of the existing cap of ₹ 25 crore.

The considerations of shares received by eligible startups for shares issued or proposed to be issued by all investors shall be exempt up to an aggregate limit of ₹ 25 crore.

For being eligible for exemption under Section 56(2)(viib), a startup should not be investing in immovable property, transport vehicles above
₹ 10 Lakh, loans and advances, capital contribution to other entities and some other assets except in the ordinary course of its business.

A startup shall also be eligible for exemption under Section 56(2)(viib) if it is a private limited company recognised by the department for promotion of industry and internal trade (DPIIT) , formerly DIPP, and is not investing in specified asset classes.

Eligible startups only have to file a duly signed self-declaration by with DPIIT for availing exemption. DPIIT, formerly DIPP, shall transmit these declarations to Central Board of Direct Taxes (CBDT).

The valuation of shares is no more a criterion for exemption of investments into eligible startups under Section 56(2)(viib) of Income Tax Act. This means that now would be No requirement of making any application for exemption under this section and there will be no case-to-case examination of startups for exemption under Section 56(2)(viib) of Income Tax Act.

Introduced in 2012, Section 56(2)(viib) -- commonly referred as 'Angel Tax' -- of the Income Tax Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.

Govt To Remove Tax Hurdles For Angel Funding In Startups

In the start of fresh new year of 2018, government is condering removing tax hurdles for angel investment in startups.

Till now, startups receiving funding from angel investors are being levied Angel Tax -- 30% tax as income from other sources -- which in fact is hurting the Indian startups' funding for last one and half year and even slow down the investment in startups.

The continous complaint from Indian startup ecosystem has now forced Department of Industrial Policy and Promotion (DIPP) to take this tax regime confusion issue with SEBI and reconsider or relax some of the rules that is causing fall in funding of early age startups in India.

In addition, the issue of tax rules has also been taken up with the finance ministry, amid indications that the concerns may be addressed in the Budget at a time when the government is keen to revive investments in the economy and spur job creation.

The above development was first reported in Times of India.

Although, in June 2016, the Central Board of Direct Taxes (CBDT) said capital raised by startups from domestic angel investors will not be taxed as income even if the investment was more than the fair market value of the shares. It however come with a tricky clause that only those startups will be exempted from tax that meet certain conditions laid down by the DIPP, which now makes it mandatory for them to be certified as "startups" to claim an exemption. So far, seven companies have been recommended by the department for tax benefits under the startup policy, while there are at least 150 that are claiming the benefits of the policy.

In September 2016, Minister of state for commerce industry had told media that out of 3,576 startups recognized by DIPP only 67 startups have been given tax exemption (not to be confused with Angel Tax).

Govt To Remove Tax Hurdles For Angel Funding In Startups

In the start of fresh new year of 2018, government is condering removing tax hurdles for angel investment in startups.

Till now, startups receiving funding from angel investors are being levied Angel Tax -- 30% tax as income from other sources -- which in fact is hurting the Indian startups' funding for last one and half year and even slow down the investment in startups.

The continous complaint from Indian startup ecosystem has now forced Department of Industrial Policy and Promotion (DIPP) to take this tax regime confusion issue with SEBI and reconsider or relax some of the rules that is causing fall in funding of early age startups in India.

In addition, the issue of tax rules has also been taken up with the finance ministry, amid indications that the concerns may be addressed in the Budget at a time when the government is keen to revive investments in the economy and spur job creation.

The above development was first reported in Times of India.

Although, in June 2016, the Central Board of Direct Taxes (CBDT) said capital raised by startups from domestic angel investors will not be taxed as income even if the investment was more than the fair market value of the shares. It however come with a tricky clause that only those startups will be exempted from tax that meet certain conditions laid down by the DIPP, which now makes it mandatory for them to be certified as "startups" to claim an exemption. So far, seven companies have been recommended by the department for tax benefits under the startup policy, while there are at least 150 that are claiming the benefits of the policy.

In September 2016, Minister of state for commerce industry had told media that out of 3,576 startups recognized by DIPP only 67 startups have been given tax exemption (not to be confused with Angel Tax).

Budget 2017 - Startups To Get Additional Tax Benefits

While every industry is looking forward to Budget 2017, scheduled to be unveiled on February 1 by Indian Finance Minister, Arun Jaitely, here's some good news coming the Startup industry's way.

A recent statement made by India's Commerce and Industry Minister Nirmala Sitharaman indicates that startups in India might be getting additional tax benefits in the forthcoming budget. Talking about how tax and tax related matters affect startups and their journeys, Sitharaman said, "it makes tangible difference to a start-up, and in that some work has happened, more to be happening. Let's see what this budget is going to offer".

A few weeks back, we had also reported about how the Commerce and Industry ministry had suggested the finance ministry to consider raising the tax relief window for startups from the current 3 years period to 7 years so as to encourage more and more entrepreneurs to test the startup waters.

Sitharaman also mentioned that her ministry keeps on receiving suggestions on tax and tax-related matters from the startups, which it meticulously compiles and hands over to the finance ministry. She also mentioned that she is sure that the finance ministry will look into the suggestion the Commerce and Industry ministry gave on raising the tax holiday for startups. Emphasising on the procedure, Sitharaman said that all the tax related benefits will have to come through the budget only. She also added, that her ministry has also put forth suggestions with regards to freeing startups from the obligation of MAT (minimum alternate tax). Further, the Commerce and Industry Minister also said that the government at the centre is making sure that it removes all the legislative hurdles being faced by the startups. The Centre has in fact also got the local authorities, including the states, involved in helping the budding entrepreneurs in all the local tax related issues among others.

Speaking at the first anniversary of Start Up India in New Delhi, Sitharaman also mentioned that she had recently asked DIPP secretary Ramesh Abhishek to arrange a meeting with RBI, SIDBI, banks and VCs so as to deliberate with them all the funding related issues being faced by the startups.

Speaking on the occasion, Abhishek said that the Indian startups are currently in need of more support in terms of taxation and infrastructure from the central government. He also added that the state governments should also join-in in providing full support to the units in the country. While a lot of states have already come up with startups specific policies, more states need to follow suit. "We are also involving corporates and banks to support start-ups... nothing is casting stone and we can rework at the definition of start-ups," said the DIPP secretary.

Highlighting his department's efforts towards the Indian startup ecosystem, Abhishek mentioned that the DIPP is currently meticulously working towards extending easy funding facilities to startups in the country, in addition to providing them with a suitable environment.

During the event, Sitharaman encouraged the startups/entrepreneurs in India to focus their interests on areas like waste management, aggregation of fuel, veterinary science and animal husbandry etc. and help in making the existing cities smart. She said, "These are the areas where we want start-ups to work on. I want them to look at how we can make our existing cities smart."

The Startup India initiative was launched last year by the Modi government to encourage entrepreneurship in the country. Launched by the Prime Minister himself, the much-talked about initiative laid down the blueprint for creation of a more conducive ecosystem for the growth of startups in the country. As a part of the initiative, a virtual hub that will serve as a one-stop solution platform for all startup related queries in addition to doubling up as a meeting ground for investors, incubators and startups is also in the process.

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