Tax Benefits to Start Ups and its Computation

Representative image. REUTERS/Anindito Mukherjee

Representative image. REUTERS/Anindito Mukherjee

The Government of India has introduced various schemes and incentives under the aegis of Start-Up India program to create a supportive start-ups ecosystem in India

Start-Ups are not just for the entrepreneurs who give life to their vision; in a state of poverty and unemployment, start-ups apart from injecting revenue in the economy also create jobs. In Budget 2016 and 2017, keeping the contribution of start-ups in mind, the Government of India has introduced various schemes and incentives under the aegis of Start-Up India program to create a supportive start-ups ecosystem in India.

However being a start-up is not a cakewalk and start-up enthusiasts are often not aware of the benefits they can avail under various government schemes as well as how the income is computed and what is the rate of Income tax levied. Let us take you through these one by one.

I. Tax Benefits for Start-Ups by the Govt.

When the Govt. announced Budget 2016 it also announced 100% Tax Deduction on paying income tax for eligible start-ups under section 80-IAC. This benefit is available to start-ups started between 1st April 2016 and 1st April 2019 for any 3 consecutive years.

The discretion to choose the 3 consecutive years from the first 7 years lies with the start-up itself wherein the start-up is allowed 100% tax exemption.

It is noteworthy that such 100% tax exemption is available only to eligible start-ups.

A start-up has to comply to certain criteria to be categorized as an eligible start-up. An eligible start-up is the one which was incorporated as a company or partnership or a proprietorship (not by restructuring or breaking up a business already in existence) between 1st April 2016 to 1st April 2019, whose total business turnover doesn’t exceed ₹25 Crores. This start up has to be certified as an Eligible Business by the Inter-Ministerial Board of Certification.

According to the government, an Eligible Business is the one which involves developing and commercializing new products or process or services driven by technology or intellectual property or significantly improving existing products or processes or services that create or add more value to the end-customers or the workflow.

II. Computation of Income for Start-Ups

Income for Start-ups is calculated in two ways :

The first method for computation of Income for Start-ups is by deducting the expenditure from the sales revenue of Start-ups. Total Revenue is not considered as Income for these start-ups. The Income calculation in the first method is calculated like this:

Income = Sales Revenue(i.e. total value of goods/services sold/provided)

Less : Expenses (i.e. any expenditure incurred to help sale of goods and services)

Less : Depreciation (wear and tear that reduces the value and efficiency of the assets)

At times it becomes tedious and difficult for a early stage start up to keep a meticulous record of its sales, expenses, etc. along with their receipts and invoices, so to facilitate such start-ups Govt. started the scheme of Presumptive Scheme of Taxation, applicable to Hindu Undivided Family, individual proprietors and partnership firms but not companies, whereby the income had to be disclosed in the following manner:

Income for Professionals = 50% of value of Services provided

Income for Businesses = 8% of total value of Goods sold

Rate of Income Tax for Start-Ups:

The rate of tax applicable for the Start-Ups is calculated as per the type of business whether it’s a proprietorship firm, a partnership firm or a registered company:

Type of business Rate of Tax applicable

Proprietorship / Individual As per income tax slab rates

Partnership / LLP 30% of the income

Indian company 25% of the income

The income tax returns are filed in any of the forms from ITR3 to ITR 6 depending upon the manner of computation of income. For Presumptive scheme of taxation ITR Form 4 i.e. ITR-4 is used and for Income calculated according to the revenue, deduction of expenses and depreciation method, ITR-3 / ITR-5/ ITR-6 / ITR-7 could be used depending upon the nature of business.

The last date for filing returns is July 31st or September 30th every year.

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