What are the tax exemptions offered under DPIIT registration?

The Startup India initiative, launched by the Government of India, aims to nurture innovation and entrepreneurship by offering a range of benefits to startups. One of the most significant advantages comes in the form of tax exemptions provided to startups that are officially recognized under the Department for Promotion of Industry and Internal Trade (DPIIT), formerly known as the Department of Industrial Policy and Promotion (DIPP). This article discusses the tax exemptions available under DPIIT registration and how startups can leverage them to fuel growth.

DPIIT Registration and Startup India

DPIIT registration, also known as DPIIT recognition or DIPP registration, is a formal certification granted to startups that meet certain criteria. This recognition provides startups with a Startup India certificate, making them eligible for various benefits, including tax incentives, access to government schemes, and easier regulatory compliance. The purpose of these benefits is to support young companies, boost entrepreneurship, and encourage innovative solutions to pressing problems.

Eligibility for DPIIT Recognition

Before we explore the tax exemptions, it is essential to understand which startups are eligible for DPIIT recognition:

1. Legal Structure: The startup should be registered as a Private Limited Company, a Registered Partnership Firm, or a Limited Liability Partnership (LLP).

2. Age of the Startup: The entity should not be older than ten years from its date of incorporation.

3. Annual Turnover: The annual turnover of the startup must not exceed ₹100 crores in any of the previous financial years.

4. Purpose and Innovation: The startup should be engaged in activities that drive innovation, development, improvement of products or services, or processes. It must also have the potential to generate employment or create wealth.

5. Original Entity: The startup should not be formed by splitting up or reconstructing an existing business.

Once a startup meets these criteria and obtains DPIIT recognition, it becomes eligible for several tax exemptions designed to encourage growth and reduce financial stress.

Tax Exemptions Under DPIIT Registration

1. Income Tax Exemption Under Section 80-IAC

One of the most significant tax benefits offered under DPIIT registration is the income tax exemption under Section 80-IAC of the Income Tax Act.

(A) What It Offers: Eligible startups are exempted from paying income tax on profits for three consecutive financial years out of the first ten years since incorporation.

(B) Eligibility: To qualify, the startup must be a Private Limited Company or an LLP incorporated on or after April 1, 2016. It should also have a turnover of less than ₹100 crores in any financial year.

(C) Application Process:

• The startup must first obtain DPIIT recognition through the Startup India portal.
• It then needs to apply for the tax exemption separately by filing Form 80-IAC.
• The application must include supporting documents, such as audited financial statements and a detailed business plan.
• The Inter-Ministerial Board (IMB) reviews the application and, if satisfied, grants the exemption.

Benefits: This exemption allows startups to reinvest their earnings into business growth without the financial burden of income tax. It provides a crucial financial cushion during the initial, often cash-strapped, years of the startup journey.

2. Exemption from Angel Tax Under Section 56(2)(viib)

Another major tax relief for DPIIT-registered startups is the exemption from Angel Tax, which is levied on the premium amount received on the issuance of shares.

What It Covers: Angel Tax is a tax on the difference between the fair market value of shares and the price at which they are issued to investors. It is imposed under Section 56(2)(viib) of the Income Tax Act. DPIIT-recognized startups are exempt from this tax.

Eligibility:

• The startup must have DPIIT recognition.
• The aggregate paid-up share capital and share premium of the startup post-issuance should not exceed ₹25 crores.
• The startup should not be investing in assets like residential properties, loans, or shares of other companies.

Application Process:

• The startup must submit a declaration in Form 2 to DPIIT, affirming compliance with the conditions laid out for the exemption.
• Upon approval, the startup can raise funds from angel investors without the risk of being taxed on the premium amount.

Benefits: This exemption helps startups secure angel investments without worrying about unfair taxation, thereby facilitating greater access to early-stage funding.

3. Exemption on Long-Term Capital Gains Under Section 54EE

Section 54EE provides relief on long-term capital gains if the gains are invested in a fund notified by the Central Government.

• What It Offers: Capital gains tax exemption on the amount invested in the specified fund, up to ₹50 lakhs. The investment must be made within six months from the date of the transfer of the original asset.
• Holding Period: The investment must be held for a minimum of three years. If withdrawn before three years, the exemption will be revoked.

Benefits: This exemption incentivizes the reinvestment of capital gains into the startup ecosystem, encouraging more investments in innovative ventures.

4. Exemption on Capital Gains from Residential Property Under Section 54GB

This exemption applies to individuals who sell residential property and invest the capital gains in an eligible startup.

What It Offers: Exemption from capital gains tax if the proceeds from the sale of residential property are invested in a DPIIT-registered startup.

Conditions:

• • The startup must hold more than 50% of the share capital or voting rights post-investment.
  • The startup must use the funds to purchase new assets and should not transfer or sell these assets within five years of acquisition.

Benefits: This provision encourages investment in startups by allowing individuals to redirect their real estate gains into entrepreneurial ventures, thus supporting the startup ecosystem.

How to Obtain DPIIT Recognition and Startup India Certificate

1. Register on the Startup India Portal: Create an account and fill out the required details.

2. Submit Application for DPIIT Recognition: Provide information about the business, including its incorporation details, the nature of innovation, and how it creates employment.

3. Receive Startup India Certificate: Once the application is reviewed and approved, the startup receives its DPIIT recognition and Startup India certificate, enabling access to tax benefits and other perks.

Conclusion

DPIIT registration offers substantial tax exemptions that can significantly alleviate the financial burden on startups. From income tax deductions under Section 80-IAC to exemptions from Angel Tax, these incentives play a crucial role in promoting innovation and entrepreneurship. By taking advantage of these benefits, startups can channel their resources into scaling their operations and creating impactful solutions.