Lok Sabha Question No. 4080 (UNSTARRED), answered on 2020-03-18
Subject: Tax Exemption to Startup Companies
Ministry: COMMERCE AND INDUSTRY
Asked by: Sumedhanand Saraswati

## GOVERNMENT OF INDIA MINISTRY OF COMMERCE & INDUSTRY

## DEPARTMENT FOR PROMOTION OF INDUSTRY AND INTERNAL TRADE

## LOK SABHA

## UNSTARRED QUESTION NO. 4080.

TO BE ANSWERED ON WEDNESDAY, THE  18 TH   MARCH, 2020.

## TAX EXEMPTION TO STARTUP COMPANIES

## 4080.  SHRI SUMEDHANAND SARASWATI:

## Will the Minister of COMMERCE AND INDUSTRY be pleased to state: वाणिज्य एवं उद्योग मंत्री

- (a) whether  the  Government  has  fixed  any  target  to  give  tax  exemption  to startups  with  a  view  to  provide  employment  opportunities  for  the  country's youth;
- (b) if so, the details of various startup schemes;
- (c) whether the Government has allocated any budget for the startups; and
- (d) if  so,  the  fund  allocated  by  the  Government  for  this  purpose  along  with  the State-wise details thereof?

## ANSWER वाणिज्य एवं उद्योग मंत्री (श्री पीयूष गोयल) THE MINISTER OF COMMERCE & INDUSTRY (SHRI  PIYUSH GOYAL)

- (a) & (b): No, Sir. The Government has not fixed any target to give tax exemption to  startups.  However,  provisions  for  tax  exemptions  to  startups  have been made, details of which are annexed at Annexure - I
- (c) & (d): Government  of  India  has  established  a  Fund  of  Funds  for  Startups (FFS) with corpus of Rs. 10,000 crores, to meet the funding needs of startups. DPIIT is the monitoring agency and Small Industries Development Bank of India (SIDBI) is the operating agency for FFS. The total corpus of Rs. 10,000 crores is envisaged to be provided over the 14 th and 15 th Finance Commission cycles based on progress of the scheme and availability of funds. As on 18 th February 2020, SIDBI has committed Rs 3123.20 crore to 47 SEBI registered Alternative Investment  Funds  (AIFs).  These  funds  have  raised  a  corpus  fund  of Rs.  25,728  crore.  Further,  the  AIFs  have  invested  a  total  of  Rs. 3,378.47  crore  into  320  startups  out  of  which  Rs.  912.91  crore  have been drawn from Fund of Funds for Startups. Fund of Funds does not directly  invest  into  startups  but  provides  capital  to  SEBI-registered Alternate Investment Funds (AIFs), known as daughter funds, who in turn invest money in growing Indian startups through equity and equitylinked instruments. Thus, there is no direct fund allocation from DPIIT to States/UTs under Startup India initiative.

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## ANNEXURE REFERRED TO IN REPLY TO PARTS (a) & (b) OF THE LOK SABHA UNSTARRED QUESTION NO. 4080 FOR ANSWER ON 18.03.2020.

## Details of Tax exemptions under Startup India initiative

## i. Income Tax Exemption on profits under Section 80-IAC of Income Tax Act

A  DPIIT  recognized  startup  shall  be  eligible  for  full  deduction  on  the profits and gains from business for any three consecutive years out of seven  years  from  the  year  of  incorporation  of  startup  provided  the "eligible start-up", a company or a limited liability partnership engaged in eligible business, fulfils the following conditions: -

(a) it is incorporated on or after the 1st day of April 2016 but before the 1st day of April 2021;

(b) the total turnover of its business does not exceed twenty-five crore rupees  88[in  the  previous  year  relevant  to  the  assessment  year  for which deduction under sub-section (1) is claimed]; and

(c)  it  holds  a  certificate  of  eligible  business  from  the  Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government;

There  have  been  further  amendments  to  this  under  the  Finance  Bill 2020, through which the provision for a deduction of an amount equal to 100% of the profits and gains derived from an eligible business by an eligible startup for three consecutive assessment years out of seven years has been proposed to be increased to 10 years. It has also been proposed that the total turnover of its business should not exceed Rs. 100  crores  in  the  previous  year  relevant  to  the  assessment  year  for which deduction under this section is claimed vis-à-vis the earlier norm of  Rs.  25  crores. This  amendment will take effect from 1 st April  2021 and will,  accordingly,  apply  in  relation  to  the  assessment  year  20212022 and subsequent assessment years.

## ii. Income  Tax  Exemption  on  investments  above  fair  market  value under Section 56 of Income Tax Act

Exemption  from  tax  under  the  provisions  of  section  56(2)(viib)  to Startups for issue of shares above fair market value on the basis of a self-declaration  to  the  Central  Board  of  Direct  Taxes.  The  aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue should not exceed Rs. 25 Crores Intimation for such exemption is shared by the Central Board of Direct Taxes (CBDT) with the startup. The form and process is defined under notification no. G.S.R.  127(E)  dated  19 th February,  2019  issued  by  DPIIT  specifying the restrictions for further investments etc.

## iii. Amendment in Section 54GB of Income-tax Act

Exemption from tax on capital gains arising out  of  sale  of  residential house or a residential plot of land if the amount of net consideration is invested  in  prescribed  stake  of  equity  shares  of  eligible  startup  for utilizing  the  same  for  purchase  of  specified  asset.  Further  to  this, following amendments will come into effect from 1 st April 2020

- a.  The condition of minimum holding of 50% of share capital or voting rights in the startup has been relaxed to 25%
- b.  Extension of period under which benefit under section 54GB from for sale of residential property can be availed up to 31 st March 2021
- c. Condition  restricting  transfer  of  new  asset  being  computer  or computer software is to be relaxed from 5 years to 3 years

## iv. Introduction of Section 54EE in the Income Tax Act, 1961

Exemption from tax on long-term capital gain if such long-term capital gain  is  invested  in  a  fund  notified  by  Central  Government.  The maximum amount that can be invested is Rs. 50 lakh.

## v. Amendment in Section 79 of Income Tax Act

Eligible Startups to carry forward their losses on satisfaction of any one of the two conditions:

- a.  Continuity of 51% shareholding/ voting power or
- b.  Continuity of 100% of original shareholders carrying voting power

## vi. Pass Through of Losses

Pass through of losses allowed to Investment Funds i.e. Category I and II AIF similar to pass through of income. These amendments will take effect from 1 st April  2020 and will, accordingly apply in relation to the assessment year 2020 - 2021 and subsequent assessment years.

## vii. Inclusion of Category I & II AIF

Investment  made  by  Venture  Capital  Fund  of  Category  -  I  AIF  in  a startup was exempted from the applicability of the provisions of section 56 (2)(viib) of the IT Act. This exemption has been extended to all subcategories of Category - I AIF and Category - II AIF via introduction of 'specified fund' in the said section.

## viii. Amendment to Sections 156, 191 and 192 of the Income Tax Act

These amendments have been proposed in the Finance Bill 2020. They will enable  employees  receiving  specified  security  or  sweat  equity  share  as perquisite under section 17(2)(vi) of an eligible startup referred to in section 80-IAC,  to  deduct  or  pay,  as  the  case  may  be,  tax  on  such  income  within fourteen  days  after  the  expiry  of  forty-eight  months  from  the  end  of  the relevant  assessment  year;  or  from  the  date  of  the  sale  of  such  specified security or sweat equity share by the assessee; or from the date of assessee ceasing to the employee of the person, whichever is earlier, on the basis of rates in force of the financial year in which the said specified security or seat equity share is allotted or transferred. This amendment will take effect from 1 st April  2020.  As  per  the  earlier  norms,  the  said  perquisite  including  ESOPs were taxed in the hands of the employee at the time of exercise of the option.

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