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Tax Law Presentation on Start Ups.pptx

  1. What, Who and How of Startup in India
  2. Startup in India Page 2 16 December 2019 ► Startup India is a flagship initiative of the Government of India, intended to build a strong ecosystem that is conducive for the growth of startup businesses, to drive sustainable economic growth and generate large scale employment opportunities. ► The Government through this initiative aims to empower startups to grow through innovation and design. ► For availing various benefits under the Startup India scheme, an entity would be required to be recognized by Department of Industrial Policy and Promotion (DIPP) as a startup by applying at page.html.
  3. Who can be a Startup? Page 3 16 December 2019 1. If it is incorporated as a private limited company or registered as a partnership firm or a limited liability partnership in India 2. Up to ten years from the date of its incorporation/registration 3. If its turnover for any of the financial years since incorporation/registration has not exceeded INR 100 Crores 4. If it is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation Note: An entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘startup’.
  4. Startup registered on the startup India website vs DIPP recognized startups Page 4 16 December 2019 ► A startup which has a profile on the startup India website is considered a registered startup on the portal. ► These startups can apply for various acceleration, incubator/mentorship programmes and other challenges on the website along with getting an access to resources like Learning and Development Program, Government Schemes, State Polices for startups, and pro-bono services. ► For DIPP-recognition, the startups have to apply at recognition-page.html to avail benefits mentioned in the above slides
  5. Cities ahead in the startup venture in India
  6. Page 20 16 December 2019 Cities ahead in the startup venture in India Bengaluru Delhi/NCR Mumbai Chennai Hyderabad Kolkata Pune Ahmedabad Kochi
  7. Startup India: Initiatives by Central Government
  8. Benefits under Startup India Initiative Page 8 16 December 2019 The benefits provided to recognized startups under the Startup India initiative are: 1. Self-Certification: Self-certify and comply under 3 Environmental & 6 Labour Laws 2. Tax Exemption: Income Tax exemption for a period of 3 consecutive years and exemption on capital and investments above Fair Market Value 3. Easy Winding of Company: In 90 days under Insolvency & Bankruptcy Code, 2016 4. Startup Patent Application & IPR Protection: Fast track patent application with up to 80% rebate in filling patents
  9. Benefits under Startup India Initiative Page 9 16 December 2019 5. Easier Public Procurement Norms: Exemption from requirement of earnest money deposit, prior turnover and experience requirements in government tenders 6. SIDBI Fund of Funds: Funds for investment into startups through Alternate Investment Funds 7. Apply for tenders: Startups can apply for government tenders. They are exempted from the “prior experience/turnover” criteria applicable for normal companies answering to government tenders. 8. R&D facilities: Seven new Research Parks will be set up to provide facilities to startups in the R&D sector
  10. Benefits under Startup India Initiative Page 10 16 December 2019 9. No time-consuming compliances: Various compliances have been simplified for startups to save time and money. Startups shall be allowed to self-certify compliance (through the Startup mobile app) with 9 labour and 3 environment laws 10. Tax saving for investors: People investing their capital gains in the venture funds setup by government will get exemption from capital gains. This will help startups to attract more investors. 11. Choose your investor: After this plan, the startups will have an option to choose between the VCs, giving them the liberty to choose their investors. 12. Meet other entrepreneurs: Government has proposed to hold 2 startup fests annually both nationally and internationally to enable the various stakeholders of a startup to meet. This will provide huge networking opportunities.
  11. Benefits granted by State Governments:
  12. Page 26 16 December 2019 Benefits under Maharashtra State Innovate Startup Policy, 2018
  13. Definition of a Startup Page 13 Incorporated as either a private limited company, a partnership firm or a limited liability partnership in Maharashtra, as per the prevalent norms for registration Operational for not more than seven years from the date of its incorporation or registration, which is extended to 10 years for units in the biotechnology and social sectors Reporting an annual turnover of at most INR 25 Crores since its incorporation or registration The unit should either strive towards innovation, development or improvement of products, processes or services; OR be a scalable business model with strong potential for high employment generation or wealth creation Notes ► The aforementioned criteria have been defined under the Startup India:Action Plan by the Government of India ► Units in the social sector include, but are not limited to, Education, Skill Development, Healthcare, Clean Energy, Water Sanitation & Conservation, Waste Management,Agricultural, Food Security and Financial Inclusion ► Entities formed by the split-up or reconstruction of an existent business unit are ineligible under the Policy Eligibility Criteria 16 December 2019
  14. Incentives offered Page 14 16 December 2019 Sr. No. Particulars Additional details 1 SGST reimbursement ► 100% reimbursement of Net SGST subject to the condition that input credit for the same is not available to the customers 2 Stamp Duty and Registration Fees reimbursement ► 100% reimbursement for first 3 years ► 50% reimbursement for subsequent 3 years ► Aggregation of business places supplied by private places through a common platform may also be permitted 3 Quality Testing assistance ► Assistance of 80% of quality testing costs incurred by startups at BIS-accredited facilities 4 Patent filing assistance ► 80% rebate in filing costs ► Up to INR 2 Lakh for Indian patents and up to INR 10 Lakhs for international patents 5 Other incentives ► Self certification for select compliances and norms, with exemption from inspections for 7 years ► Relaxation from norms under Maharashtra Shops and EstablishmentsAct ► Startups in the manufacturing sector are exempt from the “prior experience and/or turnover” criteria, subject to specified conditions
  15. Additional non-fiscal benefits and initiatives Page 15 Access to Leapfrog Maharashtra Portal ► The portal will serve as a communication hub and a single window clearance facilitator ► Serves as the nucleus for the State’s startup hub for enabling effective knowledge exchange ► Clearances and approvals can also be obtained efficiently ► The portal launch date is awaited from authorities ► Mumbai – Fintech and AVGC ► Pune – Automotive and Electronics ► Nashik – Healthcare ► Aurangabad – Agro-process ► Nagpur – Clean Energy Designation of Innovation Clusters Institution of Incubators and Parks 16 December 2019 ► The State will encourage the development of incubators through Private, Public or Private-Public Partnership (PPP) methods, in collaboration with the private sector and educational and R&D institutions ► A multi-facility Startup Park has been proposed in order to consolidate incubators, accelerators, investors, mentors and other stakeholders in one location
  16. Additional non-fiscal benefits and initiatives Page 16 State-sponsored Funds ► Fund-of-funds with an initial corpus of INR 100 Crore and a total corpus of INR 500 Crore ► Infrastructure fund for incubators, accelerators and other labs ► Encouragement of CSR funds and an Alternative Investment Market ► The State will support units in the social sector through crowdfunding platforms ► Startup Week ► Grand Challenges ► B-Plan Competitions ► Startup Symposia ► Get-togethers State Sponsored Events Development of Human Capital 16 December 2019 ► Organization of workshops and programmes in schools and universities ► Designation of community builders and role models ► Setup of TEDCs ► Institution of EdTech platforms
  17. Page 35 16 December 2019 Gujarat Scheme For Assistance Of Startups / Innovation, 2015
  18. Gujarat Scheme for Assistance of Startups / Innovation, 2015 Page 18 Criteria for Recognition as Eligible Startup Unit [a] ► Incorporated as a Private Limited Company, Partnership or Limited Liability Partnership for not more than 10 years from the date of registration/incorporation ► Maximum annual turnover of INR 100 Crore since incorporation Criteria for Recognition as Eligible Startup Unit [a] ► The Unit is working towards innovation, development or improvement of products, processes or services [OR] ► A scalable business model with a high potential of employment generation or wealth creation ► Units formed through a split up or reconstruction of an existing entity are ineligible Definition of Innovative Project ► “Innovation is the process of introducing new or making changes with updated technology, large and small, radical and incremental, to products, processes, and services that results in the introduction of something new and innovative products” Policy Title & Eligible Entities 16 December 2019 Introduction ► Gujarat Scheme forAssistance for Start ups/Innovation, 2015 – 2020 ► Individuals with an innovate idea or universities, educational institutions, incubation centres, R&D institutions, Public Sector Units (PSUs) and private establishments that support and mentor innovators are eligible
  19. Gujarat Scheme for Assistance of Startups / Innovation, 2015 Page 19 16 December 2019 Sr. No. Particulars Incentive Amount 1 Sustenance allowance for innovator INR 10,000 per month for 1 year 2 Assistance for mentoring services Up to INR 5 Lakh 3 Assistance for procuring raw material and other components pertinent to the innovative process Up to INR 10 Lakh A. Assistance for Innovation Sr. No. Particulars IncentiveAmount 1 Net VAT/SGST Reimbursement 80% for 5 years up to 70% of eligible fixed capital investment* 2 Marketing and PublicityAssistance for introduction of product to the market Up to INR 10 Lakh B. Assistance once idea is conceptualized *Computation of Net VAT/SGST will exclude the additional tax payment and reduction in Input tax credit, if any Additional benefits include Provision of mentor services Permission for the innovator to utilise the facilities in the eligible institution Select innovators will receive free access to institutions that include university libraries, government laboratories, Centres of Excellence and PSUs
  20. Challenge of Angel Tax faced by a Startup
  21. Angel Tax In the recently launched Budget 2023-24, the government has proposed to extend the provisions of ‘angel tax’ to transactions involving foreign investors. Angel taxes are taxes funds raised by startups if they exceed the fair market value of the company. Finance minister Nirmala Sitharaman said in the budget speech that non-residents will now come under the purview of Section 56(2) VII B, also known as angel tax, which was introduced in 2012 as an anti-abuse measure aimed at tax avoidance. Alternative investment funds registered with the Securities and Exchange Board of India (Sebi) will continue to be exempted from the tax. However, foreign investors who were earlier outside the tax’ s purview have now been brought under the ambit of angel tax.
  22. ♦ History of Angel Tax In India The tax was introduced in the 2012 Union Budget by then finance minister Pranab Mukherjee to arrest and stop laundering of funds. It has come to be called angel tax since it largely impacts angel investors in start-ups.
  23. ♦ Law Governing Angel Tax In India Section 56(2)(viib) of Income Tax Act, 1961 is the core section of Angel Taxation. Angel taxation is only a terminology given to tax levy under the abovementioned section. when a closely held company issues equity shares and any investor subscribes for such shares and pays such consideration per share which is above the fair value of such shares, then such excess i.e. (Consideration per share less Fair Value per Share) is to be treated as income from other sources of such receiver company and Consequently such company has to pay tax on such excess amount @ 30% plus cess as applicable. When this section becomes applicable to a closely held company and such company is a startup company, then tax paid on such excess receipts (amount above Fair Value) is termed as Angel Tax and Similarly the persons investing in its shares are termed as Angel Investors.
  24. Angel Tax New Proposal • It is related to the premium received. If an Indian unlisted company receives an excess premium on the sale of shares to a foreign investor, the premium is considered “income from other sources”. And it will be subject to tax. • Before this proposal in budget 2023-24, angel tax was imposed only on investments made by a resident investor. Proposed change: • • The amendment is required in the Finance Bill, 2023. It has proposed to amend Section 56(2) VII B of the Income Tax Act. • • It will include foreign investors in the ambit of tax. When a start-up raises funding from a foreign investor, it will also be counted as income and be taxable after the amendment. • • But, exceptions are also made. It mentions that foreign investors will not need to pay any angel tax while investing in a government-recognised (Department for Promotion of Industry and Internal Trade (DPIIT) registered) startup in India.
  25. Possible impacts: • It can impact the funding of startups, as the proposal has come in the declining funding trend in startups. India’s startups dropped by 33 per cent to $24 billion in 2022 as compared to the previous year. • Indian startups get a major source of funds from foreign investors. • The source and amount of funding also impact their valuation. • • It can generate fear among the startups as the imposition of angel tax impacts the fair market valuation of the company. The tax department calculates market value based on the net assets of the company. But the estimated growth prospects and future projections based on these growth prospects determine the fair market valuation of the startup. • The proposal can damage confidence in the startup ecosystem. • • The proposal can also impact the FDI inflow that we get from these foreign investments. • • The investors may not want to deal with additional tax liability in investment in a startup. Though, to relieve such anticipation, the DPIIT secretary has mentioned that ‘Angel Tax’ provisions in Finance Bill will not impact startups. As exceptions are also there for investing in a government-recognised (Department for Promotion of Industry and Internal Trade (DPIIT) registered) startup in India. And it is an easy process to get recognition from the department, as said by the DPIIT secretary.
  26. Who are Angel Investors? Angel investors are high-net-worth individuals who invest their personal income in business start-ups or small and medium-scale companies. Why they are Gaining Importance? Angel investors finance small startups. They provide funds at a stage where such startups find it difficult to obtain funds from traditional sources of finance such as banks, financial institutions, etc. In this way, they encourage entrepreneurship in the country. Further, such investors provide mentoring to entrepreneurs as well as access to their own business networks. Thus, they bring both experience and capital to new ventures.
  27. What is Angel Tax and the Issue Related to them? 1. Angel Tax, formally known as Section 56 (2) (vii b) of the Income Tax Act, taxes funds raised by startups if they exceed the fair market value of the company. It was introduced in 2012 by the UPA government in order to detect money laundering practices and catch bogus startups. 2. In the past few years, many startups have raised concerns over angel tax calling it an extremely unfriendly and unfair tax as it is not possible to calculate the fair market value of a startup. They have also alleged that to calculate the fair market value, the Assessing Officer (AO) chooses the cash discounted flow method, which is not very startup-friendly but suits the tax officers. 3. Last December, over 2,000 startups in the country received notices to clear the angel tax and some of them were also notified to pay an expensive penalty for not paying the dreaded tax on time. Also the dept. Asks for documents which usually are not required.
  28. What are the New Rules? 1. As per earlier rules, the exemption from angel tax was for companies with turnover up to Rs 25 crores, but as per new rules, the exemption limit has been extended to companies with turnover less than Rs 100 crores and those companies should be less than 10 years old. 2. Further, investments made by listed companies with a net worth of at least ?100 crore or a total turnover of at least ?250 crore will be fully exempt from the tax; so will investments made by non-resident Indians. 3. An eligible start-up would be one that is registered with the government, has been incorporated for less than 10 years, and has a turnover that has not exceeded ?100 crore over that period. 4. Also, the Finance Minister announced that a mechanism of e-verification will be put in place to resolve the issue of establishing the identity of the investor and source of his funds. With this, funds raised by startups will not require any kind of scrutiny from the Income Tax Department. 5. Also announced that startups will not be required to present the fair market value of their shares issued to certain investors including Category-I Alternative Investment Funds (AIF).
  29. Significance of New Rules 1. The rules will definitely make life easier for start-ups, which are in desperate need for capital to fund their growth and other business requirements. 2. The changes will encourage wealthy individuals to invest in startups that receive capital at a premium on account of their innovative business model although the valuation is not justified by the physical assets they hold. 3. Further, since the new rules are applicable retrospectively, many young companies which received notices from the Income Tax Department in the past will be relieved by the latest tweak in the rules.
  30. Concerns 1. Companies need to be registered with the government as start-ups to make use of the latest exemption. 2. To be classified as a startup, a company has to prove certain conditions such as that it hasn’t invested in vehicles worth more than ?10 lakh, in land unrelated to the business, or in jewellery. 3. These conditions, which are probably intended to prevent money-laundering, can lead to a lot of bureaucratic delays as well as rent-seeking. 4. In addition, the new rules for angel tax, although less severe than earlier, can cause the same old issue of arbitrary demands for tax for companies that don’t fall under the defined start-ups category. 5. Taxes due are calculated based on what amount the sale price of a company’s unlisted shares is greater than its fair market value. 6. It is not possible to know the market value of shares that aren’t openly traded in the market. So tax authorities with questionable intentions can still find reasons to harass startups with unreasonable demands for tax. The damage to investor confidence may stay unless the government does something about the arbitrary nature of this angel tax. The changes, when seen in totality, are welcome, for startup companies. The changes will also assuage the government’s concerns to a small extent with respect to shell companies evading taxes under this mechanism, while permitting exemptions for startup organisations.
  31. ♦ Point of Concern:. The main point of Concern is Fair Value of Investments as per Rules Specified By Income Tax and Fair Value Generally Accepted for Valuation of Start up for Investment by Angel Investors. In the current pace of start-ups and investments and taking consideration into the Rules prescribed by Income Tax Act the valuation of start ups has to be greater than the value derived by Income Tax Rules and the angel tax is nothing but an Tax on difference between (Value of share for Investing in start-ups and Fair Value as per Rules given by Income Tax)
  32. Fair Value As Per Income Tax Rules. (Rule 11U And 11UA) • Rule 11Uof the income tax rules provides for the meaning of expressions used in determination of fair market value while following methods prescribed under Rule 11UA of the income tax rules. • Rule 11UA, on the other hand, provides for methods of determining fair market value of a property, other than immovable property, including valuation of • Jewellery, • Archaeological collections, drawings, paintings, sculptures or any work of art, • Shares and securities (both quoted and unquoted)
  33. Fair Value Generally Accepted for Valuation of Start up for Investment by Angel Investors. • Valuation of start-ups is also a different world since industry demands Discounted cash flow (DCF) method to be applied instead of Net Assets Value (NAV) method. The valuation of a start-up is usually based on a commercial negotiation between the company and the investor, and it depends on the company's projected earnings at that point in time. • However, since start-ups operate in a highly uncertain environment, many companies are not always able to perform as per their financial projection. Equally, some companies exceed the projection by a long mile if they are doing well.
  34. ♦ Illustrative Calculation of Angel Tax. Particulars Amount Fair Market Value of Share as Per Angel Investors For Investment. Particulars Amount Fair Market Value of Share as Per Angel Investors For Investment. Rs. 500/Share Fair Value of Share Calculates as Per Rules and Methodology given by Income Tax Act 1961. Rs. 300/Share Number of Share as mutually decided by Angel Investor and Start-up Company. 1000 Shares Income Taxable In the Hands of Start- up Company under the head Income From Other Source. Shares 1000(Rs. 500 - Rs. 300) = 2,00,000/- Tax Payable by Start-up Company Rs. 2,00,000 * 30.90%=Rs. 61,800/-
  35. ♦ Exemption/Relief To Some Start-ups. Major Relief has been granted to Start-ups by The Department for Promotion of Industry and Internal Trade in super session of all earlier notification by means of issuing New Notification dated 19 Feb 2019 • • Start-up Means:-The entity shall be considered as Startup for a period of 10 years (earlier 7 years) subject to turnover not exceeding 100 crores (earlier 25 crores) and the entity should work towards innovation, development or improvement of products or services. • • Exemption from Section 56(2)(viib):- Aggregate amount of paid up share capital and share premium of the startup after the proposed issue of shares does not exceed Rs. 25 crores (Earlier 10 Crore). In calculating the above limit of 25 crores non-residents, venture capital funds ('VCFs') and venture capital company, registered with SEBI are not to be included. Accordingly shares can be issued to such excluded investors without any limit and still the Startup will be eligible to claim exemption u/s 56(2)(viib) of the Act provided the shares beyond the threshold limit are issued to the excluded investors. • • Startup has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11UA of the Income-tax Rules, 1962.
  36. LIMITATION OF THE STUDY The study engrosses only details available through online platform. Due to time constraint the in depth study could not be conducted. The project has prepared on current policy only and tax slabs, exemption. relief may change as per amendment.
  37. The step is likely to impact startups as they raise bulk of the capital from foreign investors. In 2022, private equity and venture capital funding into India totalled $54 billion, while it was close to $77 billion in 2021, a record year for Indian firms. Angel tax has been the sword of Damocles hanging over the heads of various Indian startups. This had been misapplied to them because all startups end up raising money from investors at a premium and often tax demand would come after one or one-and-a-half years. No investor would touch these startups because any money they put into the startup would actually go towards clearing the older tax liability," Pai said. He added that this would be taxed for startups under “income from other sources" and corporate tax rates would apply. The tax would also apply to domestic investors who are not Sebi-registered AIFs. “If money came in from hypothetically a State Bank of India or LIC into a startup, that would also be liable to tax because they’re not Sebi-registered AIFs," Pai added. To avoid the purview of angel tax, startups can file a “Form 2 Exemption". However, according to the law, this exemption would prevent the startup from undertaking many activities such as setting up a subsidiary, making any advances of salary, rental deposits, and vendor advances. Startups also would be barred from making treasury investments or participating in stock merger and acquisition deals as claiming the exemption would hamper the startup in many ways, according to Pai. Finding of the Study and Conclusion