Income Tax on Startups in India

by Anumeha Singh Insurance Specialist

Income tax is a direct tax collected by the Government of India. It is mandatory to be filed by every person or company holding a PAN card or registered as a company.

What is Income Tax?

It is the income of an individual or a company. Income tax for startups via a simple formula:

Income = Sales/Service Revenue – Expenses – Depreciation.

The income, calculated thus, helps the organizations in not having to pay for all the revenue generated when they have costs to bear. It helps the businesses in sustaining themselves for a long time.

Introduction to Startups

A Startup is an organization like any other business, except that it is driven by innovation. For example, printing is a business, but photo prints on metal are a startup as it requires innovation. For a country to grow, it is very important that startups are there. It shows that youth are daring to try and innovate.

Startups are, today, connecting various people across the country, and people are willing to leave their jobs to work in startups. Recognizing this, Government of India started Startup India scheme, which, apart from a rebate on income tax for startups, has a variety of other benefits.

What is Startup India?

Startup India was a scheme started by the current government headed by Honorable Prime Minister Shri Narendra Modi and Honorable Finance Minister Shri Arun Jaitley. Startup India was introduced to recognize the efforts of startups in development of the nation. To promote startups, various benefits were announced for eligible startups, including zero income tax for startups for three consecutive years.

Start-Up India

Announced in 2015, under Startup India, startups are eligible for various benefits to help them get through the difficult beginning years and promote entrepreneurship among the Indian youth. Some of the benefits of Start-Up India scheme are:

·         No income tax for startups for any three consecutive years within the first seven years of startup.
·         Simplified procedure.
·         Can apply to tenders that require prior experience even without experience.
·         Self-compliance saves time from many of the compliances.
·         R&D facilities are being set up for the companies.
·         Interaction with VCs to get a suitable investor.
·         Can wind up in 90 days after filing closure application.
·         Investors save tax by funding your startup and hence are more interested.

Eligibility for Startup India

Not all the startups are eligible for startup India. The startups that fulfill the below conditions are eligible for all the benefits under Startup India

·         Incorporated between 1^st April 2016 and 1^st April 2019.
·         A fresh company and not created by dismantling an old company or organization just to be eligible.
·         Only companies or limited liability partnerships are eligible.
·         For three years consecutive zero income tax for startups, total turnover must not exceed 25 Crores annually.
·         It should be certified as an eligible business by Inter-Ministerial Board of Certification on the basis of :

o Innovation

o Development

o Deployment or commercialization of new

§ Products

§ Processes

§ Services

o Driven by technology or intellectual property

· A recommendation letter from one of the below is also required

o Incubator in post-graduate Indian college

o Incubator funded by GoI

o Incubator recognized by GoI

o Funded by an Incubation/Angel/Private Equity Fund or Accelerator or Angel Network

o Indian patent and Trademark Office has granted patent related to the business

· Should also ideally provide employment to the citizens.

For Non-eligible Startups

Income Tax for Startups not eligible under the Startup India scheme for any reason is supposed to follow the formula to calculate income as mentioned above. If the above formula doesn’t fit because record maintenance isn’t easy during the formative years of a business, there are simpler calculations available at your disposal.

· For Service Industries – Income = 50% of total Services Provided Value (Professionals, freelancers, etc.)
· For Businesses – Income = 8% of total Sales Value

Income Tax for Startups in Terms of Direct Value

Income tax liability for startups is as below:

· For proprietorship – the slabs are same as that for an individual. A proprietorship is a single owner business and is one of the most lenient forms of business.
· For Indian Company – 25% of the total Income.
· For Partnership Firm or a Limited Liability Partnership – 30% of the total income.

The two important forms are ITR4 (Presumptive taxation where the direct percentage of total value is used), and ITR3/ ITR5/ ITR6/ ITR7 (where Income=Revenue – Expenses – Depreciation is used.)

Conclusion

It is now easier than ever to do business. The ease of doing business has improved. Simplified filing, and self-compliance in many cases has made running a business easier. If your business is powered by innovation as its major tool, it also qualifies for Startup India scheme, which, apart from three consecutive years zero income tax for startups, provides innumerable other benefits. It is a golden period for doing a start up in India; you just need to educate yourself with the various requirements of the genre.