When the government had announced the Budget for FY 2016-17, they had also announced various tax incentives that were related to the levy of Income tax on startups. These were then enhanced further in 2017-18, to make it easier for startups to function. In this article, we will understand the various Income tax rules and regulations that apply to startups in India, as of 2019. 

How is income tax computed for startups?

It is crucial to understand that Income tax is levied on the earnings and not the sales revenue of a startup. This is fairly good news for startups as operational costs can often make it harder for small companies to have a great profit margin. 

The earnings of a startup are calculated on the basis of sales revenue minus expenses and depreciation. This means that any expenses that are incurred that help with the sale of goods or services and any reduction in the value of the assets that have been used in the business are subtracted from the total value of the items or services that have been sold. The remaining figure is the total profit earned during the year and this is the taxable amount. 

Apart from this, since it can be challenging for smaller companies to keep track of the expenses, sales, depreciation and invoices, the government has also introduced the Presumptive Scheme of Taxation. 

As per this scheme, the income can either be disclosed as 50% of the total value of the services that have been provided, or as 8% of the total goods that have been sold by the business. It is important to note that this scheme is applicable only to HUFs and individual proprietors, and not to companies. 

Understanding income tax for startups

The first step is to compute the income, which can be carried out via the means listed above. The second step is then to understand the tax liability. There is a specific schedule of taxes that businesses and individuals need to refer to in order to know their tax liability, as explained below:

Schedule of Income Tax Rates
Type of business entity The applicable income tax
Proprietorship or individual Taxes apply as per the income tax slab rates
Partnership/ LLP firm 30% of the income
Indian company 25% of the income
It is crucial to file income tax returns before the due date using the forms mentioned below:
Income that has been computed under the presumptive taxation scheme ITR 4
Income computed by calculating the revenue, expense and depreciation ITR 3/ ITR 5/ ITR 6/ ITR7

What tax incentives apply for startups?

While announcing the Budget in 2016, the government had announced some incentives that apply for startups. Since then, these incentives have been revised to make them more inclusive and encourage startup operations in India. 

One of the main ones is the 100% tax rebate as per Section 80 IAC for the startups that are considered eligible for the same. Additionally, startups can enjoy this 100% rebate for three consecutive years. The company can choose the 3 years that it wants the rebate on.

However, it is important to note that if a company wants to claim these benefits, they have to comply with the following rules:

  • They must maintain separate account books for their eligible businesses
  • They must ask a Chartered Accountant to audit their books
  • They must use form 10CCB to furnish their audit report along with their ITR

What startups are eligible for these tax incentives?

India is a country that is filled with startups, but that does not mean that every single startup can enjoy these rebates. They must fall under the bracket of an “eligible” startup. 

In order to be an eligible startup, the following conditions must be met:

  • The company needs to be incorporated either as a Company or as an LLP
  • The company must be incorporated anytime between 1 April 2016 and 1 April 2021 (as per the Finance Act of 2018)
  • The company must not have a total turnover that exceeds Rs 25 crores
  • The company has to be certified by the Inter-Ministerial Board of Certification as an eligible business. An eligible business is generally defined as one that involves development, innovation, deployment, or the commercialization of products, services, or processes that are either driven by intellectual property or technology
  • The company cannot be one that has recently been formed by splitting up an existing company or business

If your startup meets these requirements, you can certainly avail the benefits that have been introduced to facilitate Start Up India. 

These tax incentives and rules have been introduced by the Government of India in order to facilitate entrepreneurship in the country. With such high potential, India has always been a great marketplace, and it is time for young citizens to capitalize on the same. 

By pursuing their own businesses and offering innovative solutions, they not only stand a chance to earn far greater revenues than they would if they were in a standard job, but also improve the general job market of the country.

If you have recently launched your business, you should identify the three years that you want to remain tax free with care! This can be a huge financial boon for you!

Also read: Understanding Angel Tax for Startups