Startup Tax Exemption U/s 80 IAC
Section 80-IAC mentions that an eligible startup shall be allowed a deduction of an amount equal to 100 per cent of the profits and gains. Under the Startup India Scheme of the govt of India, start-ups may apply for tax exemption for three years within ten years of their establishment. We assist the start-up in obtaining tax exemption u/s 80 IAC.
Startup Tax Exemption
With the intention to promote job-creating entrepreneurs, this section was promulgated as part of the Finance Act of 2016 and was later amended in the Finance Bill of 2018. To avail the deductions offered by this section, a startup should engage in the eligible business for three consecutive assessment years out of seven years (five years until the assessment year 2017-18) beginning from the year in which the qualified startup was incorporated. To provide a useful incentive for startups and aid their growth in the early phase of businesses, a new known as Section 80-IAC has been introduced. Accordingly, a deduction of 100 per cent of the profits and gains derived by an eligible startup from a qualified business is allowed for any three consecutive assessment years among the five years beginning from the particular year in which the eligible startup is incorporated. This article briefly discusses Section 80-IAC of the Act, that offers tax incentives for startups in India.
Eligibility for startup tax exemption u/s 80IAC
- As per the Income Tax Act, for computing deduction under this section, the gains and profits of the eligible business shall be computed as if such businesses are the only source of income of the assessee during the relevant previous years.
- The deduction shall be allowed only if a chartered accountant has audited the accounts of the startup for the relevant previous year and the assessee furnishes the audit report in the form that is prescribed, and duly signed and verified by such an accountant along with his return of income.
- For any products or services held for the eligible business are transferred to any other business carried out by the assessee or vice versa. Also, if the consideration for such transfer does not correspond with the market value of the goods or services, then, then profits and gains of the business shall be computed as if the transfer was made at market value. However, if, in the opinion of the Assessing Officer, such computation presents exceptional difficulties, the Assessing Officer may compute the profits on such reasonable basis as the Officer may deem fit.
- The deduction claimed and allowed under this section shall not exceed the profits and gains of the eligible business. Further, where the deduction is claimed and approved under this section for any assessment year, no deduction with respect of such profits will be allowed under any other section under this chapter.
Benefits of startup tax exemption u/s 80 IAC
Among the various tax exemptions for Startups in India, benefits of tax exemption u/s 80 IAC of the Income Tax are quite a prominent one. You can refer to the table below for a brief and precise explanation on all these benefits.
100% Tax Deduction:
100% tax deduction on profits can be claimed by eligible Startups while computing their taxable income.
Tax Exemption for Startups:
Eligible startups get tax exemption under section 80IAC for 3 consecutive financial years within the first 10 years of the Startup’s incorporation/registration.
Reduced Tax Burden:
Deductions u/s 80-IAC helps cope Startups with the heavy tax burden they face in their initial stages.
Easy & affordable to claim:
To claim deductions u/s 80-IAC, a simple online application can be filed without any government fee.
Documents Required for claiming Section 80-IAC Exemption
Accurate and Adequate documentation is key to the approval of 80-IAC application. Among the necessary documents required are the basic incorporation documents of the startup, its account statements, income returns, and the documents validating the concept and current stage of the startup.
| S.No | List of Details & Documents |
|---|---|
1. | Name, address, and nature of business of the startup |
2. | Date of Incorporation Number and CIN / LLPIN |
3. | Permanent Account Number (PAN) of the startup |
4. | DIPP Number of the Startup after its recognition by the DPIIT |
5. | Contact Information of the Startup (E-mail ID and Contact Number) |
6. | Copy of the Memorandum of Association of the company, or LLP Deed of the LLP or Registered Partnership Agreement |
7. | Copy of the Board Resolution, in case of a company, if any |
8. | Copies of the startup’s Balance Sheet and Profit & Loss Statement of the last 3 financial years, certified by a practising Chartered Accountant |
9. | Copies of Income Tax Returns of the last 3 financial years mandatory, if it was incorporated before 1st April, 2018 |
10. | Copy of Certificate obtained under section 56 of the Income Tax Act (Eligibility under this section) |
11. | Video link and copy of pitch deck required according to the stage in which the startup is (ideation / validation / early traction / scaling) |
How to apply for 80-IAC exemption of the Income Tax Act
The process to avail 80-IAC deduction under the Income Tax Act is completely application based. So, like all other applications, there is long list of documents required to be attached with it as well. Since, we consider documentation as the most important aspect of any application and one of the major reasons for its ultimate approval or rejection by the concerned authority, we strongly recommend every applicant to ensure the possession of all the documents required to apply for tax exemption u/s 80-IAC in their correct formats and with the updated information, beforehand, to avoid any hindrances later.
After arranging all the necessary documents, the next step is to visit the official website of Startup India and under the head “Recognition” on the main menu, choose “Apply for Tax Exemptions”. You will be asked to log into the portal using your login credentials.
After you login, the application form for claiming 80-IAC exemption will appear on the screen. You are required to fill these forms with necessary details of the startup like its name, address, business activity/industry, contact information, incorporation and PAN details. Also, since the startup is already recognized by the DPIIT, you are also required to submit the DIPP number mentioned in its Startup India Recognition Certificate.
After you are done with filling out all the details, you can upload all the necessary supporting attachments like the constitution documents of the startup, copy of annual accounts and ITR, video link, and pitch deck explaining the product prototype and idea behind establishing the Start Up.
The last set of details to be filled in the application, after all the basic details of the startup and the respective supportive documents are uploaded, are the details of the authorized signatory, including his name and designation. The authorised signatory is usually one of the directors/designated partners of the startup, appointed for this purpose by the Board if it is a company and Partners if it is an LLP.
Once all the details have been filled out correctly, and all the documents have been uploaded in their prescribed formats, you can finally submit your application on the Startup India Portal itself. The application will be processed by the concerned authority, and if approved, you will be able to claim tax deduction under Section 80-IAC of the application.