Introduction
Startup India, a flagship initiative of the Government of India, aims to foster the growth of startups by providing various tax benefits. One significant benefit is outlined under Section 56 of the Income Tax Act, offering exemptions or deductions to startups. In this article, we delve into the details of these tax benefits available to startups in India.
Understanding Section 56(2)(viib) of the Income Tax Act & DPIIT Notifications
Section 56(2)(viib) of the Income Tax Act mandates that any consideration received by a person from an investor exceeding the fair market value of shares is taxable as income from other sources. However, startups receive exemption under this section, as per the Department for Promotion of Industry and Internal Trade (DPIIT) notification dated May 19, 2016. According to the DPIIT notification issued on February 19, 2019, startups fulfilling specific conditions are exempt from Section 56(2)(viib). These conditions include recognition by DPIIT, a limit on paid-up capital and share premium, and restrictions on investing in certain assets.
Conditions for Exemption under Section 56(2)(viib)
- Recognition by DPIIT: Startups must be recognized by the DPIIT to qualify for the exemption.
- Limit on Paid-up Capital and Share Premium: The aggregate amount of paid-up share capital and share premium must not exceed twenty-five crore rupees.
- Restrictions on Investment: Startups are prohibited from investing in certain assets such as immovable property, loans and advances, shares and securities, etc., for a period of seven years from the end of the latest financial year in which shares were issued at a premium.
Form-2 Declaration to DPIIT
Startups meeting the above conditions must submit a duly signed Form-2 declaration to the DPIIT, certifying compliance with the stipulated requirements.
Revocation of Exemption
If a startup fails to fulfill the conditions within the specified timeframe, the exemption provided under Section 56(2)(viib) will be revoked with retrospective effect.
Conclusion
The tax benefits provided under Section 56 of the Income Tax Act are crucial for the growth and development of startups in India. By exempting startups from certain tax liabilities, the government encourages entrepreneurship and investment in innovative ventures. These benefits not only attract investors but also enable startups to reinvest profits into their businesses, fostering sustained growth and development in the startup ecosystem.
FAQs
What is the significance of Section 56(2)(viib) of the Income Tax Act for startups?
This section mandates that any consideration received by a person from an investor exceeding the fair market value of shares is taxable. However, startups receive exemption under this section.
What are the conditions for exemption under Section 56(2)(viib)?
Startups must be recognized by the DPIIT, have a limit on paid-up capital and share premium, and refrain from investing in certain assets for a specified period.
What is Form-2 Declaration to DPIIT?
Startups meeting the exemption conditions must submit a Form-2 declaration to the DPIIT, certifying compliance with the requirements.
What happens if a startup fails to fulfill the exemption conditions?
If a startup fails to meet the conditions within the specified timeframe, the exemption provided under Section 56(2)(viib) will be revoked with retrospective effect.
How do these tax benefits impact the startup ecosystem in India?
The tax benefits provided under Section 56 encourage entrepreneurship, attract investors, and facilitate the reinvestment of profits, thereby fostering sustained growth in the startup ecosystem
