Startups, as a rule, need a caring hand which guides them on the path of doing business and growing. In light of the recent union budget and the various incentives the central government has given to enrich the startup culture in India, we have prepared a small list of the various ways in which startups in India can get tax exemptions and benefits. It is important to note that a majority of startups fails within the first few years of existence due to a lack of proper planning and execution. A list of tax dos and do not’s is essential to preserve the culture of Startup India.
- The first thing to remember is that after budget 2017, the period of claiming all manners of profit-linked tax exemption for startups in India has been increased by 2 years. It now stands at 7 years up from the5 years which existed earlier. This tax break will be essential for nurturing the startup culture in the country. The only tax which will exist is the MAT or the ‘Minimum Alternate Tax’ which is calculated only on the book profit of the startup.
- All startups will need to submit their proposals for the tax exemption benefits to the Department of Industrial Policy and Promotion or the DIPP. The DIPP will then take a final call and decide if the startup meets its criteria for tax breaks.
- The MAT has also been tweaked this year. The budget confirmed that the MAT will now be carried forward for 15 years compared to the 10 years allowed earlier. This is an important feature of Budget 2017.
- If the startup incurs losses and if the founder is directly involved, the losses will be carried over until after the tax break period ends. This will allow all startups to receive private equity investment as well.
- Furthermore, the tax deduction revenues for companies with a turnover of a sum of Rs 50 crore or below is now 25%, in what is being seen as a positive move.
- Note that exemptions in all Capital Gains Tax have also been proposed. The capital gains tax is the tax charged on profits gained from the sales of capital assets, including stocks and bonds. This is to avoid double taxation duties for startups.
- The much reviled Angel Investment Tax was repealed last year in the budget. This was done after the concerning amendments under Section 56(2)(vii)(b) of the Income-Tax Act were completed. However, as before, the DIPP will have to give permission before the exemption can be availed.
- The LIC will invest in the Fund of Funds or the FoF, which has been set up last year. This master fund will have an initial kitty of Rs. 2,500 crore while the total corpus over a 4-year period Rs. 10,000 crore over a four-year period.
Tax Tips For Entrepreneurs and Startups
If you are an entrepreneur and you are looking for tax tips, you have arrived at the right place. We have prepared a small compendium of ways and means to avoid taxes. They have been categorised into three distinct areas. The first is:
- Income from business or profession. It is very important to keep a proper record of every transaction and you need to understand that not every transaction is good if made in cash. If you keep a proper record of expenses, file income tax returns regularly, take care of the machinery, if any, to disallow the factor of depreciation, you should be in the clear. You should always deduct tax on incomes at the source too.
- You can save a lot of tax by Income From House Property as well. You should always pay essential bills to the municipality by cheques. Such record keeping will make your payments tax exempt as well. Besides, you can always claim tax benefits from interest on housing loans as well.
- Deductions Under Chapter – VI is also an efficient way to save your tax outlay. You can seek tax exemptions under your life insurance premium, your medical insurance premium as well as your contributions and investments in the PPF as well.
- Finally, it is very unwise to rely on a single approach to your business as well. It is very important to have a backup plan in case your Plan A fails to succeed. You can always claim tax benefits on rent paid for office premises as well. You can also seek amortisation under Section 35D of the IT Act as well. You can view more Budget 2017 news here.