The economy of any country depends on quality of its people. Larger the
number of employed people, better will be the economy. The importance of
promoting entrepreneurs has been recognised by the Indian Government.
'Startup India, Stand up India' is one such campaign for creating a conducive
environment for startups in India. It aims to boost entrepreneurship,
encourage startups with job creation and building an economy driven by
For empowering startups to grow through innovation and technology, the
Indian Government announced startup India: Action Plan [plan] which
addresses all aspects of the startup eco-system. The plan proposes a 19 point
action list which inter-alia includes compliance regime based on self-
certification, startup India hub, rollout of mobile app and portal, legal support
and fast-tracking patent examination at lower cost, faster exits, funding
support through a 'funds of funds' with a corpus of INR 10,000 crore, etc. It
also proposes to provide tax exemptions on profits, capital gains, and
investment above fair market value subject to fulfillment of certain conditions.
The objective to give these exemptions is to promote investments into/growth
of startups and address the working capital requirements.
Recently, the Government has issued a notification wherein the term 'startup'
has been defined and the procedure for its recognition and obtaining tax
benefits has been prescribed.
The Union Budget 2016 is well aligned with the startup India campaign. In line with the plan, the Budget proposes the following
initiatives for startups:
■ Amendment in the Companies Act, 2013 to improve enabling environment for startups and ensure registrations of companies in one
■ Hub to support Scheduled Caste [SC] and Scheduled Tribe [ST] entrepreneurs. Further, INR 500 crore has been earmarked for SC/ST
and women entrepreneurs under the Startup India scheme.
■ Entrepreneurship education and training to be provided through Massive Open Online Courses so that they can connect to mentors
and credit markets.
With a view to provide an impetus to start-ups and facilitate their growth in the initial phase of their business, in line with the plan and
notification issued by the Government, effective from assessment year 2017-18, the following tax exemptions and incentives have also
■ Section 80-IAC to be inserted to provide 100% deduction of profits derived by a eligible startup engaged in eligible business, subject
to fulfilment of certain conditions. The proposed deduction will be available at the option of the assessee for any 3 consecutive
assessment years out of 5 years beginning from the year in which the eligible start-up is incorporated. Eligible start-up means a
company which is incorporated on or after 1 April 2016 but before 1 April 2019; the total turnover of its business does not exceed INR
25 crore in any of the financial years beginning on or after 1 April 2016 and ending on 31 March 2021; and it holds a certificate of
eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government. Eligible
business for the purpose of claiming the above tax deduction means a business which involves innovation, development, deployment
or commercialisation of new products, processes or services driven by technology or intellectual property.
However, no exemption have been given from payment of Minimum Alternate Tax [MAT]and startups will have to pay MAT @ 18.5%
plus applicable surcharge and cess on their book profit. Thus, there is no complete tax holiday for startups. The Finance Minister may
consider giving exemption to startups from payment of MAT to give boost in true sense. Also, in the initial 5 years, the startups may
not make much profits and hence the period of 5 years may be extended to 7 to 8 years.
■ Exemption from capital gains tax would be available if long term capital gains [LTCG] are invested in units of a specified fund, as
may be notified by Central Government, upto a maximum investment of INR 50 lakhs. The exemption will be available only if amount
remains invested in such units for three years.
■ LTCG arising on account of transfer of a residential property shall not be charged to tax if such capital gains are invested in
subscription of shares of an eligible start-up. The exemption would be available if such individual holds more than 50% share capital
or voting rights after the subscription in shares and such company utilizes the amount invested in shares to purchase new assets
before the due date of filing of return by the investor.
■ Domestic companies with turnover not exceeding INR 5 crore in the previous year 2014-15 will be taxed at 29% plus surcharge and
Also with a view to promote entrepreneurship and make in India objective of Government, Finance Minister proposes to tax newly
set-up domestic manufacturing companies incorporated on or after March 1, 2016 at 25% plus surcharge and cess provided they do
not claim any profit-linked incentives, investment-linked incentives, accelerated depreciation, investment allowance, expenditure on
scientific research and certain deductions covered under Chapter VI-A.
The Budget suggests that the Government is clearly focusing on growth, development, job creation by formulating various schemes
and measures for startups and entrepreneurs in India. At the same time, it has been ensured that only deserving enterprise get to
reap the benefits of such schemes. Tax incentives such as complete tax deduction of profits for 3 years and relaxation in capital gains
tax in specified cases is a positive step. This will boost the investment in startups. However, there may be some concerns in relation
to eligibility criteria for startup, profit in initial years, MAT, etc.
Further, simpler regulation regime shall enable the startups to focus on their core business and keep compliance cost low. The
government efforts to provide skill development and training to youth along with implementation of digital literacy will lift up the
startup eco-system. The move of government will certainly create positive waves and will go a long way to deal with the problem of
unemployment, and be an effective instrument for India's transformation.