This book is a ready-referencer to understand the taxation of start-ups and other operational issues. All complex provisions have been explained with detailed Case studies and Illustration. The Current Publication is the 3rd Edition which incorporates all the changes made by the Finance Act, 2020. The key features of this book are as follows: • Analysis of every provision applicable to a start-up, inter-alia, Section 80-IAC, Section 54GB, etc. • A thorough examination of the notification issued by the DPIIT for eligible start-ups • Guidance on registration of a startup as a firm or a company Impact of revision in definition of MSMEs on Start-ups • Analysis of Emergency Credit Line Guarantee Scheme (ECLGS) • Case studies and Illustrations for easy understanding of complex laws • FAQs for resolution of queries

2. PAGE
Tax Benefits Available to DPIIT-Recognised Start-up Private
Limited Companies Based on their Turnover
I-25
Start-up FAQs I-27
1
START-UP
1.1 Backdrop 1
1.2 Start-up 1
1.2-1 What is the revised definition for MSMEs? What
are the changes in the existing legal definition/
classification
2
1.2-2 What is the effective date for coming into force
of the revised composite classification criteria of
MSMEs?
4
1.2-3 Whether start-ups will be regarded as MSMEs as
per the revised definition?
4
1.2-4 What is the legal difference between an MSME
and a start-up?
4
1.2-5 Can an enterprise satisfy the definition of MSME
and startup and get the best of both the worlds
i.e. benefits under MSMED Act as well as LSN?
7
1.2-6 How to compute investment in Plant and
Machinery
7
1.2-7 How to compute turnover for the purpose of
turnover ceilings in NMN?
8
1.2-8 Whether any registration will be required to be
recognised as MSME under the revised classifi-
cation with effect from 01.07.2020?
9
I-5
Contents

3. CONTENTS I-6
PAGE
1.2-9 If either turnover or investment of an MSME en-
terprise falls below the ceiling limits specified for
its present category, will the enterprise be placed
in the lower category? For example, investment
in plant and machinery or equipment of a small
enterprise falls below to 1 crore or less due to
disposal of some machineries and equipments
but turnover does not fall to Rs. 5 crores or less.
Will the MSME enterprise be classified in lower
category as micro?
14
1.2-10 Whathappensifenterprisecrossestheceilinglimits
specified for its present category in either of the
two criteria of investment or turnover ?
14
1.2-11 Updation and transition period in reclassification 15
1.2-12 Whether different enterprises with different
GSTINs will be regarded as separate enterprises
for the purposes of the investment and turnover
ceilings?
16
1.2-13 What benefits are available under the MSMED
Act to a micro enterprise start-up filing Udyam
Registration?
16
1.2-14 What benefits are available under the MSME
Act to a small enterprise start-up filing Udyam
Registration?
17
1.2-15 What benefits are available under the MSME Act
to a medium enterprise start-up filing Udyam
Registration?
18
1.2-16 For availing tax holiday under section 80-IAC of
the Income-tax Act, will it be necessary for start-
up to file Udyam Registration?
18
1.2-17 What Income-tax benefits are applicable to start-
ups regardless of whether they satisfy the MSME
definition or not ?
18
1.2-18 What is the Emergency Credit Line Guarantee
Scheme (ECLGS) announced for MSMEs to tide
over the situation created by Corona Virus and
whether start-ups are eligible for it if they have
not filed Udyam Registration?
19

4. I-7 CONTENTS
PAGE
1.2-19 What is the Emergency Credit Line Guarantee
Scheme (ECLGS) announced for MSMEs to tide
over the situation created by Corona Virus and
whether start-ups are eligible for it if they have
not filed Udyog Aadhaar Memorandum?
19
1.3 Start-up India scheme 26
1.4 Benefits to recognised start-ups under ‘start-up India
scheme’
27
2
DEFINITION OF ‘START-UP’
AS PER DPIIT NOTIFICATION
2.0 Backdrop 34
2.1 What entity qualifies as a ‘start-up’ under the start-up India
scheme for various Govt. Incentives/support
36
2.2 Whether start-ups incorporated abroad and operating in
India will be eligible to be regarded as ‘start-ups’ as per the
above definition?
36
2.3 Applicability of latest expanded definition to existing start-
ups i.e. start-ups existing as on 19.02.2019
37
2.3-1 Start-ups incorporated prior to 19.02.2019 and
which crossed the old turnover limit of Rs. 25 cr
before 19.02.2019 but not the new limit of Rs. 100
cr for FY 2018-19?
38
2.3-2 Start-ups incorporated prior to 19.02.2019 and
which crossed the old turnover limit of Rs. 25 cr
duringFY2018-19onorafter19.02.2019butwhose
turnover is below the new limit of Rs. 100 cr?
39
2.3-3 Start-ups incorporated prior to 19.02.2019 and
recognised by DPIIT who completed 7 years from
date of incorporation on say 18.02.2019?
39
2.3-4 Start-ups recognised by DPIIT which completed
7 years from date of incorporation on or after
19.02.2019 i.e. say on 20.02.2019
40
2.3-5 Start-ups incorporated prior to 19.02.2019 and
their recognition applications are pending with
DPIIT as on 19.02.2019
41

5. CONTENTS I-8
PAGE
2.4 Entity hasn’t completed 10 years from the date of its incor-
poration/registration
41
2.5 Turnover of entity shall not exceed INR 100 crores 41
2.5-1 Definition of ‘turnover’ 42
2.6 Entity is working towards innovation, development or
improvement or is a scalable business model
44
2.6-1 Innovation 44
2.6-2 Scalable business model 47
2.7 Entity not formed by splitting up or reconstruction of a
business already in existence
51
2.7-1 Formed by splitting up of a business already in
existence
51
2.7-2 Reconstruction 51
2.7-3 Whether conversion of a start-up entity which is
a firm or LLP partnership into a private limited
company under Chapter XXI of the Companies
Act, 2013 (the 2013 Act) amounts to splitting up or
reconstruction of a business already in existence?
Will new converted entity lose benefits available
to a start-up under the Notification?
53
3
APPROVALS NEEDED BY START-UP
ENTITY FOR CLAIMING TAX BENEFITS
3.1 No tax incentives under section 80-IAC or section 54GB if
start-up entity is a partnership firm
56
3.2 Merely satisfying the definition of start-up is not enough to
claim tax benefits under the Income-tax Act
56
3.3 Approvals needed by start-up to claim tax benefits under
the Income-tax Act
57
3.4 Recognition of a start-up by DPIIT 59
3.4-1 What is the procedure for applying for DPIIT
recognition
59
3.4-2 Whether a startup LLP with foreigner as a partner
can get recognition by DPIIT?
64

6. I-9 CONTENTS
PAGE
3.4-3 Whatifstart-upapplicationforDPIIT-recognition
is rejected or marked incomplete?
64
3.4-4 Is there any appeal against order rejecting the
application for recognition?
65
3.4-5 Whether recognition by DPIIT essential for claim-
ing tax benefits under the Income-tax Act, 1961?
65
3.4-6 Whether fresh recognition to be obtained by a
DPIIT-recognised start-up firm on conversion
to LLP/private limited company or by a DPIIT-
recognised LLP on conversion to private limited
company?
66
3.5 Certification of the start-up entity by IMB for the purposes
of section 80-IAC of the Act
66
3.5-1 What if startup private limited company decides
that it does not want tax holiday under section
80-IAC but would opt to pay low tax rates with-
out exemptions under section 115BAA/section
115BAB [Para 5.11]? Would certification by IMB
be needed in that case?
67
4
TAX EFFICACY OF DIFFERENT START-UP
ENTITY FORMS - FIRMS, LLPs & PVT. COS.
4.1 Start-up entity forms recognised under the start-up India
scheme
68
4.2 Start-up entity which is a registered partnership firm 69
4.3 Start-up entity which is a limited liability partnership 70
4.3-1 Can foreigner be a partner in a startup LLP and
can such start-up be recognised by DPIIT?
71
4.3-2 What are the tax consequences for a start-up LLP
under the Income-tax Act?
71
4.4 Start-up entity which is a private limited company 73
4.4-1 Minimum paid-up capital requirements for form-
ing a private company
76

7. CONTENTS I-10
PAGE
4.4-2 Restriction on right to transfer shares [Section
2(68)(i)]
76
4.4-3 Limitationonthenumberofmemberstonotmore
than 200 [Section 2(68)(ii)]
77
4.4-4 Exclusion of joint shareholders for the purpose
of limit of 200 members - First proviso to section
2(68)(ii)
78
4.4-5 Exclusion of employee-shareholders of private
companyforthepurposeoflimitof200members-
Second proviso to section 2(68)(ii)
78
4.4-6 Exclusionofex-employeesshareholdersofprivate
companyforthepurposeoflimitof200members-
Second proviso to section 2(68)(ii)
78
4.4-7 Prohibition of any invitation to the public to sub-
scribe for any securities of the company [Section
2(68)(iii)]
79
4.4-8 Is One Person Company (OPC) a private limited
companyandeligibletobeconsidereda‘start-up’?
80
4.4-9 Tax consequences for a start-up entity which is a
private limited company
84
4.5 Summary 90
5
TAX HOLIDAY TO START-UPS
UNDER SECTION 80-IAC
5.1 Tax holiday to start-ups under section 80-IAC 92
5.2 Eligible start-up 93
5.2-1 Start-up entity must be a private limited company
or LLP
93
5.2-2 Engaged in eligible business 94
5.2-3 Instancesofstart-upscertifiedas‘eligiblebusiness’
by IMB as per Start-up India website
95
5.2-4 Instances of Applications rejected by IMB 101
5.2-5 InstanceswhereIMBgavestart-up30daystoreply
to its detailed observations or accept observations
as reasons for rejection
105

8. I-11 CONTENTS
PAGE
5.2-6 It is incorporated on or after 1-4-2016 but before
1-4-2021
110
5.2-7 Total turnover not to exceed Rs. 100 crores 110
5.2-8 It holds a certificate of eligible business from the
Inter-Ministerial Board of Certification
111
5.2-9 ‘Board’/IMB 114
5.2-10 Whetherstart-upsexistingason19.02.2019whose
turnover is more than 25 cr. and less than Rs. 100
cr. can apply to IMB for certification for section
80-IAC purposes?
114
5.2-11 Does a start-up have to separately apply to IMB
for certification every assessment year?
116
5.2-12 Is it essential to obtain DPIIT recognition before
applyingtoIMBforcertificationforsection80-IAC
under Para 3 of the latest start-up Notification?
116
5.2-13 What are the common reasons for which IMB
rejects applications for certification under section
80-IAC?
118
5.2-14 Can the IMB revoke certification for section
80-IAC?
118
5.2-15 What is the time-limit within which IMB has to
revoke certification?
118
5.2-16 What is the effect of revocation of certificate by
IMB?
118
5.3 Start-up not formed by splitting up, or the reconstruction,
of a business already in existence
118
5.4 Start-up not formed by the transfer to a new business of
machinery or plant previously used for any purpose
119
5.5 Additional conditions applicable 120
5.6 Deduction is subject to sections 80A and 80AB 120
5.7 Deduction not available if ITR not filed within due date 121
5.8 Simultaneous deduction under section 80JJAA and section
80-IAC is available
122
5.9 Minimum alternate tax 122
5.10 Alternate minimum tax applicable to LLP negates section
80-IAC and renders tax holiday illusory
123

9. CONTENTS I-12
PAGE
5.11 Startups may forego tax holiday under section 80-IAC and
opt for lower tax rates under section 115BAA and section
115BAB
124
5.12 What are salient features of new section 115BAA? 130
5.12-1 Opting in 131
5.12-2 Opting out of section 115BAA regime-permanent
exit
132
5.12-3 What are the conditions to be satisfied by a
domestic co. to claim concessional tax rate of
22% u/s 115BAA
132
5.12-4 Once having entered section 115BAA regime, can
company exit it?
140
5.12-5 What benefits will a domestic co. get upon fulfil-
ment of conditions in 5.12-3 Above
140
5.12-6 “Subject to other provisions of this Chapter” 141
5.12-7 What are the incomes to which the tax rate under
section 115BAA does not apply?
141
5.12-8 Whatistherateofsurchargeapplicabletoincome
taxable @ 22% under section 115BAA and to other
incomes taxable under various other provisions
of Chapter XII i.e. sections 110 to 115BBG except
sections 115BA and 115BAB
142
5.12-9 Whether company opting for section 115BAA is
exempt from MAT?
142
5.12-10 If an existing company opts for section 115BAA,
what happens to its unutilised MAT credit?
142
5.13 What is the low tax rate regime under section 115BAB for
new manufacturing companies?
143
5.13-1 Opting for section 115BAB regime 145
5.13-2 Opting out of section 115BAB regime 145
5.13-3 Optionexercisedforsection115BABregimebeing
invalid due to non-compliance with conditions in
sub-section (2)
146
5.13-4 What are the conditions to be satisfied by a
domestic co. to claim concessional tax rate of 15%
u/s 115BAB
146

10. I-13 CONTENTS
PAGE
5.13-5 Benefit of section 115BAB is not available to a
foreign company
149
5.13-6 Whether section 115BAB shall apply to LLPs/
partnership firms
149
5.13-7 Is section 115BAB applicable to listed companies 149
5.13-8 Date of registration of company should be on or
after 01-10-2019
149
5.13-9 The company has commenced manufacturing
or production of an article or thing on or before
31-3-2023
150
5.13-10 Ours is a partnership firm formed on 01-04-2019
engaged in manufacturing. We plan to convert
into a company on or after 01-10-2019. We began
manufacturing on 01-07-2019. Can the company
claim benefit of 15% tax rate u/s 115BAB?
151
5.13-11 Isitnecessarythatbusinessofdomesticco.should
be ‘new business’ in order to claim benefit u/s
115BAB?
151
5.13-12 What is meant by the condition “company is not
formed by splitting up or reconstruction of a
business already in existence”
152
5.13-13 Whatifanydifficultyarisesregardingfulfilmentof
thisconditionregardingbusinessnotbeingformed
by splitting or reconstruction of existing business
153
5.13-14 What are the consequences if it is found that
business of the company is formed by splitting up
or reconstruction of existing business
153
5.13-15 What is meant by the condition “does not use ma-
chinery or plant previously used for any purpose”
154
5.13-16 What is meant by “total value” for the purpose of
determining whether total value of second hand
plant and machinery used does not exceed 20%
of total value of plant and machinery used by the
company?
155
5.13-17 Whether the condition, as regards non-user of
second-hand plant and machinery exceeding 20%
of the total value of plant and machinery, is a one-
155

11. CONTENTS I-14
PAGE
time condition to be followed only in company’s
first year or is required to be complied with every
year?
5.13-18 What if any difficulty arises regarding fulfilment
of this condition regarding business not being
formed out of existing business
156
5.13-19 What are the consequences if it is found that more
than 20% of the plant and machinery used by the
company is second-hand plant and machinery
156
5.13-20 Thecompanydoesnotuseanybuildingpreviously
used as a hotel or convention centre
156
5.13-21 Whetherthecondition,asregardsnon-userofany
building previously used as a hotel or convention
centre, is a one-time condition to be followed
only in company’s first year or is required to be
complied with every year?
157
5.13-22 Whatifanydifficultyarisesregardingfulfilmentof
this condition non-user of any building previously
used as a hotel or convention centre
157
5.13-23 What are the consequences if it is found that
buildingusedbythecompanywaspreviouslyused
as hotel or conventions centre and deduction u/s
80-IDwasclaimedandallowedinrespectthereof?
157
5.13-24 Whatis“manufactureorproductionofanyarticle
or thing”?
158
5.13-25 What is the difference in computation of total
income under normal provisions and under the
provisions of section 115BAB?
174
5.13-26 What exemptions or deductions are not available
tocompaniesoptingforsection115BAA/115BAB?
175
5.13-27 Unabsorbed depreciation 176
5.13-28 If a company opts for section 115BAB, whether
current year’s losses can be set off?
176
5.13-29 Whether there is any bar on set-off of carried
forward loss from any earlier assessment year?
177
5.13-30 How to opt for section 115BAB Scheme? 178

12. I-15 CONTENTS
PAGE
5.13-31 Can company keep opting in and opting out of
section 115BAB at its own sweet will?
178
5.13-32 Canacompanyexitthesection115BABschemeand
migrate to normal computation provisions or to
section 115BAA ?
178
5.13-33 What benefits will a domestic co. Get upon fulfil-
ment of conditions
180
5.13-34 Special rate of 17.16% on income derived from or
incidentaltomanufactureorproductioninrelated
party transactions is subject to compliance with
sub-section (6)
181
5.13-35 Where the total income of a domestic company,
includes any income, which has neither been
derived from nor is incidental to manufactur-
ing or production of an article or thing and in
respect of which no specific rate of tax has been
provided separately under Chapter XII
181
5.13-36 Income derived from or incidental to manufac-
turing or production of an article or thing
182
5.13-37 Subject to other provisions of this Chapter 183
5.13-38 Whatistherateofsurchargeapplicabletoincome
taxable @ 15% under section 115BAB and to other
incomes taxable under various other provisions
of Chapter XII i.e. sections 110 to 115BBG except
sections 115BA and 115BAA
184
5.13-39 What are the incomes to which the tax rate of 15%
(effective tax rate 17.16%) under section 115BAB
does not apply?
184
5.13-40 What is the surcharge applicable to the incomes
in the table as above?
185
5.13-41 What is the surcharge applicable to the tax rate
of 15% u/s 115BAB?
185
5.13-42 Whethercompanycoveredundersection115BAB
is exempt from MAT?
185
5.13-43 Ifadomesticcompanywhichhasoptedforsection
115BAB fails to comply with conditions in section
115BAB(2), what are the consequences? Are any
safetyvalvesavailableagainstsuchconsequences?
185

13. CONTENTS I-16
PAGE
5.13-44 What if company finds difficulties in complying
with the provisions of section 115BAB(2)(a)(ii)/
(iii)/section 115BAB(2)(b)?
187
5.13-45 Ifassessee-companyisfoundduringassessmentto
be not compliant with section 115BAB, then how
will income of company be computed?
187
5.13-46 Whether company can carry on business other
than specified business?
188
5.13-47 What if company wants be a diversified company
not limited to manufacturing?
188
5.13-48 Is there any maximum turnover limit criteria a
domestic co. must satisfy to claim benefit u/s
115BAB?
188
5.13-49 Is there any sunset clause in section 115BAB after
which special low rate of 17.16% Will not apply?
188
5.13-50 We have formed and registered DPIIT-recognised
startupprivatelimitedcompanyinNovember2019.
Will we be eligible for tax holiday under section
80-IAC if we opt for section 115BAB?
189
5.13-51 We have formed and registered DPIIT-recognised
startupprivatelimitedcompanyinNovember2019.
Will we be ineligible for section 115BAB if we get
certification of Inter Ministerial Board (IMB) as
eligible to claim deduction under section 80-IAC?
189
5.13-52 What happens to claim for carry forward and set
off of losses in terms of section 79 if a new startup
company opts for section 115BAB?
189
5.13-53 If manufacturing LLP or firm converts itself to
a company on or after 1-10-2019 and satisfies all
conditions of section 115BAB, will the company
be eligible to avail set-off of unutilised Alternate
MinimumTax(AMT)creditoferstwhileLLP/firm?
190
5.14 Conclusion 190
5.15 Case studies and illustrations on section 80-IAC 190

14. I-17 CONTENTS
PAGE
6
FUNDING BLUES OF PRIVATE
LIMITED START-UP COMPANIES
6.1 Onus on start-up private limited Co. to explain ‘source of
the source’ of share capital/share premium raised
192
6.2 Angeltaxu/s56(2)(viib)-Sharepremiumreceivedbyclosely
held companies in excess of FMV taxable
194
6.2-1 Exemption of start-ups from angel tax 197
6.2-2 Consequences of non-compliance with start-ups
with conditions for exemption from angel tax
specified in LSN
198
6.2-3 Where first proviso to section 68 attracted, will
there be double taxation - Taxation under section
56(2)(viib) as well as section 68?
199
6.3 Modeofacceptanceofsharecapitalmonies-Section269ST 200
6.4 How should promoter raise money to fund his own invest-
ment in start-ups before he can get angel funding
202
7
TAX IMPLICATIONS OF FUNDING A START-UP BY
INVESTING IN IT MONEY FROM SALE OF RESIDENTIAL
PROPERTY INVESTED IN START-UP - SECTION 54GB
7.1 If eligible start-up company (Pvt. Ltd. Co.) is liable to MAT,
then will promoter get section 54GB relief?
203
7.2 Taxexemptionforsellingresidentialpropertyandinvesting
long-termcapitalgainsinequitysharesofstart-upcompany
203
7.3 Conditions to be satisfied for availing tax relief in respect of
capital gains by investment in shares of a company which
is ‘eligible start-up’
204
7.4 Promotersellinghisresidentialpropertyandinvestingmon-
ies in its shares-efficient from point of view of explaining
‘source of source’ under section 68
206

15. CONTENTS I-18
PAGE
8
EXEMPTION FROM ‘ANGEL TAX’
TO PRIVATE LIMITED COMPANIES START-UPS
8.1 Exemption from angel tax as per paras 4 to 7 of latest start-
up notification
207
8.2 Start-up should be a private limited company recognised
by DPIIT
210
8.3 Aggregate consideration for shares should not exceed INR
25 crores
211
8.3-1 Is the limit of consideration for shares received
of INR 25 cr. for angel tax exemption applicable
financial year-wise?
213
8.3-2 Promoter sells his residential property and invests
in equity shares of his start-up private co. FY
2019-20 for 25% stake and claimed section 54GB
exemption for capital gains from property in his
ITR. Will this amount count for limit of INR 25
cr. for angel-tax exemption
213
8.3-3 Will preference shares issued count for the limit
of INR 25 cr?
214
8.3-4 Illustration on angel tax exemption - PQR Pvt.
Ltd. is a DPIIT-Recognised start-up incorporated
on01.04.2016.Theaggregateconsideration(share
capital plus share premium) received till date for
issue of shares is INR 70 cr. (Share capital INR 10
cr plus share premium INR 60 cr) The break-up
of amounts received from various parties
214
8.4 Start-up has not invested in specified assets for period of
7 years from end of latest FY in which shares are issued
for premium
216
8.4-1 Declaration in Form 2 to be filed for availing
exemption from Angel Tax
217
8.5 Declaration in Form 2 to be submitted by start-up fulfilling
conditions
218
8.6 Consequences of non-compliance with start-ups with con-
ditions for exemption from angel tax specified in LSN
218

16. I-19 CONTENTS
PAGE
8.6-1 Whatifconditionsofexemptionfromangeltaxare
violatedandFMVofsharesexceedsconsideration
received on them? Will start-up PLC be able to
claim any deduction as negative income or loss?
219
8.6-2 ‘Company fails to comply with any of those con-
ditions’
219
8.6-3 If company ceases to be ‘start-up’ as defined in
LSNbyreasonofcrossingINR100croresturnover
limit or by reason of expiry of 10 years from the
date of incorporation, will tax and penalty as per
new second proviso apply to past issues of shares
for which exemption from angel-tax under LSN
was claimed ?
223
8.7 WhataboutpendingassessmentsofDPIIT-recognisedstart-
up companies based on notices issued prior to 19-02-2019?
How should start-ups deal with these?
223
8.8 When to file declaration in Form 2? Can it be filed after
issue of notice under section 143(2)/147 when assessment
proceeding is pending?
225
8.9 Whether DPIIT-recognition can be obtained after issue of
notice under section 143(2)/147 when assessment proceed-
ing is pending?
225
8.10 What if assessment was made before 19-02-2019 and
demand raised in respect of angel tax i.e. additions u/s
56(2)(viib)? Can exemption be obtained by filing Form No.
2 in such cases?
225
8.11 What happens if matter as in FAQ 8.10 Above is pending
in appeal?
226
8.12 What about demands raised on start-up company in orders
passed before 19-2-2019?
227
9
COMPUTATION ON FMV OF SHARES ISSUED
WHEN ANGEL TAX EXEMPTION IS NOT APPLICABLE
9.1 Determination of fair market value of start-up company’s
shares
228

17. CONTENTS I-20
PAGE
9.2 Break-up value method 233
9.2-1 Balance sheet as on valuation date 234
9.2-2 ‘Book value’ 234
9.2-3 ‘Book value of assets’ 235
9.2-4 AmountpaidasadvancetaxundertheIncome-tax
Act
235
9.2-5 Fictitious assets 235
9.2-6 Book value of liabilities 236
9.2-7 The paid-up capital in respect of equity shares
[Sub-clause (i) of Rule 11UA(2)(a)]
236
9.2-8 The amount set apart for payment of dividends on
preference shares and equity shares [Sub-clause
(ii) of Rule 11UA(2)(a)]
236
9.2-9 Reserves, by whatever name called, other than
those set apart towards depreciation [Sub-clause
(iii) of Rule 11UA(2)(a)]
237
9.2-10 Any amount representing provision for taxation
[Sub-clause (iv) of Rule 11UA(2)(a)]
237
9.2-11 Any amount representing provisions made for
meetingliabilities,otherthanascertainedliabilities
[Sub-clause (vi) of Rule 11UA(2)(a)]
239
9.2-12 Any amount representing contingent liabilities
other than arrears of dividends payable in respect
of cumulative preference shares [Clause (vi) of
Rule 11UA(2)(a)]
243
10
CONDITIONS FOR CARRY FORWARD
OR SET OFF OF LOSSES OF START-UP PLC U/S 79
10.1 Carry forward and set off of losses of start-up PLC under
section 79 - Pre-amendment position
245
10.2 Carry forward and set off of losses of start-up PLC under
amended section 79
246
10.3 If turnover of start-up PLC exceeds the turnover limit
in section 80-IAC, will it also lose tax benefits under section
79?
248

18. I-21 CONTENTS
PAGE
11
DEFERRING TDS OR TAX PAYMENT IN RESPECT
OF ESOP INCOME OF EMPLOYEES OF
ELIGIBLE START-UPS
11.1 Deferring TDS or tax payment in respect of income per-
taining to Employee Stock Option Plan (ESOP) of start-ups
250
12
MANDATORY ACCEPTANCE OF PAYMENTS
THROUGH PRESCRIBED ELECTRONIC MODES IF
TURNOVER EXCEEDS RS. 50 CRORES - SECTION 269SU
12.1 Mandating acceptance of payments through prescribed
electronic modes if business entity’s turnover exceeds 50
crores [Sections 269SU and 271DB]
254
12.2 Conditions to be fulfilled for applicability of section 269SU 256
12.3 Issection269SUapplicabletoDPIIT-Recognisedstart-ups? 258
12.4 ‘Total sales, turnover or gross receipts’ 258
12.5 Distinction between ‘turnover’ and ‘total sales’ 259
12.6 ICAI’s views on ‘turnover’ 259
12.6-1 Whether sales tax/excise duty collected is to be
included in turnover
260
12.7 Items to be excluded/deducted from ‘turnover’ 261
12.8 Items to be included/not to be deducted from ‘turnover’ 261
12.9 VAT/other indirect taxes collected/collectible - Whether
part of turnover
262
12.10 ‘Gross Receipts’ of business - ICAI’s views 263
12.11 Items to be included in ‘gross receipts’ 263
12.12 Items not to be included in ‘gross receipts’ 264

19. CONTENTS I-22
PAGE
13
TAXATION OF CAPITAL GAINS ON SALE
OF SHARES BY INVESTORS EXITING START-UPS
13.1 Transfer of shares of start-up private limited co. by exiting
investor will result in capital gains income
266
13.2 Special provision for full value of consideration for transfer
of unquoted share - Section 50CA
267
13.2-1 Quoted Share 267
13.2-2 Fair Market value 267
13.3 Taxation of short-term capital gains resulting from transfer
of unlisted equity shares
267
13.4 Taxation of long-term capital gains resulting from transfer
of unlisted equity shares
268
13.5 Where individual/HUF investor had claimed section 54GB
benefits
268
APPENDICES
APPENDIX 1 : NEW DEFINITION OF ‘START-UPS’ 271
APPENDIX 2 : REPEALED DEFINITIONS OF ‘START-UP’ 278
APPENDIX 3 : RELEVANT SECTIONS OF INCOME-TAX ACT, 1961 289
APPENDIX 4 : RELEVANT RULES OF INCOME-TAX RULES, 1962 311
APPENDIX 5 : NOTIFIED CLASS OF PERSONS UNDER CLAUSE
(ii) OF PROVISO TO SECTION 56(2)(viib) 317
APPENDIX 6 : SECTION 56(2)(viib) OF THE INCOME-TAX ACT,
1961 - INCOME FROM OTHER SOURCES -
CHARGEABLE AS - START UPS - CONSOLIDATED
CIRCULAR FOR ASSESSMENT OF START UPS 319
APPENDIX 7 : STARTUP INDIA KIT 321
APPENDIX 8 : SCHEME FOR FACILITATING START-UPS INTEL-
LECTUAL PROPERTY PROTECTION (SIPP) 337
APPENDIX 9 : EMERGENCY CREDIT LINE GUARANTEE
SCHEME (ECLGS) OPERATIONAL GUIDELINES
UPDATED AS ON MAY 26, 2020 341

20. I-23 CONTENTS
APPENDIX 10 : FREQUENTLY ASKED QUESTIONS (FAQs) ON
GUARANTEED EMERGENCY CREDIT LINE OF
RS. 3 LAKH CRORE 351
APPENDIX 11 : EMERGENCY CREDIT LINE GUARANTEE
SCHEME (ECLGS) 357
APPENDIX 12 : NOTIFIED CLASSES OF PERSONS UNDER
SECTION 56(2)(viib), CLAUSE (ii) OF PROVISO 358
APPENDIX 13 : THE MICRO, SMALL AND MEDIUM ENTER-
PRISES DEVELOPMENT ACT, 2006 359
APPENDIX 14 : NEW MSME NOTIFICATION (NMN) 375
PAGE

21. START-UP
1.1 BACKDROP
A country of 130 crore population can’t create jobs for everyone.
Entrepreneurship has to be incentivised. Job providers have to be
created who occupy themselves productively and create avenues
for employment for others. To boost job-creation, Government
incentivises start-ups by giving them tax incentives and creating a
start-up ecosystem.
The idea behind encouraging start-ups is to transform the nation
from a country of job-seekers to a country of job-creators.
1.2 START-UP
Wikipedia defines ‘start-up’ as under:
“A start-up or start-up is started by individual founders or entre-
preneurs to search for a repeatable and scalable business model.
More specifically, a startup is a newly emerged business venture
that aims to develop a viable business model to meet a marketplace
need or problem.................... Start-ups face high uncertainty and do
have high rates of failure, but the minority that go on to be success-
ful companies have the potential to become large and influential.
Some start-ups become unicorns, i.e. privately held startup com-
panies valued at over $1 billion. According to TechCrunch, there
were 279 unicorns as of March 2018, with most of the unicorns
located in China, followed by the United States. The largest unicorns
founded as of October 2018 included Ant Financial, ByteDance, DiDi,
Uber, Xiaomi, and Airbnb.”
1C H A P T E R
1

22. According to Wikipedia, ‘entrepreneurships’ and ‘start-ups’
are similar. However, the scope of the former term is wider
and covers all new businesses including self-employment and
businesses that never intend to grow big or become registered.
‘Start-up’ refers to a new business that intends to grow beyond
the solo founder, have employees, and intend to grow.
Any new enterprise that has a scalable business model and intends to
growbeyondthesolofounder,haveemployeesandintendstogrowis
a ‘start-up’. A ‘start-up’ entity may take any legal form-proprietorship
partnership, LLP, private limited company, public limited company
etc. However, in order to obtain recognition of DPIIT (Department
for promotion of Industry and Internal Trade), the start-up entity
must be a registered partnership firm or a LLP or a private limited
company and must satisfy other conditions in the Latest Startup
Notification (LSN) issued by DPIIT [See Chapter 2]. In order to be
eligible for tax holiday under the Income-tax Act, the start-up must
be a private limited company or an LLP and DPIIT recognised.
DPIIT recognised start-ups are eligible for the following benefits:
 Intellectual Property Rights (IPR) benefits.
 Relaxation in public procurement norms.
 Self-certification under Labour Environment Laws.
 Faster exit for start-ups.
Question arises whether a start-up is also eligible to be classified as
MSME to obtain benefits under the Micro, Small and Medium En-
terprises Development Act, 2006 (MSMED Act, 2006) (Appendix 13).
Also whether and what is the difference between an MSME under
the MSMED Act, 2006 and New MSME Notification (NMN) and a
start-up under the LSN. These issues are discussed hereunder.
1.2-1 What is the revised definition for MSMEs? What are the
changes in the existing legal definition/classification
The Central Government has, vide Notification S.O. 2119(E), dated
26.06.2020 [New MSME Notification (NMN) [See Appendix 14]],
notified a composite criteria of investment and turnover for classi-
fying the enterprises as micro, small and medium enterprises. The
Notification also specifies the form and procedure for filing the
Para 1.2 START-UP 2

23. memorandum (“Udyam Registration”). The Notification comes into
force with effect from 01.07.2020 and is in exercise of the powers
conferred by sub-section (1) read with sub-section (9) of section
7 and sub-section (2) read with sub-section (3) of section 8, of the
Micro, Small and Medium Enterprises Development Act, 2006 and
in supersession of the notifications S.O. 1702(E), dated the 1st June,
2020, S.O. 2052(E), dated the 30th June, 2017, S.O. 3322(E), dated the
1st November, 2013 and S.O. 1722(E), dated the 5th October, 2006.
Para 1 of the NMN specifies a composite criteria of investment and
turnover for classifying the enterprises as micro, small and medium
enterprises. Accordingly, an enterprise shall be classified as a micro,
small or medium enterprise on the basis of the following criteria,
namely:—
(i) amicroenterprise,wheretheinvestmentinplantandmachinery
or equipment does not exceed one crore rupees and turnover
does not exceed five crore rupees;
(ii) asmallenterprise,wheretheinvestmentinplantandmachinery
or equipment does not exceed ten crore rupees and turnover
does not exceed fifty crore rupees; and
(iii) a medium enterprise, where the investment in plant and
machinery or equipment does not exceed fifty crore rupees
and turnover does not exceed two hundred and fifty crore
rupees.
ThereviseddefinitionofMSMEapplicablewitheffectfrom01.07.2020
is based on composite criteria of turnover limits and limits of invest-
ment in plant and machinery or equipment. The same limits apply
to both manufacturing and service enterprises.
Existing MSME classification (applicable upto 30.06.2020)
Criteria: Investment in plant and machinery or equipment
Classification Micro Small Medium
Manufacturing
Enterprises
Investment ≤
25 lac
Investment Rs. 25
Lac but ≤ Rs. 5
crores
Investment Rs. 5
crores but ≤ Rs. 10
crores
Services Enter-
prises
Investment ≤
10 lac
Investment Rs. 10
Lac but ≤ Rs. 2
crores
Investment Rs. 2
crores but ≤ Rs. 5
crores
3 START-UP Para 1.2

24. Revised MSME classification applicable w.e.f. 01.07.2020
Criteria: Composite criteria of Investment in plant and machinery
and turnover [as per New MSME Notification (Appendix 13)]
Classification Micro Small Medium
Manufacturing/
Service Enter-
prises
Investment ≤
Rs. 1 cr and
turnover ≤ Rs.
5 cr
Investment Rs.
1 cr but ≤ Rs.10
crores and turn-
over Rs. 5 cr but
≤ Rs. 50 cr
Investment Rs.
10 crores but ≤
Rs. 50 crores and
turnover Rs. 50
cr but ≤ Rs. 250 cr
1.2-2Whatistheeffectivedateforcomingintoforceoftherevised
composite classification criteria of MSMEs?
The revised classification criteria as per the NMN come into force
with effect from 01.07.2020.
1.2-3 Whether startups will be regarded as MSMEs as per the
revised definition?
Yes. They will be regarded as MSMEs provided they satisfy the
investment limits and turnover limits in the definitions of MSME.
An enterprise can be an MSME as well as a startup by satisfying the
definitions of both MSME in NMN as above and of startup as per
LSN.MSMEandStartuplegalstatusarenotmutuallyexclusive.Only
partnership firms, LLPs and Companies can have both the status of
“MSME”andofstartupundertheLSN.Proprietorships,HUFs,Public
limited companies, AOPs, Cooperative Societies can be MSME but
not startup as defined in LSN.
Startups will cease to be regarded as “startups” under LSN the mo-
ment they cross the 100 cr turnover ceiling limit or 10 years have
lapsed since incorporation. Even after an entity ceases to be a startup
as above, it will continue to be MSME as per NMN so long as it does
not exceed the turnover limit of Rs. 250 cr and investment limit of
Rs. 50 cr. Likewise an entity may lose its MSME status if investment
limit of Rs. 50 cr is exceeded but retain its startup status turnover is
Rs. 100 cr or less and 10 years have not lapsed since incorporation.
1.2-4 What is the legal difference between an MSME and a
startup?
MSME is defined by the MSME Act. Startup is defined by the DPIIT’s
Para 1.2 START-UP 4

25. StartupNotificationNo.GSR127(E),dated19.02.2019[i.e.NewStart-
up Notification (NSN)]. Turnover limit to quality as ‘start-up’ under
LSN is Rs. 100 crores to qualify for DPIIT recognition. Turnover
limit to qualify as MSME is Rs. 250 crores. An enterprise can be an
MSME as well as a startup by satisfying the definitions of NMN as
well as NSN respectively.
The distinction between MSME and startup can be summed up thus
as under:
Sr.
No.
MSME Startup
1. Defined by NMN issued under the
MSMED Act, 2006
Defined by LSN
2. Investment limits and turnover
limits should both be satisfied to
be regarded as MSME
Only turnover limit of Rs.100 cr is
applicable. No investment limits in
the definition of startup
3. MSME status will exist as long as
investment limits and turnover
limits are not exceeded
Startup status will last till turnover
exceeds Rs.100 crores or 10 years
from date of incorporation are
completed, whichever is earlier
4. Turnover limit for MSME Status is
Rs.250 crores
Turnover limit for Startup Status
is Rs.100 crores
5. Investment ceiling for MSME sta-
tusisRs.50crores.Ifthatisexceed-
ed, enterprise ceases to be MSME
No investment ceilings to be re-
garded as startup under LSN
6. Enterprise can enjoy MSME sta-
tus for any length of time after its
incorporation so long as its invest-
ment does not exceed Rs.50 cr and
turnover does not exceed Rs.250cr
Startup status under LSN is only
for 10 years from date of incor-
poration
7. To be recognised as MSME, enter-
prisemustfileUdyamRegistration
To be recognised as startup, en-
terprise must file application for
DPIITRecognitionintermsofLSN
8. If investment limit of Rs.50 crores
is not exceeded and turnover limit
ofRs.100croresisnotexceededbut
10 years have lapsed since date of
incorporation, then enterprise will
be MSME but will not be a startup
If investment limit of Rs.50 crores
is exceeded but turnover limit of
Rs.100 crores is not exceeded and
10 years have not elapsed from
date of incorporation, enterprise
will not be regarded as MSME but
will be regarded as startup
5 START-UP Para 1.2

26. Sr.
No.
MSME Startup
9. MSME enterprise can have any
legal form of organisation i.e. pro-
prietorship or partnership firm or
alimitedliabilitypartnership(LLP)
or a company (whether public lim-
ited or private limited) or Hindu
undivided family (HUF) or AOP or
cooperative society
Only partnership firms, LLPs and
private limited companies will be
eligible for startup status
10. Enterprisecanfollowanybusiness
model to qualify as MSME
To qualify as a startup, Businesses
model must be working towards
innovation, development or im-
provement of products or services
orbusinessmodelmustbescalable
with high potential of employment
generation or wealth creation
11. Enterprise will be an MSME even
if it is formed by splitting up or
reconstructionofbusinessalready
in existence
Enterprise will not qualify as a
startup if it is formed by splitting
up or reconstruction of business
already in existence
12. MSME private limited companies
whichdonotqualifyasstartupsare
liable to angel tax on shares issued
at premium if issue price is higher
than Fair Market Value
Startup private limited companies
are exempted from angel tax if in-
vestments made or to be made by
all investors including family and
friends do not exceed Rs.25 crores
13. NotaxholidayforanMSMEunless
it qualifies as a startup
Tax holiday u/s 80-IAC of the
Income-tax Act, 1961 for a startup
whichisanLLPoraprivatelimited
company
14. No tax exemption to capital gains
from sale of residential property
of promoter if the same is invest-
ed into a private limited company
which is an MSME but does not
qualify as a startup
Taxexemptionundersection54GB
of the Income-tax Act, 1961 to cap-
ital gains from sale of residential
property of promoter if the same
is invested into a private limited
company which is a startup
15. Benefits under the MSMED Act
available to MSMEs
BenefitsundertheMSMEDAct are
notavailabletostartupsunlessthey
qualifyasMSMEsbysatisfyingthe
investment limits in the definition
and file Udyam Registration
It can be seen from above that an enterprise may cease to be start-
up but continue to be regarded MSME and vice versa.
Para 1.2 START-UP 6

27. 1.2-5 Can an enterprise satisfy the definition of MSME and startup
and get the best of both the worlds i.e. benefits under MSMED
Act as well as LSN?
Yes. An enterprise can claim benefits under both MSMED Act as well
as LSN if it is a partnership firm or LLP or private limited company
recognised by DPIIT and 10 years has not elapsed from the date of
its incorporation and it satisfies the investment limits in NMN and
files Udyam Registration online.
1.2-6 How to compute investment in Plant and Machinery
Para 4 of the NMN deals with calculation of investment in plant and
machinery or equipment and provides as follows:
(1) The calculation of investment in plant and machinery or
equipment will be linked to the Income Tax Return (ITR) of
the previous years filed under the Income-tax Act, 1961.
(2) In case of a new enterprise, where no prior ITR is available, the
investment will be based on self-declaration of the promoter
of the enterprise and such relaxation shall end after the 31st
March of the financial year in which it files its first ITR.
(3) The terms “plant and machinery” and “equipment” shall have
the meaning as assigned to the plant and machinery in the
Income-tax Rules, 1962 framed under the Income-tax Act,
1961 and shall include all tangible assets (other than land and
building, furniture and fittings).
(4) Thepurchase(invoice)valueofaplantandmachineryorequip-
ment, whether purchased first hand or second hand, shall be
taken into account excluding Goods and Services Tax (GST),
on self-disclosure basis, if the enterprise is a new one without
any ITR.
(5) The cost of certain items specified in the Explanation I to
sub-section (1) of section 7 of the Act shall be excluded from
the calculation of the amount of investment in plant and
machinery.
The cost of following items to be excluded in the computation of the
value of plant and machinery or equipment:
u equipments such as tools, jigs, dies, moulds and spare parts for
maintenance;
7 START-UP Para 1.2

28. u consumable stores;
u cost of installation of plant and machinery;
u research and development equipment;
u pollution control equipment;
u generation sets and extra transformer installed by the under-
taking as per the regulations of the State Electricity Board;
u bank charges and service charges paid to the National Small
Industries Corporation or the State Small Industries Corpora-
tion;
u procurementorinstallationofcables,wiring,busbars,electrical
control panels (not those mounted on individual machines), oil
circuit breakers or miniature circuit breakers which are nec-
essarily to be used for providing electrical power to the plant
and machinery or for safety measures;
u gas producer plants;
u transportation charges (excluding GST, sales tax and excise)
for indigenous’ machinery from the place of manufacturing
to the site of the factory;
u technical know how for erection of plant and machinery;
u storagetankswhichstorerawmaterials,finishedproductsonly
and are not linked with the manufacturing process;
u fire fighting equipments.
1.2-7 How to compute turnover for the purpose of turnover ceil-
ings in NMN?
Para 4 of the NMN deals with calculation of turnover and provides
as under:
(1) Exports of goods or services or both, shall be excluded while
calculatingtheturnoverofanyenterprisewhethermicro,small
or medium, for the purposes of classification.
(2) Information as regards turnover and exports turnover for an
enterprise shall be linked to the Income-tax Act or the Central
Goods and Services Act (CGST Act) and the GSTIN.
(3) The turnover related figures of such enterprise which do not
have PAN will be considered on self-declaration basis for a
Para 1.2 START-UP 8

29. period up to 31st March, 2021 and thereafter, PAN and GSTIN
shall be mandatory.
1.2-8 Whether any registration will be required to be recognised
as MSME under the revised classification with effect from
01.07.2020?
Para 2 of the NMN deals with becoming a micro, small or medium
enterprise and provides as under:
(1) Any person who intends to establish a micro, small or medium
enterprise may file Udyam Registration online in the Udyam
Registrationportal,(called‘UdyamParichay’)basedonself-dec-
laration with no requirement to upload documents, papers,
certificates or proof.
Note :
The words “any person who intends to establish a micro, small
or medium enterprise” tends to convey the impression that
existing MSMEs who are not registered under Udyog Aadhaar
upto 30.06.2020 can’t file Udyam Registration online.
This is not so as can be seen from screenshots from the new
portal given below as it allows those who don’t have Udyog
Aadhaar Memorandum (UAM) by giving previous years annual
turnover.
(2) On registration, an enterprise (referred to as “Udyam” in the
Udyam Registration portal) will be assigned a Permanent Iden-
tity Number to be known as “Udyam Registration Number”
(3) An e-certificate, named “Udyam Registration Certificate” will
be issued on completion of the registration process.
Para 6 of the NMN deals with registration process and provides as
under:
(1) The form for registration shall be as provided in the Udyam
Registration portal.
(2) There will be no fee for filing Udyam Registration.
(3) Aadhaar number shall be required for Udyam Registration.
(4) The Aadhaar number shall be of the proprietor in the case of
a proprietorship firm, of the managing partner in the case of
9 START-UP Para 1.2

30. a partnership firm and of a karta in the case of a Hindu Undi-
vided Family (HUF).
(5) In case of a Company or a Limited Liability Partnership or a
Cooperative Society or a Society or a Trust, the organisation
or its authorised signatory shall provide its GSTIN and PAN
along with its Aadhaar number.
(6) In case an enterprise is duly registered as an Udyam with PAN,
any deficiency of information for previous years when it did
not have PAN shall be filled up on self-declaration basis.
(7) No enterprise shall file more than one Udyam Registration:
Providedthatanynumberofactivitiesincludingmanufacturing
or service or both may be specified or added in one Udyam
Registration.
(8) Whoever intentionally misrepresents or attempts to suppress
the self-declared facts and figures appearing in the Udyam
Registration or updation process shall be liable to such penalty
as specified under section 27 of the Act.
Step-wise screenshots with numbers are given below showing the
registration process on the portal.
Para 1.2 START-UP 10