Re-gearing Startups

The Department for Promotion of Industry and Internal Trade (DPIIT), on Tuesday (February 19, 2019) issued a notification which effectively changes the definition of startups and income tax treatments relating to the funding received by start-ups.

Highlighting the key points in the notification:

Definition: The time period of a startup has now increased from 7 years to 10 years and now makes no distinction between startups in the biotechnology space versus other startups. Further, for continuous recognition of an entity as a startup, the turnover limit for each financial year has been increased from Rs.25 crore to Rs.100 crore in such period of 10 years. It may be noted that Notification G.S.R.364(E) dated April 11, 2018 which had previously amended the definition of startups had provided as follows the tenure for startups in the biotechnology space as 10 years and 7 years for other startups. The January 16, 2019 notification had not amended the definition of startups.

Exemptions under the Income Tax Act (IT Act): Tuesday’s notification provides an exemption under clause (ii) of proviso to Section 56(2)(viib) of the IT Act for startups where interalia the aggregate amount of paid up share capital and share premium after an issue or proposed issue not exceed INR 25 crore (shares issued to non-resident and venture capital company or fund have been excluded), which means to say that income received from such a startup would not be considered towards income from other sources subject to other conditions being met relating to investments of startups. This is in stark contrast with the notification issued by DIPP in January 16, 2019 wherein it had provided no such exemptions. To be clear, section 56(2)(viib) of the Income Tax Act, 1961, provides that the aggregate consideration received by a company for shares issued to a resident in any previous year where such shares that are issued over the face value, shall be chargeable under “Income from other sources”.

Consequently, Form 2 has been entirely replaced and now presents only a declaration from an authorised signatory of the company sans any supporting documents. However para 6 that pertains to the scope of today’s notification is rather vague and could be subject to some confusion.

All in all, this appears to be a welcome change and the fact that the deliberations haven’t been time-consuming is a step forward to depicting a more cohesive corp-political milieu.

Guest Author: Alifiya Mujpur Alifiya Mujpur is a fourth year law student at SRM School of Law.