Union Budget 2023: Maximizing Benefits: Understanding Tax Exemptions for Startups
India, today, is proud to have over 90,000 thriving startups across the length and breadth of the country, enhancing its economic growth. Startups have become a household name and a preferred profession, but its roots go back to the Startup India Action Plan 2016. Envisioning a vibrant startup ecosystem, the Startup India Action Plan 2016 laid the foundation of government support, schemes and tax-incentives for nurturing innovation and startups in the country. With a view to stimulate the development of startups in India and provide them with a competitive platform, the Action Plan provided that the profits of a startup are exempted from income-tax for a period of 3 years.
During initial years, budding entrepreneurs struggle to evaluate the feasibility of their business ideas. Significant capital investment is made in adopting advancing technology, fighting rising competition and navigating the unique challenges of their venture. Additionally, limited alternative sources of finance available to the small and growing entrepreneurs lead to constrained cash funds. At nascent stages, early-stage startups can immensely benefit from tax exemption.
Section 80-IAC of the Income Tax Act 1961 was introduced with the objective of providing impetus to startups and facilitating their growth in the initial phases of their business, allowing a deduction of 100 percent of the profits and gains derived by an eligible startup.
The 2023 Union Budget has also taken several steps to enhance the startup ecosystem, aiming to reduce the tax burden, improve the investment climate, and boost the entrepreneurial spirit of the country. One of the key benefits of the budget is the extension of the date of incorporation for eligible startups to avail tax benefits by an additional year. This will provide a much-needed boost to startups, especially those that are still in their early stages of growth.
Earlier, one of the conditions to qualify as an "eligible start-up,” limited the incorporation period till 1st day of April 2023. Thus, start-ups incorporated after 1st day of April 2023 would not have been eligible to apply for this tax benefit.
Now, startups incorporated in the coming financial year will also be eligible to avail the tax holiday benefit. This benefit will also support the “Startup India: The Way Ahead” vision of promoting startups in every district.
Now, the provisions of the section 80-IAC of the Income Tax Act inter alia, provide for a deduction of an amount equal to 100 percent of the profits and gains derived from an eligible business by an eligible start-up for 3 consecutive assessment years out of 10 years, beginning from the year of incorporation, at the option of the startup subject to the condition that:
- the total turnover of its business does not exceed INR 100 crores,
- it is holding a certificate of eligible business from the Inter-Ministerial Board Certification, and
- it is incorporated on or after 1st day of April 2016 but before the 1st day of April 2024.
In conclusion, the Indian startup ecosystem has come a long way in recent years and is poised for even greater growth in the future given the Union Budget’s fresh impetus. With supportive government policies, tax exemptions, a thriving venture capital industry, and a talented pool of entrepreneurs, India is well positioned to become a major player in the global startup scene.
The thousands of successful startups operating in the country today are a testament to the entrepreneurial spirit and innovation that drives the Indian economy forward.