Incentives for Start-Ups : Capital gains exemption for investment in start-ups extended by 1 year

Ministry of Finance took the twitter to write, “To incentivize funding of the start-ups, the capital gains exemption for investment in start-ups has also been extended by 1 more year till 31st March, 2022.”

Startup Incentives from the Government

In January, Prime Minister Narendra Modi announced a host of startup-friendly policies as part of his Startup India Initiative. A Rs. 10,000 crore fund for innovation-driven businesses, a Rs. 500 crore loan guarantee system, and a three-year exemption from paying income tax on profits have been established. A capital gains tax exemption for start-ups was also introduced, as well as a number of other incentives, as listed below.

A Startup Action Plan

A plan was unveiled to assist entrepreneurs in playing a revolutionary role in India’s growth. To date, businesses have had to comply with a slew of federal and state labour and environmental rules. Penalties and fines would be imposed if these laws were not followed. Startups would be able to self-certify their compliance with nine labour and environmental rules without having to be examined on a regular basis, as is presently the case, and would receive faster approvals as a result. Only if there is a written complaint against the startup will compliance be examined.

In order to preserve intellectual property, startups will receive an 80% discount on patent registration expenses compared to other businesses. Startups are high-risk companies, with approximately 90% of them failing at this time. If a startup fails, figuring out a speedier exit strategy is also possible if an entrepreneur wishes to close his company. A business could be wound up in three months, and necessary measures will be inserted in the parliament’s Bankruptcy and Insolvency Bill for this purpose.

Exemption from taxes

To lessen the tax burden on startups, a “entrepreneur-friendly taxation framework” will be implemented. As part of the action plan, tax exemption has been offered under three separate programmes. According to Budget 2016, a new Section 54EE has been proposed to give an exemption from capital gains tax if long-term capital gains proceeds are invested by an assessee in units of specified funds for three years, failing which the exemption will be abolished. It allows for a maximum investment of Rs. 50 lakhs in the fund’s units. It also proposes to alter section 54GB to grant exemption to an individual who wishes to form a corporation by selling a residential property and investing the proceeds in the corporation’s shares.

Long-term capital gains arising from the transfer of a residential property would be tax-free if the capital gains were invested in the subscription of shares of a company that qualified as an eligible start-up.

Only after receiving certification from the Inter-Ministerial Board, which was established for this purpose, would a startup be qualified for these exemptions. To award the exemptions, this body would analyse the business’s creative nature. A full explanation of the startup eligibility conditions. On amending section 54GB so that the expression “new asset” includes computers or computer software in case of technology-driven start-ups so certified by the Inter-Ministerial Board of Certification, in order to provisions that are in sync with the current trend of startups where the use of technology is primarily with computer software and hardware for the core asset base due to the nature of the business activity.

Other Benefits

A new framework for protecting intellectual property rights and speedier patent registration are among the other benefits. The government also plans to establish facilitation centres where small businesses can get free legal counsel and other support to help them comply with regulations. Procurement rules are also being recommended to be loosened so that startups can join and compete with established companies. Other features include policies that support women entrepreneurs, sector-specific incubators, and the creation of biotech bio clusters. Investments in incubators that exceed the fair market value are excluded, similar to the current exemption for venture capital funds investing in businesses that exceed the FMV. Individual governments and the business sector will each provide 40% and 20% of the funding for the establishment of new incubators, respectively.