STARTUPS IN INDIA

A startup is a private company incorporated under the Companies Act, 2013. This complies with the Ministry of Commerce and Industry & Department of Industrial Policy and Promotion Notification released on June 13, 2017. As per the startup notification, a firm is considered a startup if it satisfies the following conditions:

The firm should be either a private limited company or limited liability or partnership firm.

The annual revenue of the company must not exceed 25 crore rupees.

The firm must be less than seven years old from the date of registering. However, few companies from the Biotechnology segment are provided exceptions until ten years.

The firm must try to work on innovation, building or enhancing their goods, procedures, and services. It shall adopt a flexible business model with a robust efficiency for job growth and economic growth.

A notification regarding the exemptions available for startups (also the private companies), which would positively aid the newly incorporated companies in carrying out their businesses, was released by the Ministry of Corporate Affairs. Under this notification, few amendments were made to the provisions in the Companies Act, 2013.

CASH FLOW STATEMENTS NOT MANDATORY:

Under clause 40 in section 2 of the Act, previously, every company’s financial statement must consist of cash-flow information as well. But, after the notification, a startup is exempted from making cash-flow statements. This is done to save time and money for startups. Startups receive capital from investors or the public, or the government. Since it takes time to receive such funds from the investors, initially, there wouldn’t be any cash flow within the firm, and hence a cash flow statement will be unessential.

NOT MANDATORY TO CONDUCT FOUR MEETINGS PER YEAR:

A modification was made in section 173 subsection 5 of the Companies Act, previously, it is only a Private Company, a Dormant Company, a Small Company, and a One-person Company which are given the leeway in conducting quarterly meetings in a year. Still, later, according to the new notification, no startup needs to hold a minimum of 4 meetings a year. Still, it is mandatory to conduct a minimum of two meetings a year with a minimum gap of 90 days between the meetings.

Interested Directors also to be counted in the quorum for the meetings:

Regarding the Company Meetings Quorum, previously, section 184 (2) of the Act stated that the quorum would be counted considering only the directors who are not interested given that there are at least two such directors, provided that the remaining directors who are interested are equal to or exceeding two-third of the entire board of directors. But after the new notification, even the interested directors are counted in the quorum for a meeting, given that they reveal their interests with the entire board in advance. This solved all the ambiguities regarding the counting of quorum when there are only two directors where one is interested, and the other is not interested. This clarification was essential for startups as there wouldn’t be many directors in the initial stage when it is started on a small scale.

EXEMPTION FROM ANGEL TAX:

Section 56 of the Income Tax Act exempts taxing on investments above fair market value, also known as Angel tax. While starting a company, Entrepreneurs are always associated with the investment. They have to face problems because investments are difficult to get, and even if received investments, the tax imposed on them adds to the difficulties. When a startup issues its shares to the public and if those shares fare is higher than the fair market value. Such investments received are considered an income from other sources, and this income should be taxed according to the Income Tax Act. This tax is recognized as Angel tax. But with the new notification, the government has exempted Angel tax on all government recognized startups. Taking advantage of this section, startups can now save tax and utilize it for capital.

Exemption from Auditing of financial statements for Start-up:

According to the Companies Act, an Auditor has the authority to review the company’s accounts, documents, and reports and file their report with the necessary elements as provided in the Act. These reports by the Auditor and the company’s financial reports (quarterly or annual reports) will be released to all the members at the time of the annual general meeting. Besides considering the other accounting and financial standards, the Auditor is expected to report on the effectiveness of the company's internal financial management structure and whether those procedures are efficient. But the new 2017 notification has exempted this for a few companies where:

The company is a small company or a one-person company

The annual revenue of the company must not exceed 50 crore rupees according to its latest financial audit. Or the company had borrowed less than 25 crores from any bank or financial institution during that particular fiscal year.

3-year exemption from Income Tax on Profits earned by a startup:

According to Section 80IAC of The Income Tax Act, 1961, a government-recognized startup within its first ten years of incorporation is allowed an exemption from income tax on profits for any three consecutive years. With this provision, many startups were provided with great relief. And of course, the money left over from tax can be refinished to business, which will boost the business. But to take advantage of this section, the startup must fulfill a few conditions, such as

The startup must have been registered only after April 1, 2016, but not before.

And the annual revenue of such a startup shall not exceed 25 crores rupees. This benefit is only available for recognized startups that are picked up based on how it was recognized and for what conditions the startup had fulfilled.

TAX EXEMPTION ON LONG-TERM CAPITAL GAINS:

According to the exemption provided under Section 54GB of the Income Tax Act, Tax exemptions are provided to individuals and HUF on long-term capital gains. It is evident from the Income Tax Act; the long-term capital gain acquired by selling away a property is not taxable when another property is purchased with the same. Similarly, the long-term capital gain acquired by selling away a property is not taxable when reinvested in a startup. This provision is mainly designed to boost investment in startups so that maximum investment could be diverted to them. A point to be noted is that once the stocks are invested, they cannot be sold for five years. Apart from this, there is something called tax planning in recognized startups. By which they can safeguard their existence from income tax for a period of initial seven years. During the initial stages of business, startups have a high chance of incurring losses. For suppose if a recognized startup incurs losses for the first two years, such startups can avail any of the two available provisions of the Income Tax Act (i.e., carry forward & set-off) to get an exemption from income tax. And then, in the next three years, under section 80IAC of the Income Tax Act, startups can take advantage of a tax rebate of 100% on the expected profits. In this way, a startup can save income tax for the first seven years through tax planning. So, it is evident that the government's various incentives and exemptions concerning income tax can only be availed by registered startups.

DURATION EXTENDED TO 10 YEARS FOR REGULATORY FILINGS:

Recently, in 2019, the Ministry of Corporate Affairs aimed to permit the startups to issue 50 percent of their paid-up capital as sweat equity and to increase the duration of exemptions from other regulatory filings by up to 10 years rather than just five years. For these ten years, they would be excluded from the law prohibiting startups from raising deposits above 100% of their paid-up share capital.