All you need to know on Section 80-IAC: Tax Incentives for Startups

The Government of India has added Section 80-IAC to the Income Tax Act to kick-start the growth of startups in India and give the newly founded businesses a competitive platform to survive in a competitive business environment. According to Section 80-IAC, a startup that qualifies may deduct an amount equal to 100% of its income and gains. This section was introduced as a part of the Finance Act of 2016 with the goal of encouraging entrepreneurs who create jobs, and it was later modified in the Finance Bill of 2018. In this article, we will cover information on Section 80-IAC: Tax Incentives for Startups. 

Introduction

A new law known as Section 80-IAC has been enacted to serve as a helpful incentive for startups and to support their growth throughout the early stages of business. As a result, for any three consecutive assessment years within the five years starting from the specific year in which the eligible startup is formed, a deduction of 100% of the income and gains obtained by an eligible startup is permitted under Section 80-IAC.

Conditions for claiming deductions under Section 80-IAC of Income Tax

A startup may apply for tax exemption under section 80IAC of the Income Tax Act after receiving recognition. After receiving approval for tax exemption, a startup may take advantage of a tax vacation for three consecutive fiscal years during the first 10 years following incorporation.

• Whether the company or Limited Liability Partnership (LLP) in which the business is incorporated.
• If the company’s total annual revenue does not exceed INR 20 crores in any of the prior years beginning on or after April 1, 2016, and ending on March 31, 2021.

Taxpayers should be aware that starting from the date of incorporation, the criterion of turnover not exceeding INR 25 Crores would apply to the prior seven years. Furthermore, for the year for which the company claims the 100% deduction, turnover cannot exceed the allowed limit of INR 25 crores.

Condition for a new Plant and Machinery Business

It is not acceptable to transfer equipment or plant that has been used for any purpose in the past to a new firm. However, if all of the following criteria are met, any machinery that was utilized outside of India by a person would not be treated as machinery or plant used in the past for any purpose:

• If the equipment or facility was not utilized in India at any point prior to the assesses installation.
• If the plant or machinery was brought to India.
• In determining a person’s total income for any period prior to the date the machinery or plant was installed by the assessee, no deduction on account of depreciation with regard to such machinery or plant has been authorized or is permitted under the rules under the Income Tax Act of 1961.

Additionally, in the case of a startup, any equipment, plant, or component thereof that has previously been used for the purpose is transferred to the new business, together with the total worth of the equipment, plant, or component. The overall cost of the equipment or plant used in the firm should not be more than 20% of plant and machinery in a business.

Information needed for the application on Tax exemption under Section 80 IAC

• MOA or LLP Agreement
• Board Resolution, If any
• For the last three fiscal years, the startup’s annual accounts and income tax reports.
• It is not necessary to file an Income Tax Return (ITR) if your startup was formed on or after April 1, 2018. ITR is required for startups that were incorporated before.
• Details related to pitch deck and Startup Video Link.

Conclusion

Additionally, in the case of a startup, any equipment, plant, or component thereof that has previously been used for the purpose is transferred to the new business, together with the total worth of the equipment, plant, or component. The overall cost of the equipment or plant used in the firm should not be more than 20% of plant and machinery in a business, making the entity potentially eligible for 80IAC tax exemptions.