Taxation For Entrepreneurs and Start-ups In India

Finding investors and generating revenue is not the only duty of an entrepreneur. There are several vital aspects that an entrepreneur should be aware of to run the start-up successfully. One such crucial aspect is that of taxation.

The first step to understanding entrepreneur tax is to know how income tax is computed for the start-up, what is the tax liability of the entrepreneur, and what are the tax incentives available.

Taxation of Start-ups in India

Income tax applies to the earnings of the start-up and not its sales revenue. Depreciation and expenses can be deducted from the sales revenue for calculating the earnings. In case a small start-up is unable to track the sales, expenses, invoices, and depreciation, it can also make use of the presumptive taxation scheme under Section 44AD of the IT Act.

With the help of this scheme, a start-up has the option to disclose its income as 50% of the value of services provided or 8% of the sold goods. But note that there are eligibility requirements for using this scheme.

Income Tax Rate for Start-ups

Once you know the income of your start-up, the next step is to understand the tax rates. The tax rates depend on the type of business entity. Here is a brief overview-

Business Type	Tax Rate
Individual or Proprietorship	Taxed as per the slab rates of income tax
Indian Company	25%
LLP/Partnership	30%

Tax Incentives Available for Start-ups

To encourage start-ups, the government of India has also launched several incentives under its “Start-up India” campaign. Some of the top incentives’ entrepreneurs can make use of are as follows-

100% Tax-Exemption for 3 Years

As per the current laws, start-ups are not required to pay any income tax in the first three years of its operations if their annual turnover is below Rs. 25 crores. However, MAT (Minimum Alternate Tax) on the book profit is still applicable.



Zero Angel Investment Tax

Angel investment tax, which was launched in 2012, has also been abolished now. With this, the funds of a start-up raised from angel investors like family and friends are tax-free. 



Capital Gains Tax Exemption of 20%

There is also a tax-exemption of 20% on the capital gains generated by a start-up. Capital gain is the income that a start-up can generate by selling its capital assets like bonds and stocks.

Building a Successful Start-up

While legal professionals are hired by start-ups to manage their taxes better, it is still essential for every entrepreneur to at least have a basic idea about the tax rules and incentives available.

The information listed above can be an excellent starting point for any entrepreneur wanting to know more about taxes in India. 

Are startups tax-free in India?

Under the Startup India Program, eligible startups can get tax exemptions. The following tax breaks are available to qualified startups:

100% Tax-Exemption for 3 Years

This program was open to startups incorporated between April 1, 2016, and March 31, 2021. The eligibility was extended in Budget 2021 to March 31, 2022. If the startup's annual turnover does not exceed Rs. 25 crores in any fiscal year, then it will be eligible for a 100% tax credit on profits for three years within seven years. As a result, the firms will be better able to cover their initial working capital needs.

Long-term capital gains are exempt from tax

The Income Tax Act has a new Section 54EE that allows qualifying startups to avoid paying tax on long-term capital gains, provided they invest all or a portion of those gains in a fund that has been approved by the Central Government within six months of the asset's transfer date.

A total of Rs. 50 Lakhs may be invested in the designated long-term asset. This sum must be kept in the chosen fund for three years. The exemption will be terminated in the year that the money is withdrawn if it is withdrawn prior to three years.

Tax exemption on investments above the fair market value

The tax imposed on investments in qualified startups that exceed fair market value has been waived by the government. These investments may be made by local angel investors, family members, or funds that are not officially recognized as venture capital funds. Additionally, incubator investments that exceed fair market value are exempt.

How do startups avoid taxes?

Saving money on entrepreneur tax enables start-up businesses to save a significant sum of money, which they can then utilise to expand their operations.

Exemption on capital gains

Capital gains are taxed on earnings made from the sale of capital assets like stocks and bonds and are subject to a 20% exemption. The government has introduced a 20% capital gains tax exemption.

Taxes depending on your turnover

On new manufacturing enterprises, the government imposes a 25% tax plus a cess and fee. Companies that make less than Rs. 50 crores a year must pay 29 percent tax, nonetheless. Small and medium-sized businesses are subject to a 25% tax rate if their annual revenue is less than Rs. 50 crore. Additionally, the window for claiming a profit-linked tax break has been extended from 5 to 7 years. About 6.67 lakh enterprises in the nation would gain from the government's action.

Payment of EPF by the Government

The government will now contribute 8.33% each year for three years to the employees' provident fund (EPF). A 12% portion of the employee's base pay was contributed. By reducing startup fees by 12% for a continuous three years, this action will relieve many employers and give them the chance to hire qualified applicants for their organisations because those candidates will have employment security. To take advantage of the benefits, several businesses have been registering with EPFO.

What is the tax rate for entrepreneurs?

The company tax rate has been reduced to 22% under the optional corporate tax scheme, plus the resultant surcharge and cess, for an effective tax rate of 25.17%. For new domestic manufacturing enterprises, Section 115BAB of the Income-tax Act offers the option of a 15% concessional rate of taxation, provided that they meet certain requirements and do not take advantage of any specific incentives or deductions.

According to the Budget paper, the Act stipulates that the new domestic manufacturing firm must be established and registered on or after October 1, 2019, and it must start producing an item on or before March 31, 2023.

How can I raise my capital without paying taxes?

Utilize indexation to cancel taxes

In recent years, high inflation has been both a blessing and a nightmare for investors, depending on your perspective. Investors are permitted under tax regulations to adjust an asset's cost to inflation during the holding period. On long-term capital gains, the taxpayer has the choice of paying a flat tax of 10% or an indexation-adjusted 20%.

Taxpayers who took advantage of this inflation indexation benefit were able to completely eliminate their tax liability. In actuality, your tax obligation would be zero if you had made an investment in a debt fund or a debt-focused MIP scheme three years prior and had annualised returns of 10%. The indexation benefit is not available on all assets. Only a select group of capital assets, such as gold ETFs, debt funds, FMPs, as well as debt-oriented hybrid funds, are accepted.

This benefit does not apply to stocks, equity funds, or equity-oriented hybrid schemes because their long-term gains are already tax-free. Bonds and bank deposits are also out. Bank deposit interest is fully taxable at standard rates.

Avail of minor exemption

When a parent makes an investment on behalf of a minor kid, the income is combined with that of the parent with the higher income. A juvenile child may occasionally get personal income, such as monetary awards from contests or fees from advertising and events. This is uncommon, and most of the time, the parent invests on the child's behalf. The revenue from these assets is subject to a modest exemption of Rs. 1,500 per child per year.

This is only available for a maximum of two kids. Therefore, you can put Rs. 15,000 in a fixed deposit in your child's name without risk. If you have two kids, then you can earn Rs. 30,000 annually tax-free.

Invest through your adult child

For tax reasons, a person is classified as a separate individual after he/she turns 18. As a result, his/her income is no longer combined with that of his/her parents, and he/she is now eligible for the same exemptions and deductions as other adult taxpayers.

It is absolutely lawful to give money to a child above the age of 18 and then invest it for tax-free returns. You are not required to pay taxes if you give your child any sum.

Which business is tax free in India?

Agricultural income

The majority of the Indian economy is based on agriculture. Agriculture is the foundation of everything. The Indian government supports agriculture. Thus, it permits a rebate on agricultural revenue.

All farming income, including the processing and sale of agricultural crops grown on agricultural land, is exempt from taxes. Agriculture-related revenue is not subject to any type of taxation by the government.

Gain from a partnership firm

A partnership firm is a grouping of two or more people working together. The firm must pay income tax on its profits, which is subsequently subtracted in accordance with those profits. The partners then divide the proceeds among themselves. A partner is no longer subject to income tax upon receiving the share.

Individual HUF share

HUF's income is taxable. The HUF is regarded as a taxable entity. On the HUF's income, tax is paid. The remaining money is then divided among the group's participants. Therefore, the members are exempt from paying income tax.


DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.