Income Tax 02 Feb,2020
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Rationalization of Start-ups – Still have ambiguity
Geetanshu BhallaChartered Accountant

As discussed by various tax professionals that the provision of section 80-IAC has not been in aligned with the notification dated February 19, 2019 issued by the Ministry of Commerce and industry in relation to providing the provision of process and procedure of obtaining the requisite certificate required for availing the benefit available under the aforesaid section. In order to remove the ambiguity, Hon'ble Finance Minister has proposed to make the suitable amendment to make the definition of Start-up provided under the Act align the said notification. However, still the ambiguity is present after proposing the suitable amendment. Author in this article discussed both the situations how the proposed amendment will remove the ambiguity and how the ambiguity will still be present after the amendment.

Current Provision

There is section 80-IAC of the Income tax Act, 1961 which provides a deduction of an amount equal to one hundred per cent of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of seven years, at the option of the taxpayers, subject to the condition that

 1.  the eligible start-up is incorporated on or after 1st April, 2016 but before 1st April, 2021 and

 2.  the total turnover of its business does not exceed twenty-five crore rupees.

However, Ministry of Commerce and industry has issued a notification dated February 19, 2019 providing the procedure and the process of getting the requisite certificate required for availing the benefit available under the aforesaid section. In the said notification, MCA has provided the definition of start-up.

An entity shall be considered as a Startup:

 1.  Upto a period of ten years from the date of incorporation/ registration, if it incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India. - However, existing Income tax Act provides the status of start-ups only for the period of seven years

 2.  Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees. -

However, Existing Income tax Act provide the turnover limit of twenty- five crores.

 3.  Entity is working towards innovation, development or improvement of products processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. -

Same provision has been provided under the Income tax Act

 4.  Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a 'Startup'. -

Same provision has been provided under the Income tax Act

 1.  Remove the ambiguity

Accordingly, to remove the ambiguity, Finance minister has proposed to the following amendment

 (i)  the deduction under the said section 80-IAC shall be available to an eligible start-up for a period of three consecutive assessment years out of ten years beginning from the year in which it is incorporated; - Time limit of seven years has been proposed to be increased to Ten years

(ii)  the deduction under the said section shall be available to an eligible start-up, if the total turnover of its business does not exceed one hundred crore rupees in the previous year relevant to the assessment year for which deduction under sub-section (1) is claimed. - Turnover limit of twenty-five crores has been proposed to be increased to hundred years

 2.  Ambiguity Still present

The definition under the said notification issued by the Ministry of commerce and industry has provided that the turnover should not be exceed INR 100 crores in any of the financial years since incorporation/ registration. However, after proposed amendment, the income tax provision will provide that turnover should not be exceed INR 100 crores rupees in the previous year relevant to the assessment year for which deduction under sub-section (1) is claimed.

Accordingly, if a start-up will exceed the turnover limit of INR 100 crores in let say its 8th year of incorporation and will not avail the deduction available under section 80-IAC of the Act in the relevant assessment year, its deduction available in six and seventh year will not be invalid as per the provision of Income tax Act, 1961. However, start-up loss its status retrospectively by virtue of the aforesaid notification. Thereby caused un due hardship with the star- ups which certainly not the intent of the Government. Hence, govt should take due care while passing the Bill.