Tax Benefits for Startups in India: A Comprehensive Guide (2023)

As a startup owner in India, navigating the complex tax landscape can be daunting. However, understanding the tax benefits for startups available to your business is crucial for saving money and promoting growth. This blog post provides a comprehensive guide to the tax benefits for startups in India in 2023.

We start by discussing the key startup tax benefits in 2023, such as reduced tax rates, exemptions, credits, and other incentives. We explain how these benefits can help startups save money and grow their business.

We then move on to discuss the implications of the 2023 Budget for startups. The 2023 Budget introduced new tax policies, incentives, and measures aimed at promoting entrepreneurship. We provide insights into how these Budget implications can impact the tax landscape for startups in 2023 and beyond. We also outline the steps startups can take to maximize the benefits of the 2023 Budget for their business.

Finally, we explain how startups can avail of tax benefits in 2023, including the process for availing these benefits, documentation requirements, and deadlines. We also discuss critical considerations for startups when it comes to tax planning and compliance, such as keeping up with changes in tax laws and policies. We emphasize the role of tax consultants and legal advisors in helping startups navigate the tax landscape and maximize the benefits available to them.

By the end of this post, you will better understand the tax landscape for startups and the benefits available to your business. Let’s dive in.

How to Avail Tax Benefits for Your Startup in India

Certain conditions must be met if you’re a startup in India to qualify for tax benefits. Here’s a list of criteria that define a company as a startup in India as per the Startup India policy:

Criteria for Startup India Policy

1. The company should have started within five years since the initiative was shaped.
2. The annual turnover of the venture must not exceed ₹25 crores.
3. The company must be a pioneer in its area of expertise and must be pushing for innovation.
4. It must be a new venture and not one formed by the splitting up or revamping of an earlier enterprise.

Once your company meets these criteria, you can avail of various startup tax exemptions offered by the Indian government.

Startup Tax in India – Exemptions in 2023

Income Tax Exemptions

Indian startups can take advantage of several startup tax exemptions provided by the government to encourage entrepreneurship. Depending on the available schemes, companies registered as private limited companies, limited liability partnerships, or partnership firms may also be eligible for additional benefits.

First Three Years

Newly registered startups in India are eligible for 100% exemption from income tax for the first three years, excluding the Minimum Alternate Tax (MAT), which follows the 18.5% tax rate on book profits. To qualify, startups must be registered with the Department of Industrial Policy and Promotion (DIPP). This benefit helps new businesses balance out their expenditures during the early years when the setup costs are a substantial financial burden for entrepreneurs.

Capital Gains Tax

Startups raising capital by issuing stocks, bonds, and shares can qualify for an exemption of 20% of their capital gains, which results in lower taxes on their profits earned through these transactions.

Angel Tax

Startups often struggle to secure funding during their early stages, but the government aims to help entrepreneurs access the capital they require by exempting investments made by angel investors from tax. This is also known as angel tax for startups. The amendment of Section 56(2) (vii) (b) of the Income Tax Act has also given entrepreneurs the right to issue shares at a higher rate than the value noted in the books, making it easier to raise funds.

Funds

Apart from startup tax exemptions, the Indian government has established various funds to help support entrepreneurs in the country.

Funds of Funds (FOF)

The Funds of Funds (FOF) benefit provides startups registered under DIPP with access to a fund with an initial corpus of ₹2500 crores and a final corpus of ₹10000 crores lasting for four years. The fund operates as a direct investment under the Securities and Exchange Board of India (SEBI) direction.

With the shortage of funding being a significant challenge for many startups in India, this benefit comes as a welcome relief and can accelerate the growth of these ventures.

Other Provisions

In addition to startup tax exemptions and funds, the Indian government has introduced several other provisions to support entrepreneurs in the country.

Scheduled Tribe and Scheduled Caste Entrepreneurs

The government has set aside up to ₹500 crores to support entrepreneurs from the Scheduled Tribe and Scheduled Caste sects and women entrepreneurs.

Motor Vehicle Act

The government has amended the Motor Vehicle Act to encourage entrepreneurship by making it easier to establish commercial driving schools and train drivers.

Presumptive Tax Schemes

Presumptive tax schemes are now available to companies with a turnover below ₹2 crores, up from the earlier threshold of ₹1 crore.

Employee Provident Fund

Startups can now take advantage of the Employee Provident Fund provision for the first three years, which can help reduce costs during the early stages of the business.

Tax Benefits for Startups in India in 2023 Budget

The 2023 budget presented by Finance Minister Nirmala Sitharaman has far-reaching implications for various sectors of the Indian economy. Here are some of the key highlights of the budget:

Ease of Doing Business & Tax Benefits

To ease doing business in the country, the government has proposed extending income tax benefits from March 31, 2023, to March 31, 2024. This move aims to boost the confidence of businesses and investors and encourage them to invest in the country. The budget also proposes to increase the benefit of carry-forward of losses from seven years to ten years.

To further reduce the compliance burden on businesses, more than 39,000 compliances have been reduced, and 3400 legal provisions have been decriminalized. The government has also deployed 100 commissioners for small appeals, who will be more selective in scrutiny.

Agritech Startups

The budget has significantly boosted the agricultural sector by announcing various measures promoting agriculture-based startups. The government will set up an Agriculture Accelerator Fund to encourage agritech startups. This move aims to promote innovation and affordable solutions for farmers’ challenges, enhance profitability, and bring modern technology to the sector.

To improve access to farm inputs, market intelligence, and support for the agri-industry, startups, the government will build a Digital Public Infrastructure for Agriculture as an open-source, open-standard, interoperable public good that will enable inclusive farmer-centric solutions.

The government also proposes to increase the agricultural credit target to Rs 20 lakh crore, focusing on animal husbandry, dairy, and fisheries. The budget proposes to launch a sub-scheme of the existing PM Matsya Sampada Yojana scheme to improve value chain efficiencies. In the next five years, the government will also help set up cooperative societies, primary fisheries societies, and dairy cooperatives in uncovered panchayat villages.

Bio-sciences Startups

The government has also announced measures to promote bio-sciences startups. Over the next three years, the government will set up 10,000 bio-input resource centers and enable one crore farmers to adopt natural farming. This move aims to promote sustainable agriculture practices and improve crop yield.

AI Startups

To promote the development of artificial intelligence (AI) in the country, the government will set up three centers of excellence for AI in top educational institutions. This move aims to enable ‘Make AI for India’ and ‘Make AI work for India’ and promote the development of AI-based solutions for various sectors of the economy.

MSME Benefits

The budget has significantly boosted the Micro, Small, and Medium Enterprises (MSMEs) sector by revamping the credit guarantee scheme. The revamped scheme will take effect from April 1, 2023, through the infusion of Rs 9000 Cr in the corpus, enabling additional collateral credit of Rs 2 lakh crore to MSMEs. The government has also announced that 95 percent of the forfeited amount will be returned to MSMEs for contract failure during COVID-19.

Online Gaming Startups

In a significant move aimed at promoting the growth of the online gaming industry, the government has removed the minimum threshold of Rs 10,000/- for TDS and clarified taxability relating to online gaming. This move aims to encourage the growth of the country’s online gaming industry and boost startups in this sector by startup tax exemptions. These steps will go a long way in promoting a more favorable environment for startups in the online gaming industry, which is expected to see significant growth in the coming years.

Recap

Understanding tax benefits for startups in India in 2023 is critical for startups looking to grow their business. We’ve provided a comprehensive guide to the new startup tax exemptions in 2023, the implications of the 2023 Budget, and how to avail of these startup tax benefits. We’ve also discussed angel tax for startups and the government’s steps to address it. If you need more help with your startup’s tax and legal needs, we invite you to schedule a free advisory call with our experts. Don’t let taxes hold back your startup’s growth.