Income Tax Advisory & Compliance

The Government of India has introduced several tax benefits to nurture and support startups in their early growth stages. Section 56(2)(viib) and Section 80-IAC of the Income Tax Act are two crucial provisions that aim to reduce the financial burden on startups, incentivizing innovation and entrepreneurship. These exemptions address challenges like Angel Tax and income tax on early profits, enabling startups to channel resources toward growth and development.

At Ajay D Kumar & Associates, we provide expert assistance to help startups leverage these exemptions, ensuring compliance and maximizing benefits.

What Are 56/80-IAC Exemptions?

1. Section 56(2)(viib) (Angel Tax Exemption):
This provision exempts startups from tax on the excess premium over the fair market value (FMV) of shares received from investors. It applies to startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) and prevents Angel Tax from discouraging investments.

Example:
A startup issues shares at ₹100 per share, while the FMV is ₹70. The excess ₹30/share would typically be taxed as income. However, with Section 56 exemption, this tax is waived.

2. Section 80-IAC (Startup Tax Holiday):
Under this section, eligible startups can claim a 100% tax exemption on profits for three consecutive financial years within their first ten years of incorporation.

Example:
A startup earns ₹50 lakh in profit annually for its first three years. With 80-IAC, it saves approximately ₹15 lakh annually in taxes (assuming a 30% tax rate).

Process to Avail 56/80-IAC Exemptions

For Section 56 Exemption (Angel Tax Exemption):

1. Obtain DPIIT Recognition:
   • Register your startup on the Startup India portal.
   • Submit details about your business and innovative idea.
2. File Form 2 with DPIIT:
   • Provide financial details and justification for the exemption.
3. Inter-Ministerial Board (IMB) Review:
   • The IMB evaluates your application and may request additional details or presentations.
4. Receive Approval Notification:
   • If approved, a notification is issued confirming the exemption.

For Section 80-IAC Exemption (Startup Tax Holiday):

1. Obtain DPIIT Recognition:
   • As with Section 56, startup recognition is a prerequisite.
2. Submit Application to CBDT:
   • File the necessary forms (e.g., Form 1) with the Central Board of Direct Taxes.
   • Include audited financial statements and projections.
3. Evaluation by Authorities:
   • Authorities review the application to confirm eligibility.
4. Claim the Exemption:
   • Upon approval, claim the tax holiday in your annual income tax filings.

Documents Required for 56/80-IAC Exemptions

For DPIIT Recognition:

• Certificate of Incorporation.
• PAN card of the company.
• Brief business description and innovative aspect.
• Shareholder details and investment agreements (if applicable).

For Section 56 Exemption:

• Valuation report by a certified professional.
• Financial statements showing share premium.
• Details of investments received.

For Section 80-IAC Exemption:

• Audited financial statements.
• Profit and loss accounts for relevant years.
• Income tax filings (if any).
• Projected financials for future growth.

Time Period for Approval

• DPIIT Recognition: 3–6 weeks after application submission.
• Section 56 Exemption: 2–3 months, depending on the complexity of the case and IMB review.
• Section 80-IAC Exemption: 2–4 months, including CBDT evaluation and approval.

Why Are These Exemptions Important for Startups?

1. Encourages Investments:
   • Angel Tax exemptions make startups more attractive to investors.
2. Tax Savings:
   • Profit tax holidays allow startups to reinvest earnings in growth.
3. Cash Flow Benefits:
   • Reduced tax liabilities improve liquidity.
4. Supports Innovation:
   • Startups can focus on R&D and scaling instead of managing tax burdens.
5. Government Recognition:
   • DPIIT certification enhances credibility and trust among stakeholders.

How Ajay D Kumar & Associates Helps You

1. Eligibility Assessment:
   • Analyze your business to determine eligibility for these exemptions.
2. DPIIT Registration Assistance:
   • Guide you through the Startup India portal registration process.
3. Accurate Documentation:
   • Prepare and review financial statements, valuation reports, and application forms.
4. Representation:
   • Represent your startup before the IMB and other regulatory authorities.
5. Compliance Advisory:
   • Ensure your startup remains compliant with exemption conditions.
6. Ongoing Support:
   • Assist in annual filings and maintaining exemption benefits over the years.

Navigating the complexities of 56/80-IAC exemptions requires expert guidance. Ajay D Kumar & Associates is here to simplify the process and help your startup unlock its full potential with these government benefits. Contact us. to discuss your eligibility and take the first step toward financial growth and success.