CBDT clarifies position on tax holiday for small start-ups

CBDT clarifies position on tax holiday for small start-ups

In response to media reports stating that the Central Board of Direct Taxes (“CBDT”) is planning on revising the turnover threshold for a start-up to receive a tax holiday under the Income Tax Act, 1961 (“Act”), the CBDT has issued a clarification stating that such media reports are untrue. The CBDT has reiterated that only start-ups will continue to get a tax holiday only if it fulfils the criteria to be considered as an eligible start-up as prescribed under the Act.

Section 80-IAC of the Act prescribes the criteria for an entity to be considered as an “eligible start-up”. The criteria stipulated are as follows:

1.  The entity should have been incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2021;
2. The total turnover of the entity should not exceed INR 25 crores in the current and previous assessment year;
3. The entity should have a certificate of eligible business from the Inter-Ministerial Board; and
4. The entity must be engaged in the business of innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation

If the entity fulfils the criteria mentioned above, Section 80-IAC of the Act allows for a deduction of upto a 100% of the profits and gains derived from such business for three consecutive assessment years while computing the total income. This deduction can be claimed only when the gross total income of an eligible start-up includes any profits and/or gains.

Thus, a deduction may be claimed at the option of the eligible start-up for any three consecutive assessment years within seven years from the date of the eligible start-up’s incorporation.

The CBDT Clarification

The Department for Promotion of Industry and Internal Trade (“DPIIT”) issued a notification on February 19, 2019 (“DPIIT Notification”) laying down the procedure of registration of an entity as a start-up. As per the notification, an entity is considered as a start-up

1. Upto a period of 10 years from the date of incorporation/registration
2. The turnover of such entity for any of the financial years since incorporation/registration has not exceeded INR 100 crores
3. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

The CBDT clarified that that all start-ups registered under the DPIIT Notification will not automatically become eligible for deduction under Section 80-IAC of the Act.  

In the clarification, the CBDT has stated that the reason of there being a difference between the turnover thresholds under Section 80-IAC (INR 25 crores) and the DPIIT notification (INR 100 crores) is to create a distinction between small start-ups and other start-ups.

Quick View

Through this clarification, the CBDT has removed all speculation about the revision to the turnover threshold for a start-up to receive a tax holiday under the Act. Therefore, in order for a start-up to claim a tax holiday under Section 80-IAC of the Act, it will need to comply with not only the eligibility criteria stipulated in the DPIIT Notification, but also the eligibility criteria stipulated under Section 80-IAC of the Act.

Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.