Amendment for Startups by Finance Act 2020

Amendment for Startups by Finance Act 2020

The Finance Act 2020 brings various amendments which will positively impact start-ups. Recently, the Honorable Finance Minister remarked, “Entrepreneurship is the spirit of India and has been its strength. Considering the role of start-ups in Indian Economy, Finance Minister has given various relaxations for start-ups which will give new energy into start-up sector.

By Finance Act 2020, following relaxations are being provided to start-ups:

Relaxation in period for claiming tax holiday:

As of now, an eligible* Start-up is allowed deduction of 100% of its profits for any 3 consecutive years out of 7 years from the year of incorporation/registration. Considering long demand of start-ups now period for claiming deduction of 100% of its profits is relaxed to 3 consecutive years out of 10 years

Impact: Now longer period will be given to start-ups to choose any 3 years from 10 years as compare to previous 7 year’s clause.

Turnover limit increased for qualifying as eligible Start-up:

At present, there is an Annual Turnover Limit of INR 25 Crore for Start-ups to qualify as an eligible Start-up. By finance act 2020, it is proposed to increase the turnover limit to INR 100 Crore from existing 25 Crore.

Impact: Now big start-ups shall also be eligible for availing tax holidays as prescribed u/s 80IAC.

Reduction of TDS rate on “fee for technical services”

At present, payment for fee for technical services to a resident is liable to TDS u/s 194J at 10%. By finance act 2020 it is proposed that withholding tax on payment for ‘fee for technical services’ (other than professional services) shall be liable for TDS at 2%.

Impact: This will help to start-ups (who are providing technical services) in resolving the working capital crunch issue as previously their income was liable for 10% TDS whereas now it would be liable at 2%.

Deferment of tax on specified security or sweat equity shares issued by start-ups:

Now eligible Start-up will be required to deduct taxes in relation to specified security or sweat equity shares issued, within 14 days of earliest of the following:

  • 5 years from the F.Y. in which the specified security or sweat equity share is allotted / transferred to the employee
  • Date of the sale of specified security or sweat equity shares;
  • Date of cessation of employment

*A Start-up would be called as eligible start-up if such start-up is recognised or obtained eligible certificate from DPIIT.

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