Will small start-ups continue to get three-year tax HOLIDAY or not?

Income Tax for Startups: There has been confusion on whether small start-ups with turnover up to Rs 25 crore will continue to get tax relief or not. The Central Board of Direct Taxes (CBDT) has now issued a clarification on this issue. In an official statement, the CBDT has said that small start-ups with turnover up to Rs 25 crore will continue to get the promised tax holiday as specified in Section 80-IAC of the Income Tax Act, 1961. The Income Tax Act provides a deduction for 100 per cent of the income of an eligible start-up for three years out of seven years from the year of its incorporation. 

CBDT has also clarified that all the start-ups recognised by DPIIT, which fulfilled the conditions specified in the DPIIT notification, did not automatically become eligible for deduction under Section 80-IAC of the Act.

Eligibility for tax HOLIDAY

A start-up has to fulfil the conditions specified in Section 80-IAC for claiming this deduction. Therefore, the turnover limit for small start-ups claiming deduction is to be determined by the provisions of Section 80-IAC of the Act and not from the DPIIT notification.

CBDT dispelled the confusion created by some media report claiming discrepancy that the I-T law was yet to reflect DPIIT’s higher turnover threshold of Rs. 100 crore. 

CBDT said, "there was no contradiction in DPIIT’s notification dated 19.02.2019 and Section 80-IAC of the I.T. Act, 1961 because in para 3 of the said notification, it has clearly been mentioned that a start-up shall be eligible to apply for the certificate from the Inter-Ministerial Board of Certification for claiming deduction under Section 80-IAC of the Act, only if the start-up fulfils the conditions specified in sub-clause (i) and sub-clause (ii) of the Explanation of Section 80-IAC. Therefore, the turnover limit for eligibility for deduction under section 80-IAC of the Act, as per the DPIIT’s notification is also Rs. 25 crore."

Startup Definition

CBDT has said that Section 80-IAC contains a detailed definition of the eligible start-up which, interalia, provides that a start-up which is engaged in the eligible business shall be eligible for deduction, if:

(i) it is incorporated on or after 1st April 2016

(ii) its turnover does not exceed Rs. 25 crore in the year of deduction.

(iii) it holds a certificate from the Inter-Ministerial Board of Certification.