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Corporate Taxation: Everything Early-Stage Startups Should Consider

    There has been an exponential increase in the number of start-ups in our country these past few years. From a range of brick-and-mortar stores to ingenious digital apps that aim to make our lives easier, India is witnessing it all. Start-ups not only empower the youth but also play a significant role in economic betterment by increasing employment, which drives the workforce of a country towards a secure future. Start-ups are vital. But getting one started and working it out is a whole new thing.

    As tough as getting on with ‘the next big thing’ is, there is another aspect that smacks entrepreneurs hard – taxes. You might be an owner of a brand-new company. You may have your plan and your products with you, your employees backing you up, and your profits too. But, every business, be it a domestic one or a foreign company in the country, has to pay a certain amount as corporate taxes to the government. This article will eliminate your doubts surrounding corporate taxation for a start-up and will help you navigate them seamlessly.

    Corporate Taxation In India For Domestic Companies

    In financial terms, a corporate tax is a tax levied on a corporation’s profits or net income. The tax is paid on income that includes the company’s revenue after certain deductions like general and administrative expenses, cost of goods sold, depreciation, selling, marketing, etc. The tax rates differ according to the type of corporation. It depends on whether it is a domestic corporation or a foreign one. Startups in India have to pay a Minimum Alternate Tax (MAT) of 18.5% along with applicable surcharge and cess. Look at the table below to know the corporate tax rates for a domestic company operational in India. 

    Rs. 400 Crores 25% 7%
    More than Rs. 400 Crores 30% 12%

    *Surcharges- an extra amount of money paid in addition to the usual amount. So, 7% will be charged if the total income is above Rs. 1 Crore and up to Rs. 10 crores.

    MAT- Minimum tax amount to be paid by corporations to the government. 

    Tax Exemptions For Start-ups In India

    The government is well aware of the fact that start-ups are necessary for the economy. Hence, to further motivate the youth towards building start-ups in the country, they have come up with different tax exemptions. Here are some of them: 

    • Tax Holiday for Startups: Startups registered between April 1, 2016, and March 31, 2022, can apply for a 100% tax exemption on profits for three consecutive years within a seven-year period. To qualify for this the startup’s total turnover must not exceed Rs.25 crores annually. This tax relief eases the financial burden for startups, facilitating smoother business setup and operations.
    • Exemption on Long-term Capital Gains: Under Section 54EE, eligible startups are exempt from long-term capital gains tax if the gains are invested in a government-specified fund within six months of the transfer date. The investment limit is Rs.50 lakhs, with a mandatory three-year lock-in period. Early withdrawal of funds results in the revocation of the exemption.
    • Exemption on Investments Above FMV: Startups are not taxed on investments exceeding fair market value, including those from angel investors, incubators, and non-venture capital registered funds and individuals. This exemption allows startups to access additional funds for operational needs.
    • Tax Exemption Under Section 54GB: Section 54GB of the Income Tax Act provides an exemption from long-term capital gains tax for individuals/HUFs who sell residential property and invest the proceeds in eligible startups or SMEs. The exemption applies if the shares are held for at least five years from the acquisition date and the invested amount is used for purchasing assets which cannot be sold or transferred for five years.

    Taxes will always be a significant part of a business, as they are the revenue-generating instrument of a country. Therefore, it is necessary to know them better, not only to ensure compliance but also find ways to save some tax amount (therefore larger net profit). The Indian government has been consciously supporting the youth in entrepreneurship and working towards ease of doing business in India working; these tax exemptions are proof of them. So, know your taxes and ensure your start-up flourishes with as few hiccups as possible.