Many investors like to invest in promising startups. Startups can raise money from the public by becoming public limited ventures and issuing shares. However all the startups cannot become public limited ventures due to lack of financial resources, and the form of organization adopted by most startups can be a sole proprietorship, partnership, a limited private organization, a joint stock organization or cooperative society organization. Startups can receive funding from investors who perceive that the startup has the abilities to grow the money.
Recently there has been much talk by the media about investor premium in startups coming under the lens. While foul play cannot be ruled out in some cases, yet most startups would like to grow by fair play and yet have come under lens due to not having a proper understanding of regulations about income tax for startups and financial reporting requirements for startups.
The government departments that raised issues on startups included the income tax department and the ministry of corporate affairs. The notices were issued to more than two thousand startups that raised money since 2013 from investor premiums. Investors expect to earn from the increased value of startup shares. The notices that were issued by IT department and MCA expressed main concern that the valuation of these startups was not clear and subject to debate and dispute and also regarding the income tax amount which the startups needed to pay.
Some cases of dhabas making crores of profits in a year (in the state Punjab) and are not paying any income tax have also been recently highlighted by the media. As per media persons, the dhaba was being run for several decades, and the dishes it served were very popular among the local people. Though the dhaba (local eateries) runners made great paneer pakoras they were ignorant about audit and taxation matters.
Many people who make their income from their startups may think that why should they give their own money as taxes? Still, others may think that if they make greater profits, they will have to pay greater tax. However, these perceptions are mired in twisted notions. Startups are social entities, and like all other social entities, they have a responsibility to the society as so they need to pay the taxes applicable in their case. Not paying income taxes is against the law and soon the income tax department may come after them. Far less from loosing, many startups can gain from properly filing their income tax returns by way of getting a refund for extra taxes paid as TDS, by carrying forward business losses and by claiming all the relevant tax deduction, exemption, and rebate benefits. If startups need to operate in society, they need to have a strong stand in the eyes of the law as anytime legal issues may arise. Taxpaying startups have a strong legal stand and they get the support of the legal system while addressing legal matters which may arise against them.
The Following Paragraphs Provide a Concise Guide on Income Tax for Startups.
Forms for Filing Income Tax for Startups
For the proper filing of income tax for startups, the application form needs to be chosen. Filing of returns in an incorrect form makes it difficult to furnish complete information. The following section discusses the appropriateness of the forms used for filing income tax from different sources. A single ITR form may not serve the purpose of filing income tax returns for all startups. For filing income tax for startups the correct form needs to be identified among these:
Individuals and Hindu Undivided Families (HUFs) can use ITR-1 form for salary income, income from (one) house property, and income from other sources like investment schemes. ITR -1 form can be used for filing income tax returns if the income is less than Rs.50 lakhs for the financial year. ITR-1 cannot be used for filing income from business or capital gains. Hence ITR-1 is not the correct form for filing income tax for startups.
ITR 2 form can be used for filing income tax returns by individual and HUF to declare income from salary, house property, capital gains, other sources but not income from the business. ITR-2 is applicable for filing an income more than Rs.50 lakhs in a year. So ITR-2 is also not the correct form for filing business income returns or startup income returns.
ITR 3 can be used for filing income tax returns by individual, HUF, and partner in a business firm. The incomes which can be declared using ITR 3 includes incomes from salary, house property, capital gains, and other sources. ITR 3 can be used to file income tax for income earned from a startup if individual/HUF is a partner in the startup.
Individuals, HUF, and firms can use ITR 4 for filing income tax returns. The source of income which can be declared using ITR 4 includes income from salary, (one) house property, Business income, presumptive business income (as per sections 44 AD, 44ADA and 44 AE), and other sources but not for capital gains. Hence startups which have presumptive business income can use ITR-4. A professional or business startup entity can opt for presumptive business income scheme if turnover from business is less than Rs.2 crores in a financial year. The entity will be taxed on declared profits, and it is not mandatory for the entity to maintain books of accounts. The declared profits should be 6% for digital transactions and 8% for non-digital transactions.
ITR 5 can be used by partnership firm, LLP (limited liability partnership firm), BOis, and AOPs, to file their income tax returns. The incomes which can be filed in ITR-5 include incomes from house property, business, capital gains, and other sources but not income from salary.
ITR -6 is apt for companies (not individuals or HUF and companies not claiming exemption under section 11) for filing their income from business and also from house property, capital gains, and other sources but not for salary income.
If startup organization is a trust (as defined under section 139 -4 A/B/C/D) then ITR 7 is the appropriate form for filing of income tax returns by the trust entities. ITR 7 can be used for filing returns from business, house property, capital gains, and other sources but salary income cannot be filed using ITR 7.
A significant percentage of Individuals/HUF or other startup entities which file income tax have income from agricultural sources. All the ITR forms mentioned above have provisions for filing an exemption for agricultural income. ITR 1 and ITR 4 have provisions of filing for exemption on agricultural income less than Rs 5000. Other forms do not mention this limitation.
Apart from ITR 1 and ITR 4, all ITR forms have provisions of filing income from foreign assets and sources as well as lottery.
ITR form for carrying forward of losses
ITR 1 and ITR 4 do not provide for the filing of carrying forward of losses. Except for these two ITR forms, all the other 5 ITR forms provide a section for carrying forward of losses.
Startups need to follow the few basic rules as mentioned for maintaining clear financial and income tax filing records:
As per laws governing startups and businesses, business startups which record over Rs.1 crore turnover in a financial year or professional startups which record above Rs.50 lakhs turnover in a financial year required to get their tax audit done. It is mandatory for these startups to appoint a chartered accountant to conduct the audit of their accounts. If a business wants to carry forward any losses, then the tax audit is also required. A tax audit is compulsory for businesses which declare less than 8% (for non-digital) and 6% (for digital) profits out of the turnover. Professional startups also need to compulsorily get a tax audit done even when declared profit is 50% of the receipts.