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TMI BlogTax Incentives for Start-ups in India : Clause 140 of Income Tax Bill, 2025 and Comparative Analysis with Section 80IAC of Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... he legislative intent behind Clause 140, as with Section 80IAC, is to incentivize entrepreneurship and innovation by offering significant tax deductions to start-ups. The provision is tailored to address barriers faced by new businesses, particularly those in technology and scalable sectors, by reducing their tax burden during the crucial early years. The policy considerations include enhancing India's global competitiveness, promoting employment generation, and encouraging wealth creation through the development of new products, services, and business models. The historical background reflects India's push, since 2016, to become a start-up hub, with tax incentives forming a key pillar of the government's Start-up India initiative. Detailed Analysis of Clause 140 of the Income Tax Bill, 2025 1. Scope of Deduction (Sub-sections 1 and 2) Clause 140(1) provides that an eligible start-up, whose gross total income includes profits and gains from an eligible business, is entitled to a deduction of 100% of such profits for three consecutive tax years. The deduction is not automatic for the first three years; rather, as per sub-section (2), the assessee may claim the deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -sections 5 and 6) Clause 140(5) and (6) clarify that imported machinery previously used outside India is not considered "previously used" if certain conditions are met (never used in India, imported, and no prior depreciation claimed). Further, if previously used machinery transferred to the new business does not exceed 20% of the total value of machinery used, the condition is deemed satisfied. Section 80IAC incorporates these rules as Explanations 1 and 2 to sub-section (3). The rationale is to accommodate the practical needs of start-ups, which may rely on imported machinery or transfer a small quantum of used assets without forfeiting eligibility. 5. Computation of Profits (Sub-sections 7, 9, 10, 11, 13, 14) Clause 140(7) mandates that, for the purpose of deduction, profits of the eligible business are to be computed as if it were the only source of income. This isolates the start-up's eligible business profits from other activities, preventing cross-subsidization or dilution of the deduction. Sub-sections (9) and (11) address intra-group transfers: if goods or services are transferred between the eligible business and other businesses of the assessee at non-market va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igible start-up" as a company/LLP incorporated between 1 April 2016 and 1 April 2030, with turnover <= Rs. 100 crore, and certified by the Inter-Ministerial Board. * "Limited liability partnership" as defined under the LLP Act, 2008. Section 80IAC contains substantially identical definitions. Practical Implications For Start-ups The deduction provides a substantial tax holiday, which can be strategically availed during the most profitable years within the first decade of operations. This is particularly advantageous for start-ups with unpredictable or delayed revenue streams, such as those in technology, R&D, or scalable consumer businesses. The conditions relating to formation, asset use, and certification ensure that only genuinely new and innovative businesses benefit. The audit requirement and restrictions on intra-group transfers and related party transactions prevent misuse and ensure that the benefit is not artificially inflated through accounting or structuring arrangements. For Tax Authorities The detailed computational provisions, market value adjustments, and anti-abuse rules provide the authorities with tools to scrutinize claims and prevent tax avoidan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Potential Issues * Certification Process: The requirement for certification by the Inter-Ministerial Board, while intended as a safeguard, can introduce administrative delays and subjectivity. There have been industry concerns about the transparency and efficiency of this process under the existing regime. * Definition of "Innovation" and "Scalable Business Model": While the provision attempts to define eligible businesses, the terms "innovation" and "scalable business model" are inherently subjective and may lead to interpretational disputes. * Market Value and Arm's Length Price: The application of market value and arm's length principles to intra-group transactions may be complex in practice, especially for start-ups with unique or intangible products. * Audit and Compliance Burden: The audit requirement, while necessary for oversight, can increase compliance costs for nascent start-ups. * Policy Uncertainty: The government's power to withdraw exemptions for classes of undertakings, while justified as an anti-abuse measure, could introduce uncertainty for businesses planning long-term investments. Comparative Perspective: International and Domestic Co ..... 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