Tax Benefits to Startups holding Intellectual Property in India

Eligible companies can be recognised as Startups by the DPIIT under the Startup India initiative, gaining access to a slew of tax advantages, simpler enforcement, IPR fast-tracking, and more.

Fri Jul 01 2022 | Govt. Agencies and Taxation | Comments (0)


The Indian government has recently developed a tax structure designed explicitly for intellectual property rights (IPR). Given the country's rapid economic growth, the need for IPR production is a pressing need. Through a healthy tax structure, IPR can be elevated to the highest level and maximum benefits can be given to inventors, ensuring a culture of innovation in the country. Many startups have been observed not promoting or failing to promote their intellectual property (IP) due to a fear of financial loss or a lack of knowledge. In such startups, a better taxation model may catalyse the research and development of intellectual property properties, and they may consider reviving the IP. A good intellectual property taxation regime and effective royalty policies will also encourage writers and artists to create more original and creative works, as well as increase the number of inventions or know-how transfers into India.

Start Up India, a Government of India (GOI) initiative, was established to make the process of starting a company easier. The following are the program's three primary goals:

  • Simplification and Hand-holding.
  • Funding Support and Incentives.
  • Industry-Academia Partnership and Incubation.

This program is organised by the Department for Promotion of Industry and Internal Trade (DPIIT). This scheme focuses on getting rid of the licence raj and simplifying the processes related to land permissions, foreign investment proposals, and environmental clearances.

Eligibility criteria to avail the benefits under Start-up India:

The following examinations must be passed in order to receive benefits under the start-up India scheme:

  • The venture in question is no more than seven years old since it was incorporated or registered. The age limit for biotechnology companies has been raised to ten years.
  • The venture must be incorporated as:
  • Private Limited company or
  • Registered Partnership or
  • Limited Liability Partnership.
  • The turnover for any fiscal year must not cross/exceed INR 25 Crore.
  • The entity's existence should not have been achieved by the division or restoration of a previously existing company.
  • The entity's presence could not have been done by the separation or reconstruction of an existing corporation.

Benefits available for IPR under DPIIT: In the last few years, India's IPR operation has increased significantly. The number of patents filed has risen by a factor of ten. The ministries have taken a number of steps to ensure that the registered intangible assets are safeguarded.

Scheme for Facilitating Start-Ups Intellectual Property Protection (SIPP)

  • This Scheme has been started by the GOI to promote innovation and creativity of start ups
  • The Scheme is to encourage and promote awareness regarding IP in start-ups.
  • It assists in promotion of technologies in the start-up culture.
  • Helps in Fast tracking of patent applications
  • Expedited examination of those patent applications

Tax Benefits for Startups Holding IP

  • Section 80 IAC: A startup may apply for tax exemption under section 80 IAC of the Income Tax Act after receiving recognition (ITA). Section 80 IAC exempts accepted startups from paying income taxes for the first three years of their life (ten years for startups in the biotechnology sector).

Eligibility criteria for applying for income tax exemption (80IAC) are:

  • The entity should be a recognized startup
  • Only Private limited or a Limited Liability Partnership is eligible
  • The startup should have been incorporated after April 01, 2016
  • Section 56: Angel tax - Post recognition, a startup may apply for Angel Tax Exemption. Eligibility criteria for tax exemption under Section 56 of ITA are:
  • The entity should be a DPIIT recognized startup
  • Aggregate amount of paid up share capital and share premium of the startup after the proposed issue of share, if any, does not exceed INR 25 Crore.

    SMEs: The Department of Electronics and Information Technology introduced the Support for International Patent Protection in E&IT (SIP-EIT) scheme to provide financial assistance to MSMEs and technology start-up units for international patent filing. The SIP-EIT scheme recognises the potential for development in the fields of information technology and electronics. This programme promotes indigenous creativity while also recognising the importance and capabilities of global intellectual property. The reimbursement cap has been set at INR 15 lakhs per invention or 50% of the total costs of filing and processing a patent application, whichever is lower.

    Currently, the manufacture of Intellectual Property (IP) involves a number of different transactions, each of which is taxed separately:
  • Deduction: The money used for IP research and development, which is the pre-existing stage and includes costs such as study, processing, and so on, is considered as an expenditure that must be deducted from gross income for income tax purposes.
  • Revenue: Income earned as a royalty from the sale of intellectual property is handled and taxed in accordance with the Income Tax Act of 1961. Royalty income is taxed in order to encourage creativity in the region.
  • GST: Tax on the sale, transfer, licencing, and assignment of intellectual property.

    Once IP is developed, it can be commercialised by incorporating it into goods and selling them, or the right to use the IP can be transferred temporarily or permanently, and it is taxed under the Indian direct and indirect taxation scheme.
  • Royalty: Royalties are both a taxable source of revenue and a company expense. If anyone pays you royalties for using your property, you must disclose these payments as business profits. In respect of any right, land, information, or services used or given by a non-resident in India, or for the purposes of making or earning any income from any source in India, royalty income is taxable. If the salary is paid under a contract signed before April 1, 1976, and the contract is authorised by the Central Government, it is not taxable.
  • Depreciation:Section 32(1)(ii) of the Act calls for  depreciation of the intellectual property as expenditure for the purpose of calculation of income tax.
  • Expenditure: Section 35A of the ITA, explains the expenditure on acquisition of patents and copyrights rights.
  • If the consideration is paid in one lump sum, depreciation on the obtained patents and copyrights is claimed over a period of time. Depreciation can be asserted as entirely incurred for the purpose of business in a situation where the consideration is charged on a periodic basis. Deductions would be permitted for each of the previous years on a sum equal to the required fraction of the amount spread over 14 years for any expenditure incurred after February 28, 1966, but before April 1, 1998, on the acquisition of patent rights or copyrights for the purpose of business.

Importance of Registration to get Tax Benefits for IP Holding Startups:

  • Self-Certification: Since start-ups are required to self-certify compliance with nine labour and environmental regulations, this is an efficient way to minimise certification liability. For a minimum of three years, no inspections are conducted in cases involving labour laws.
  • Start-up Patent application: This expedites the patent filing process and offers an 80 percent discount on patent filing fees. If the patent has been filed, this rebate will be extended to the total sum of the patent fees.
  • Public Procurement: This means that both young and seasoned entrepreneurs have equal opportunities. There have been improvements, as historically there was a prerequisite for prior experience and/or prior turnover, but this has been relaxed for new companies.
  • Investment: This has allowed the availability of INR 10,000 crore worth of funds for alternative investment into start-ups.
  • Credit: This ensures that a total of INR 2,000 crore in credit is available for start-ups over a four-year period through the National Credit Guarantee Trust or SIDBI.
  • Tax exemptions: This means the income tax is exempt for a term of three years. In addition, capital gains and contributions made by incubators or angel investors over fair market value are excluded from taxation.
  • Mobile application: Start Up India allows businesses to register via a single portal on a mobile application. The method has been simplified and made very simple, as a result of this process.

How to apply for IPR benefits:

Businesses must receive a certificate of recognition from DPIIT, according to the Ministry of Commerce and Industry, in order to make doing business easier. This credential would be necessary to access all of the Start-Up India Program's IPR benefits.

How to Avail the Certificate of recognition from DPIIT?

There are two steps that have been set out for you to follow. The first describes a situation in which no patent application has been filed, while the second describes a situation in which a patent application has been filed.

For applicants who have NOT filed an application for Patent. The application form can be found in the registration section of the Start-up India website.
The following information has to be filed

  • Entity Name
  • Nature of the venture- whether it is a private limited company or a partnership or a limited liability company.
  • The registration number or the incorporation number depending upon the nature of the venture
  • Date of the registration or incorporation
  • Address or registered office
  • Authorised representative details
  • Partner details

To assist  the application, you'll also need the following documents.

  • Letter of recommendation
  • Letter of support by Incubator

A panel of facilitators has been created to provide assistance and help in the filing of IPR applications. The DPIIT would cover the cost of facilitation.

  • A letter of recommendation from an incubator that has been developed as part of a post-graduate programme. This must be in the format DPIIT specifies.
  • A letter of funding from the Indian government or a state government.
  • If the state government or the federal government has given funds for an innovation promotion programme, the letter of funding from the federal or state government is required.
  • A letter of funding from any Incubation Fund, Angel Fund, or Private Equity Fund that is properly registered with the Securities Exchange Board of India and supports the creative nature of the company. Only after SEBI has approved a letter of funding with a minimum of 20% equity from one of the above-mentioned funds that has endorsed the applicant's creative nature of business, can the letter of funding be submitted.
  • Letter of recommendation from a DPIIT-recognized industry association Any DPIIT-recognized industry association or organisation may provide a letter of recommendation.
  • The organisations that provide funding are also listed on the start-up India website.
  • All of the letters sent must follow the same format, which has been posted to the same website and must be strictly followed.The processing time for the application will be between 10 and 25 working days.

Applicants who have submitted a patent application

This category describes the process for applicants who have applied for a patent and had it released as a result of their efforts.

  • The information mentioned above in the first column must be entered on the start-up India website.
  • In the form of a recommendation, the option "patent filed and published by the office of India Patent in the field of nature of business being promoted" shall be selected.
  • The journal extract of the patent application must be uploaded under the category of supporting materials for the recommendation.
  • Depending on the type of the company, you must upload a registration certificate or an incorporation certificate.
  • The document providing the information of your organisation relating to the essence of the industry and describing your innovativeness shall be uploaded under the column of brief notice of your innovativeness of the product or service provided. This must be done in PDF format.

When it comes to tax incentives, there are two choices to consider:

  1. Opt out for Tax Benefits- If the sole purpose of your business is to obtain IPR benefits and you want to save time and effort, opting out for tax benefits can be a viable option
  2. If you want to take advantage of tax benefits , the process would be lengthy and time-consuming since the proposal must be evaluated by an Inter-Ministerial commission.

If any false information is  given, or the application is  submitted without any other documents, or a document was forged, the applicant would be fined INR 25,000.

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