Tax Incentives for Start-ups in India : Clause 140 of Income Tax Bill, 2025 and Comparative Analysis with Section 80IAC of Income-tax Act, 1961

Clause 140 Special provision in respect of specified business.

Income Tax Bill, 2025

Introduction

Clause 140 of the Income Tax Bill, 2025, introduces a comprehensive regime for tax deductions in respect of profits and gains derived by eligible start-ups from specified businesses. This clause is fundamentally a continuation and evolution of the existing Section 80IAC of the Income-tax Act, 1961, which has served as the bedrock for start-up tax incentives in India since its introduction in 2016. Both provisions are designed to foster innovation, job creation, and economic growth by providing tax relief to start-ups engaged in eligible businesses. This commentary undertakes a detailed analysis of Clause 140, examining its structure, scope, and implications, and provides a comparative analysis with Section 80IAC, highlighting continuities, departures, and the broader policy landscape.

Objective and Purpose

The 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 deduction for any three consecutive tax years out of ten years from the year of incorporation. This flexibility allows start-ups to optimize the benefit by timing the deduction during their most profitable years within the first decade of their existence.

This approach is identical to the structure in Section 80IAC, which also allows the deduction for any three consecutive assessment years out of ten years from incorporation. The alignment in the period and flexibility reflects a recognition of the variability in start-up profitability cycles.

2. Eligibility Conditions (Sub-sections 3, 16)

Clause 140(3) sets out two core eligibility requirements:

• Not formed by splitting up or reconstruction of an existing business.
• Not formed by transfer of previously used machinery or plant.

Sub-section 16 further defines "eligible business" and "eligible start-up." The business must involve innovation, development, or improvement of products, processes, or services, or a scalable business model with high employment or wealth creation potential. The start-up must be a company or LLP incorporated between 1 April 2016 and 1 April 2030, with turnover not exceeding Rs. 100 crore in the relevant tax year, and must possess a certificate from the Inter-Ministerial Board of Certification.

These conditions closely mirror those in Section 80IAC, with only minor linguistic variations. Notably, both provisions exclude entities formed by mere reorganization or transfer of assets, to ensure that only genuinely new and innovative businesses benefit. The certification requirement adds a layer of scrutiny to prevent misuse.

3. Treatment of Re-established or Revived Businesses (Sub-section 4)

Clause 140(4) introduces a carve-out: if a business is discontinued due to natural disasters, riots, fire, or war, and is re-established or revived within three years, the restriction on formation by splitting up or reconstruction does not apply. This provision is designed to support business resilience and recovery in the face of extraordinary events.

Section 80IAC addresses this issue by cross-referring to section 33B, which provides similar relief for businesses re-established after specified calamities. While the mechanism differs, the substantive effect is similar, aiming to prevent penalizing start-ups that suffer involuntary discontinuities.

4. Use of Second-hand Machinery or Plant (Sub-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 value, profits are to be recomputed at market value (defined as open market price or arm's length price for specified domestic transactions). Sub-section (10) empowers the Assessing Officer to use a reasonable basis if computation is exceptionally difficult.

Sub-sections (13) and (14) empower the Assessing Officer to adjust profits if business arrangements with related parties produce more than ordinary profits, with a requirement to use arm's length pricing for specified domestic transactions.

Section 80IAC, in contrast, incorporates these computational and anti-abuse provisions by reference to Section 80-IA(5) and (7)-(11), which contain similar rules. Clause 140 makes these rules explicit within its own text, possibly for clarity and ease of administration.

6. Audit Requirement (Sub-section 8)

Clause 140(8) requires that the accounts of the eligible business be audited by an accountant, and the audit report be filed by the specified date. This ensures compliance and provides the tax authorities with a verified basis for granting deductions.

Section 80IAC achieves this by reference to Section 80-IA(7), which contains an analogous audit requirement. Clause 140's explicit articulation of this requirement enhances transparency.

7. Bar on Double Deduction (Sub-section 12)

Clause 140(12) prohibits double deduction: profits claimed and allowed as deduction under Clause 140 cannot be claimed under any other provision of Part C of the relevant chapter, and deduction cannot exceed actual profits of the eligible business.

Section 80IAC includes a similar bar through reference to Section 80-IA(13), ensuring that the tax benefit is not duplicated.

8. Power to Exclude Classes of Undertakings (Sub-section 15)

Clause 140(15) authorizes the Central Government, via notification, to withdraw the exemption for any class of industrial undertaking or enterprise, prospectively. This provides policy flexibility to address abuse or changed economic circumstances.

Section 80IAC does not contain an explicit parallel provision, though similar powers may be exercised via amendments or notifications under the parent Act. Clause 140 thus introduces a more direct administrative control.

9. Definitions (Sub-section 16)

Clause 140(16) defines key terms:

• "Eligible business" as innovation-oriented or scalable business with high employment/wealth potential.
• "Eligible 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 avoidance. The explicit power to notify exclusions allows the government to respond to emerging abuses or shifts in policy priorities.

For Investors and the Economy

The deduction increases the post-tax returns for start-up founders and investors, potentially making Indian start-ups more attractive for investment. The focus on innovation, scalability, and employment aligns the tax incentive with broader economic objectives.

Comparative Analysis: Clause 140 vs. Section 80IAC

Aspect	Clause 140 of the Income Tax Bill, 2025	Section 80IAC of the Income-tax Act, 1961	Comparison/Observations
Quantum and Period of Deduction	100% of profits for 3 consecutive tax years out of 10 from incorporation	100% of profits for 3 consecutive assessment years out of 10 from incorporation	Substantially identical; "tax year" replaces "assessment year" for consistency with new Bill terminology
Eligibility: Formation	Not by splitting up/reconstruction or transfer of used machinery; exceptions for disaster recovery	Same; exceptions via reference to section 33B	Clause 140 explicitly lists exceptions; Section 80IAC cross-refers to other sections
Used Machinery/Plant	Imported machinery used outside India not treated as "used" if conditions met; up to 20% used allowed	Same; via explanations	Substantively identical; Clause 140 integrates these as sub-sections, 80IAC as explanations
Definition of Eligible Business/Start-up	Innovation, scalable, employment/wealth creation; company/LLP, turnover <= 100 crore, certified, incorporated 2016-2030	Same	No change; period extended to 2030 in both
Audit Requirement	Explicit in sub-section (8)	By reference to Section 80-IA(7)	Clause 140 is more self-contained
Computation of Profits	Market value adjustments, anti-abuse rules, AO's power to recompute, arm's length pricing for specified transactions	By reference to Section 80-IA(8)-(10)	Clause 140 incorporates these rules directly; more accessible
Double Deduction Bar	Explicit in sub-section (12)	Via Section 80-IA(13)	Same effect
Power to Exclude Classes	Central Government may notify exclusions prospectively	No explicit provision	Clause 140 adds administrative flexibility
Terminology	"Tax year", "assessee", "specified date"	"Assessment year", "assessee", "previous year"	Terminological modernization in the Bill

Ambiguities 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 Context

Similar start-up tax incentives exist in several jurisdictions, such as the UK's Enterprise Investment Scheme and the US Qualified Small Business Stock exclusion. The Indian regime is broadly comparable in quantum and scope but is distinguished by the requirement for government certification and explicit anti-abuse rules. The ten-year window and three-year deduction period are generous by international standards, though the Rs. 100 crore turnover cap may limit applicability to high-growth start-ups.

Within India, Clause 140 and Section 80IAC are unique in targeting start-ups, as opposed to general small business or sectoral incentives. The transition to the new Bill's format, with self-contained provisions, may improve clarity and administration.

Conclusion

Clause 140 of the Income Tax Bill, 2025, represents a consolidation and modernization of the start-up tax incentive regime previously governed by Section 80IAC. The substantive provisions remain closely aligned, ensuring continuity of policy while enhancing clarity through self-contained drafting. The approach balances the need for fostering innovation and economic growth with safeguards against abuse, through eligibility conditions, audit requirements, and anti-avoidance rules. The explicit power to exclude classes of undertakings introduces a new dimension of administrative flexibility, though it also raises concerns regarding certainty and stability for start-ups.

Going forward, the effectiveness of the regime will depend on the transparency and efficiency of the certification process, the clarity of definitions, and the balance between compliance burden and policy objectives. Judicial and administrative clarifications may be required to address ambiguities, particularly around the interpretation of "innovation" and application of market value principles. Overall, Clause 140 sustains India's commitment to nurturing its start-up ecosystem while adapting to evolving economic and administrative realities.

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Full Text:

Clause 140 Special provision in respect of specified business.

 

Dated: 17-4-2025