Startup India

A&A

July 11, 2017

Startup India

Startup India is a flagship initiative of the Government of India, intended to build a strong ecosystem for nurturing innovation and startups in the country that will drive sustainable economic growth and generate large-scale employment opportunities. The Startup India campaign is based on an action plan aimed at promoting bank financing for start-up ventures to boost entrepreneurship and encourage startups with job creation. It is focused on restricting the role of states in the policy domain and getting rid of “license raj” and hindrances like land permissions, foreign investment proposals, and environmental clearances.

Definition of startup

An entity shall be considered as a ‘startup’-

  • Up to five years from the date of its incorporation/registration,

  • If its turnover for any of the financial years hasn't exceeded Rs. 25 crores, and

  • It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property;

Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered startup’. Provided further that in order to obtain tax benefits, a startup so identified under the above definition shall be required to obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification consisting of:

  • Joint Secretary, Department of Industrial Policy and Promotion,

  • Representative of the Department of Science and technology, and

  • Representative of the Department of Biotechnology

The process of recognition as a ‘startup’ shall be through the mobile app/portal of the Department of Industrial Policy and Promotion. Startups will be required to submit a simple application with certain documents. Additional Resource: How To Register A Startup In India – A Complete Guide

Benefits and measures being undertaken

1. Self-certification:– Startups shall be allowed to self-certify compliance (through the Startup mobile app) with 9 labour and environment laws. In case of the labour laws, no inspections will be conducted for a period of 3 years. Startups may be inspected on receipt of credible and verifiable complaint of violation, filed in writing, and approved by at least one level senior to the inspecting officer. In the case of environmental laws, Startups that fall under the ‘white category’ (as defined by the Central Pollution Control Board (CPCB)) would be able to self-certify compliance and only random checks would be carried out in such cases.

2. Tax exemption on capital gains:– Long Term Capital Gains are exempt for investments made till 31 March 2019 in units of the notified fund focused on startups.

3. Tax exemption to Startups for 3 years:– 100% deduction for a period of 3 consecutive years out of the initial 5 years for eligible ‘startups’ which are set up before 1 April 2019 and whose turnover does not exceed INR 250 Million in any financial year from 1 April 2016 to 31 March 2021. However, minimum alternate tax (MAT) will apply in such cases

4. Tax exemption on Investments above Fair Market Value:– Under The Income Tax Act,1961, where a Startup (company) receives any consideration for the issue of shares that exceed the Fair Market Value (FMV) of such shares, such excess consideration is taxable in the hands of recipient as Income from Other Sources. In the context of Startups, where the idea is at a conceptualization or development stage, it is often difficult to determine the FMV of such shares. In the majority of the cases, FMV is also significantly lower than the value at which the capital investment is made. This results in the tax being levied under section 56(2) (viib). Currently, investment by venture capital funds in Startups is exempted from operations of this provision. The same shall be extended to investments made by incubators in the Startups.

5. Startup India Hub:– An all-India hub will be created as a single contact point for interactions with the government, which will help the entrepreneurs exchange knowledge and access financial aid.

6. Register through mobile application:– An online portal, in the shape of a mobile application, will be launched to help start-up founders to easily register. The app is scheduled to be launched on April 1, 2016.

7 . Fast-tracking Patent Examination, Legal Support, and 80% rebate in Patent costs:– The valuation of any innovation goes up immensely, once it gets the protective cover of a patent. To this end, the patent application of Startups shall be fast-tracked for examination and disposal, so that they can realize the value of their IP Rs at the earliest possible. A panel of facilitators to assist in the filing of IP applications and the Central Government shall bear the entire fees of the facilitators for any number of patents, trademarks or designs that a Startup may file, and the Startups shall bear the cost of only the statutory fees payable. Startups shall be provided an 80% rebate in filing of patents vis-a-vis other companies. This will help them pay costs in the crucial formative years. The scheme is being launched initially on a pilot basis for 1 year; based on the experience gained, further steps shall be taken.

8. Relaxed Norms of Public Procurement for Startups:– Typically, whenever a tender is floated by a Government entity or by a PSU, very often the eligibility condition specifies either “prior experience” or “prior turnover”. Such a stipulation prohibits/ impedes Startups from participating in such tenders. At present, effective April 1, 2015 Central Government, State Government, and PSUs have to mandatorily procure at least 20% from the Micro Small, and Medium Enterprise (MSME). In order to promote Startups, the Government shall exempt Startups (in the manufacturing sector) from the criteria of “prior experience/ turnover” without any relaxation in quality standards or technical parameters. The Startups will also have to demonstrate a requisite capability to execute the project as per the requirements and should have their own manufacturing facility in India.

9. Providing Funding Support through a Fund of Funds with a Corpus of INR 10,000 crore:– In order to provide funding support to Startups, the Government will set up a fund with an initial corpus of INR 2,500 crore and a total corpus of INR 10,000 crore over a period 4 years (i.e. INR 2,500 crore per year). The Fund will be in the nature of Fund of Funds, which means that it will not invest directly into Startups, but shall participate in the capital of SEBI registered Venture Funds.

10. Credit Guarantee Fund for Startups:– In order to overcome the traditional Indian stigma associated with the failure of Startup enterprises in general and to encourage experimentation among Startup entrepreneurs through disruptive business models, credit guarantee comfort would help the flow of Venture Debt from the formal Banking System. Debt funding to Startups is also perceived as a high-risk area and to encourage Banks and other Lenders to provide Venture Debts to Startups, a Credit guarantee mechanism through the National Credit Guarantee Trust Company (NCGTC)/ SIDBI is being envisaged with a budgetary Corpus of INR 500 crore per year for the next four years

11. Setting up incubators and building innovation centers at National Institutes:– A private-public partnership model is being considered for 35 new incubators and 31 innovation centers at national institutes.

12. Research parks:– The government plans to set up seven new research parks, including six in the Indian Institute of Technology campuses and one in the Indian Institute of Science campus, with an investment of Rs 100 crore each.

13. Entrepreneurship in biotechnology:– The government will further establish 5 new biotech clusters, 50 new bio incubators, 150 technology transfer offices, and 20 bio-connect offices in the country.

14. Building entrepreneurs:– Innovation-related study plans for students in over 5 lakh schools. Besides, there will also be an annual incubator grand challenge to develop world-class incubators.

15. Dedicated programs in schools:– The government will introduce innovation-related programs for students in over 5 lakh schools.

16. Faster exit:– The Insolvency and Bankruptcy Bill 2015 (“IBB”), tabled in the Lok Sabha in December 2015 has provisions for the fast track and/or voluntary closure of businesses. In terms of the IBB, Startups with simple debt structures or those meeting such criteria as may be specified may be wound up within a period of 90 days from making an application for winding up on a fast-track basis.

The action plan is largely optimistic since it shows a very positive intent by the government. However, going forward, it is critical that the government sets up a team of founders, investors, angels, lawyers and accountants who can ensure that the final policies surrounding startups are as flawless as possible and maintain the right balance between accountability, transparency, and doing business.

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