STARTUPS SCHEME BY GOVERNMENT OF INDIA
The Government of India on 16th January, 2016 announced a series of programs, incentives and exemptions for Startups in India. The flagship Startup India initiative announced by the Prime Minister, Narender Modi is aimed at creating a strong and vibrant startup eco-system in India and to create a culture of Entrepreneurship. In this article, we look at a startup eligibility criteria for the Startup India program.
In recent times, Indian startups are increasingly looking to move outside India owing to various difficulties faced by them in conducting business in India such as bureaucratic processes, lengthy incorporations and liquidations, restrictions on structuring transactions, problems in early-stage funding and exits, and complying with myriad laws and regulations. With the objective of incentivising young Indian entrepreneurs to explore and pursue their business ideas in India, and to avoid the exodus of talented entrepreneurs from India, the Government’s ‘Startup India’ Action Plan introduces a separate regulatory framework for startups, emphasising on promoting innovation and facilitating ease of regulatory compliance. The Government also hopes that the Action Plan will accelerate growth of startups in sectors other than technology such as agriculture, manufacturing, social sector, healthcare, education, etc. across India, including tier 2 and 3 cities, and other semi-urban and rural areas.
The Action Plan broadly deals with: (a) simplification of processes and handholding for startups; (b) funding support and related incentives; and (c) industry-academia partnership and incubation support to boost the startup ecosystem.
As per the announcement made, an entity is considered as startup if:
– it is a private limited company/ partnership firm/ limited liability partnership;
– it has been in existence for less than 5 years;
– its annual turnover has not exceeded Rs. 25 Cr. in any financial year;
– it is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property;
– it should not be formed by splitting up, or reconstruction, of a business already in existence;
Startups and eligibility for the benefit announced?
A business is considered to be a startup under the Startup India Action Plan if it aims to develop and commercialize:
- New product or service or process;
- Significantly improved existing product or service or process, that will create or add value for customers or workflow.
Further, in order for a “Startup” to be considered eligible, the Startup should:
- Be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an Incubator established in a post-graduate college in India; or
- Be supported by an incubator which is funded (in relation to the project) from GoI as part of any specified scheme to promote innovation; or
- Be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an Incubator recognized by GoI; or
- Be funded by an Incubation Fund/Angel Fund/ Private Equity Fund/ Accelerator/Angel Network duly registered with SEBI that endorses innovative nature of the business;
- Be funded by GoI as part of any specified scheme to promote innovation;
- Have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.
Startups NOT Eligible for Startup India Action Plan
The mere act of developing of products or services of the following nature DO NOT make an entity eligible for incentives:
- Products or services or processes which do not have potential for commercialization; or
- Undifferentiated products or services or processes; or
- Products or services or processes with no or limited incremental value for customers or workflow.
Obtaining Startup Tax Exemption under the Startup India Initiative
Startup would be eligible to obtain tax benefits only after it has obtained certification from the Inter-Ministerial Board, setup for such purpose. The Inter-Ministerial Board setup by DIPP would validate the innovative nature of the business for granting tax related benefits. However, approval from the Inter-Ministerial Board shall not in any manner, limit or absolve the Startup from any liability incurred in case of any misrepresentation/ fraud arising from submission of such application and/ or supporting such application.
- Tax exemption on Investment above fair market value: In line with the exemption available to venture capital funds to invest in startups above fair market value, Investments made by the incubators above FMV shall also be exempeted.
- Tax exemption to startups for 3 years. This exemption is available for the startups set up after 01st April, 2016.
- Tax exemption on capital gains: Exemption shall be given in case capital gains are invested in the fund of funds recognized by the government.
In addition, existing capital gain tax exemption for investment in newly formed MSMEs by individual shall be extended to all startups. If somebody invest the money received by selling his/her own property in his/her startup, he/she shall be given exemption from capital gain tax.
Other Benefits and initiatives
- Establishment of credit guarantee fund for the startups with a budgetary corpus of INR 500 cr per year for the next 4 years.
- Funding support through fund of funds with a corpus of INR 10000 cr.
- Facilities for faster exists for startup. As per the proposed changes, startups may be wound up within a period of 90 days.
- Relaxation in public procurement
- 80% rebate on filing patent application by startups and fast track mechanisms of startup patent application.
- Panel of facilitators to provide legal support and assist in filing of patent application
- To serve as the single platform for information exchange and interacting with the government and regulatory institution, a mobile app shall be available from April 2016.
- Introduction of compliance regime based self certification
- Establishment of Startup India Hub.
- Relaxation for inspection under the HR laws for first 3 years.
Analysis of the scheme
Many entrepreneurs were excited by the announcements made by Prime Minister Narendra Modi as part of the Startup India Action Plan. There’s no doubt the measures were significant, but they do beg the question, are all the startups really eligible for the benefits that were announced?
To answer this question let’s think the below mention points:
- One of the eligibility criteria states that “The product or service should be a new one or a significantly improved version of existing services or products.”
Let’s take the example of startups who are engaged in creating and developing online marketplaces like Flipkart and Amazon. So a new startup engaged in the same field may not be eligible unless its product is significantly improved than what existing players provide.
- Another eligibility criteria states that the startup should get a recommendation letter from the recognized incubator cell or be recognized by the GoI or should be funded by recognized funds. Now this will be quite a task for startups.
In our estimate, going by these criteria, roughly 60% of existing startups could be rendered ineligible for the Startup India plan.