STARTUP INDIA POLICY

STARTUP INDIA POLICY

AN INTRODUCTION


The “Startup India” initiative announced by the Hon‟ble Prime Minister on 15.08.2015 aims at fostering entrepreneurship and promoting innovation by creating an ecosystem that is conducive to growth of Startup. 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 efforts of the government are aimed at empowering Startups to grow through innovation and design. It is intended to provide the much needed impetus for the Startups to launch and scale greater heights. In order to meet the objectives of the initiative, the Hon‟ble Prime Minister on 16th January 2016 launched the Startup
India Action Plan. The Startup India Action Plan consists of 19 action items spanning across areas such as “Simplification and handholding.”

“Funding support and incentives” and “Industry-academia partnership and incubation”. Since the launch of the programme, a number of forward looking strategic amendments to the existing policy ecology have been introduced, like:

  1. Fund of Funds
    For providing fund support for Startups, Government has created a „Funds for Startups (FFS) at Small Industries
    Development Bank of India (SIDBI) with a corpus of Rs 10,000 crore. The FFS shall contribute to the corpus
    of Alternative Investment funds (AIFs) for investing in equity and equity linked instruments of various Startups.
    The FFS is managed by Small Industries Development Bank of India (SIDBI) for which operational guidelines
    have been issued. In 2015- 16, Rs.500 crores was released towards the FFS corpus.

2. Credit Guarantee Fund for Startups
Since debt funding for Sartups is perceived as high risk activity, a Credit Guarantee Fund for Startups is being
setup with a budgetary corpus of Rs.500 crore per year, over the next four years, to provide credit guarantee
cover to banks and lending institutions providing loans to Startups.
Once rolled out, the scheme in the lines of credit guarantee scheme for MSME, is likely to provide a huge
impetus for enabling flow of much needed credit to the Startups which may run into several thousands of crores.

3. Relaxed Norms in Public Procurement for Startups
Provision has been introduced in the procurement policy of Ministry of Micro, Small and Medium Enterprises
(Policy Circular No. 1(2)(1)/2016-MA dated March 10, 2016) to relax norms pertaining to prior experience/
turnover for Micro and Small Enterprises. Department of Expenditure has issued a notification for relaxing
public procurement norms in respect of all Startups (including medium enterprises) by all central Ministries/
Departments.

4. Tax Incentives

(i) Income Tax Exemption on profits under Section 80-IAC of Income Tax (IT) Act: The Inter-Ministerial Board of Certification is a Board set up by Department for Promotion of Industry and Internal Trade (DPIIT) which validates Startups for granting tax related benefits.

A DPIIT recognized Startup is eligible to apply to the Inter-Ministerial Board for full deduction on the profits and gains from business (exemption under Section 80IAC of the Income Tax Act) provided the following conditions are fulfilled.

The entity should be a private limited company or a limited liability partnership, Incorporated on or after 1st April 2016 but before 1st April 2021, and Products or services or processes are undifferentiated, have potential for commercialization and have significant incremental value for customers or workflow. The deduction is for any three consecutive years out of seven years from the year of incorporation of start-up.

(ii) Tax Exemption on Investments above Fair Market Value.

– DPIIT Recognized Startups are exempt from tax under Section 56(2)(viib) of the Income Tax Act when such a Startup receives any consideration for issue of shares which exceeds the Fair Market Value of
such shares.


– The startup has to file a duly signed declaration in Form 2 to DPIIT {as per notification G.S.R. 127 (E)}
to claim the exemption from the provisions of Section 56(2)(viib) of the Income Tax Act.

(iii) Introduction of Section 54EE in the Income Tax Act, 1961.

Exemption from tax on long-term capital gain if such long-term capital gain is invested in a fund notified by
Central Government. The maximum amount that can be invested is Rs. 50 lakh.

(iv) Amendment in Section 54GB of the Income-tax Act

Exemption from tax on capital gains arising out of sale of residential house or a residential plot of land if the
amount of net consideration is invested in prescribed stake of equity shares of eligible Startup for utilizing the
same for purchase of specified asset:

a. The condition of minimum holding of 50% of share capital or voting rights in the start-up relaxed to 25%

b. The period of extension of capital gains arising from for sale of residential property for investment in
start-ups has been extended up to 31st March 2021.

(v) Amendment in Section 79 of Income Tax Act.

Startups can carry forward their losses on satisfaction of any one of the following two conditions:

a. Continuity of 51% shareholding/voting power or

b. Continuity of 100% of original shareholder.

Legal Support and Fast-tracking Patent Examination at Lower Costs

A scheme for Startups IPR Protection (SIPP) for facilitating fast rack filing of Patents, Trademarks and Designs
by Startups has been introduced. The scheme provides for expedited examination of patents filed by Startups.
This will reduce the time taken in getting patents. The fee for filing of patents for Startups has also been reduced
up to 80%.

Panels of facilitators for Patents and Trademark applications have been formed to facilitate the
process of patent filing and acquisition. The facilitators would provide legal guidance and handholding through
the entire patent acquisition process free of cost.

Self-Certification based Compliance Regime:

Compliance norms relating to Environmental and Labour laws have been eased in order to reduce the regulatory
burden on Startups thereby allowing them to focus on their core business and keep compliance costs low.
Ministry of Environment and Forests (MOEF) has published a list of 36 white category industries.
Startups falling under the “White category” would be able to self certify compliance in respect of 3 Environment
Acts.

  1. The Water (Prevention & Control of Pollution) Act, 1974.

2. The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003;

3. The Water (Prevention & Control of Pollution) Act, 1981.

Further, Ministry of Labour and Employment (MOLE) has issued guidelines to State Governments whereby Startups shall be allowed to self-certify compliance in respect of Labour laws. These shall be effective after concurrence of States/UTs.

The Acts are :

  1. The Building and Other Constructions Works (Regulation of Employment & Conditions of Service) Act,
    1996.

2. The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979.

3. The Payment of Gratuity Act, 1972.

3. The Contract Labour (Regulation and Abolition)) Act, 1970.

4. The Employees Provident Funds and Miscellaneous Provisions Act, 1952

5. The Employees State Insurance Act, 1948

So far 9 States have confirmed compliance to the advisory issued by Ministry of Labour and Employment
(MOLE):


1. Rajasthan
2. Uttarakhand
3. Madhya Pradesh
4. Chhattisgarh
5. Delhi
6. Jharkhand
7. Gujarat
8. Chandigarh
9. Daman & Diu

7. Setting up Incubators


Under Atal innovation Mission, Niti Aayog will set up Atal Incubation Centres (AICs) in Public and Private sector.
Niti Aayog has received 3658 applications (1719) from academic institutions and 1939 from non-academic
instution) for setting up Atal Incubation Centres (AICs) from both Public and Private sector organizations.
Under the Mission, a grant in aid of Rs.10 crore would be provided to scale up an existing incubator for a
maximum of 5 years to cover the capital and operational costs in running the centre. Niti Aayog has received
233 applications for providing scale up support for established incubation centres.

8. Setting up of Startup Centres and Technology Business Incubators (TBIs)

14 Startup Centres and 15 Technology Business incubators are to be set up collaboratively by Ministry of
Human Resource Development (MHRD) and the Department of Science and Technology (DST). Out of the 14
Startup Centres, 10 have been approved. Once MHRD releases its share of Rs.25 lakhs each for the Startup
centres, the Startup centres would be supported by DST by December, 2016. Against the target of sanctioning 15 TBIs, 9 TBIs have been approved and other 6 TBIs, 9 TBIs have been
approved and other 6 TBIs are under process of being approved.

9. Research Parks


7 Research Parks will be set up as per the Startup India Action Plan. Out of these 7 IIT Kharagpur already has
a functional Research Park. Further, DST will establish 1 Research Park at IIT Gandhinagar and the remaining
5 shall be set up by Ministry of Human Resource development (MHRD) at IIT Guwahati, IIT Hyderabad, IIT
Kanpur, IIT Kanpur, IIT Delhi and IISc Bangalore.

Eligibility for becoming a Startup Company


The Government of India has announced ‘Startup India’ initiative for creating a conducive environment for startups in India. The various Ministries of the Government of India have initiated a number of activities for the
purpose.

An entity shall be considered as a Startup:

i. Upto a period of ten years from the date of incorporation/ registration, if it is incorporated as a private
limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered
under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability
Partnership Act, 2008) in India.

ii. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded
one hundred crore rupees. The words “Turnover” is as defined under the Companies Act, 2013.

iii. Entity is working towards innovation, development or improvement of products or processes or services,
or if it is a scalable business model with a high potential of employment generation or wealth creation.

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered
a ‘Startup’.

An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/ registration
or if its turnover for any previous year exceeds one hundred crore rupees.

Recognition as Startups

The process of recognition of an eligible entity as startup shall be as under:


i. A Startup shall make an online application over the mobile app or portal set up by the DPIIT.


ii. The application shall be accompanied by –

a. a copy of Certificate of Incorporation or Registration, as the case may be, and

b. a write-up about the nature of business highlighting how it is working towards innovation,
development or improvement of products or processes or services, or its scalability in terms of
employment generation or wealth creation.

iii. The DPIIT may, after calling for such documents or information and making such enquires, as it may
deem fit, –

a. recognise the eligible entity as Startup; or

b. reject the application by providing reasons.

Certification of the Inter-Ministerial Board for availing the Tax Benefit under Section 80-IAC

A Startup being a private limited company or limited liability partnership, which fulfils the conditions specified in
sub-clause (i) and sub-clause (ii) of the Explanation to section 80-IAC of the Income Tax Act,1961(Act) may, for
obtaining a certificate for the purposes of section 80-IAC of the Act, make an application in Form-1 along with
documents specified therein to the Board and the Board may, after calling for such documents or information
and making such enquires, as it may deem fit, –

(i) grant the certificate referred to in sub-clause (c) of clause(ii) of the Explanation to section 80- IAC of the
Act; or

(ii) reject the application by providing reasons.

The Board” means the Inter-Ministerial Board of Certification comprising of the following members:
(i) Joint Secretary, Department of Promotion of Industry and Internal Trade, Convener

(ii) Representative of Department of Biotechnology, Member

(iii) Representative of Department of Science & Technology, Member

Post getting recognition a Startup may apply for Tax exemption under section 80 IAC of the Income Tax Act. Post getting clearance for Tax exemption, the Startup can avail tax holiday for 3 consecutive financial years out
of its first ten years since incorporation.

Eligibility Criteria for applying to Income Tax exemption (80IAC)

-The entity should be a recognized Startup

– Only Private limited or a Limited Liability Partnership is eligible for Tax exemption under Section 80IAC

– The Startup should have been incorporated after 1st April, 2016.

Tax Exemption under Section 56 of the Income Tax Act (Angel Tax)

Post getting recognition a Startup may apply for Angel Tax Exemption. Eligibility Criteria for Tax Exemption under Section 56 of the Income Tax Act:

– 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.

Approval for the purposes of clause (viib) of sub-section (2) of section 56 of the Act:

A Startup shall be eligible for notification under clause (ii) of the proviso to clause (viib) of sub-section (2) of section 56 of the Act and consequent exemption from the provisions of that clause, if it fulfils the following
conditions:

(i) it has been recognised by DPIIT under para 2(iii)(a) or as per any earlier notification on the subject.

(ii) aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue of share, if any, does not exceed, twenty five crore rupees:

Provided that in computing the aggregate amount of paid up share capital, the amount of paid up share capital and share premium of twenty five crore rupees in respect of shares issued to any of the following
persons shall not be included –

(a) a non-resident; or

(b) a venture capital company or a venture capital fund;

Provided further that considerations received by such startup for shares issued or proposed to be issued
to a specified company shall also be exempt and shall not be included in computing the aggregate
amount of paid up share capital and share premium of twenty five crore rupees.

(iii) It has not invested in any of the following assets,

(a) building or land appurtenant thereto, being a residential house, other than that used by the Startup
for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;


(b) land or building, or both, not being a residential house, other than that occupied by the Startup
for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary
course of business;

(c) loans and advances, other than loans or advances extended in the ordinary course of business
by the Startup where the lending of money is substantial part of its business;

(d) capital contribution made to any other entity;


(e) shares and securities;


(f) a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds
ten lakh rupees, other than that held by the Startup for the purpose of plying, hiring, leasing or as
stock-in-trade, in the ordinary course of business;


(g) jewellery other than that held by the Startup as stock-in-trade in the ordinary course of business;

(h) any other asset, whether in the nature of capital asset or otherwise, of the nature specified in sub-
clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act.

Provided the Startup shall not invest in any of the assets specified in sub-clauses (a) to (h) for the period of
seven years from the end of the latest financial year in which shares are issued at premium;

Explanation.─ For the purposes of this paragraph,-

(i) “specified company” means a company whose shares are frequently traded within the meaning of
Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations,
2011 and whose net worth on the last date of financial year preceding the year in which shares are
issued exceeds one hundred crore rupees or turnover for the financial year preceding the year in which
shares are issued exceeds two hundred fifty crore rupees.

(ii) the expressions “venture capital company” and “venture capital fund” shall have the same meanings as
respectively assigned to them in the explanation to clause (viib) of sub Section( 2) of Section 56 of the
Act.

A startup fulfilling conditions mentioned in para 4 (i) and para 4 (ii) shall file duly signed declaration in Form 2
to DIPP that it fulfills the conditions mentioned in para 4. On receipt of such declaration, the DPIIT shall forward
the same to the CBDT.

Indian States with Startup policies

States have a vital role to play in promoting the Startup ecosystem. One of the core strengths of India lies in its
diversity, leading to enormous opportunities for cross-learning from each other. Only four State Governments
were actively supporting Startups before the launch of Startup India through a State Startup policy. The Startup
movement across the country was fragmented and there was a need for consolidating standalone efforts.

Emphasis was also required simultaneously to encourage more and more States to undertake new initiatives.
The national priority initiative has led to a wide spread movement across the country and presently 22 States
have their own Startup policies. Many other States and Union Territories (UTs) are in the process of drafting
their policies and operating guidelines.

CONCULSION

The core functioning of an enabling ecosystem in a State is a function of the policy framework and effective implementation of the same. In the journey of developing a conducive Startup community, it is important that States and UTs exchange and adopt good practices undertaken by each other. Another important role of State is to reduce the regulatory burden on budding Startup founders by simplifying labour, taxation, land, and other laws and regulations under the State purview. Many States are organizing hackathons, boot camps, pitching sessions to promote Startups. Several other States have already begun to actively setup world class incubators for Startups across various sectors.

WAY FORWARD

However, a significant effort is required to accelerate the pace of these initiatives to be at par with the pace of growth of Startups. Concerted initiatives by States will accelerate the growth of Startup ecosystems in their respective territories and transform the country into a flourishing Startup Nation.

WEBSITES REFERRED

  1. https://icsi.edu/media/webmodules/SBEC_BOOK_2020.pdf
  2. http://cellit.in/modis-startup-india-gains-momentum-from-it-sector/
  3. https://www.inventiva.co.in/stories/parul/why-indian-startup-eco-system-is-one-of-the-most-frustrating-and-worst-eco-system-in-the-world/