Having seen a move from contrasting growth stories from Infosys to Flipkart, Indian startup ecosystem was never given so much of focus and initiave by a Government like this. The much talked about change for the Startups in India is finally taking shape with Government introducing the ‘Start up India’ initiative (herein after referred to as “Scheme”). The need of hour was to develop a conducive environment for inflow of funds coupled with ensuring ease of doing business for the entrepreneurs which will help them bring up their ideas to form and a workable business model. It is worth mentioning that India is the fastest growing and Third Largest Startup Ecosystem Globally as per NASSCOM status report 2014 and set to become a multibillion dollar industry. We all have been witness to the scale achieved by these recent disruptive startups like Ola, Housing.com, Paytm and many more.
In a series of articles, beginning with this, we at IBA, aim to cover the scheme details in a practical manner.
The following paragraphs will answer the questions put up by many of the readers on the applicability of the initiative and whether they would be eligible to obtain benefits.
To obtain benefits under the scheme you should be an entity which could be a Private Limited Company, Registered partnership or a Limited Liability Partnership incorporated or registered in India and not more than 5 years old with annual turnover not exceeding INR 25 Crores in any preceding financial year. You should be working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.
To avail benefits including tax benefits, such entity should not have been formed by splitting up, or reconstruction, of a business already in existence and should have obtained certification from the Inter-Ministerial Board, setup for such purpose.
A business is covered under the definition if it aims to develop and commercialize
- a new product or service or process; or
- a significantly improved existing product or service or process, that will create or add value for customers or workflow.
The mere act of developing
- 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
would not be covered under this definition.
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; or
- be funded by GoI as part of any specified scheme to promote innovation; or
- have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.
* DIPP may publish a ‘negative’ list of funds, which are not eligible for this initiative.
Though our team intends to cover the scheme benefits in much detail, I would touch upon the major benefits offered by the scheme
- Compliance regime based on self certification: The startups can now conduct their business without worrying about the nuances of labour and environments laws which require stringent compliances. The startups now has an option of self-certification through the Start-up mobile app which would be available from April 01, 2016
- Legal support and fast track patent examination: To promote awareness and adoption of IPRs by Startups and facilitate them in protecting and commercializing the IPRs by providing access to high quality Intellectual Property services and resources, including fast-track examination of patent applications and rebate in fees
- Faster Exit: In case of failure of a startup enterprise, the government aims at providing speedy winding up ensuring that the capital and resources are reallocated to more productive avenues than regulatory compliances.
- Providing Funding support with a Fund of Funds: Government plans to provide funding support to startups within an initial corpus of INR 2,500 crores and a total of INR 10,000 crores over 4 years.
- Credit Guarantee Fund: Credit Guarantee comfort for startups would convert into increased flow of venture debt from formal banking system
- Tax exemption on Capital Gains: Exemption will be given to persons who have capital gains during the year, if they have invested such capital gains in the Fund of Funds recognized by the Government. In addition, existing capital gain tax exemption for investment in newly formed manufacturing MSMEs by individuals shall be extended to all Startups.
- Tax Exemption for 3 years: This will promote growth and ensure working capital availability. The exemption shall be available subject to non-distribution of dividend by the Startup.
- Tax Exemption on investments above Fair Market Value: The step aims to encourage seed investment in startups. Currently, investment by venture capital funds in Startups is exempted from operations of section 56(2) (viib). The same shall be extended to investment made by incubators in the Startups
The move is in the right direction and needs constant dialogue with the start up community to keep it effective and meaningful. Government will need to understand the way startups and corporates work and imbibe the traits for successful implementation of the scheme because if it fails to, the scheme will end up like many others and will do more harm than good for the overall business sentiments.