The Modi government is very keen on pushing the ‘innovation in India’ and ‘make in India’ agenda, the key to which is making doing business in India easier and better. The government has come up with several enabling measures, one of which is the policy for start-ups in India, which specs out the definition & qualifications of start-ups and the benefits that will accrue to such start-ups from this financial year starting April 1, 2016.

So let’s get down to understanding who would be recognized as a start-up. Following entities shall be considered as start-ups

  1. 5 years have not been elapsed from the date of formation of the entity
  2. The turnover of the entity for any of the financial years has not exceeded Rs. 25 crore
  3. The entity is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
  4. The entity is not formed by splitting up or reconstruction of a business already into existence.

 

Identification of businesses covered under the definition of Start-ups

  1. A business is covered under the definition if it aims to develop and commercialize
    1. a new product or service or process; or
    2. a significantly improved existing product or service or process, that will create or add value for customers or workflow.
  2. The mere act of developing
    1. products or services or processes which do not have potential for commercialization; or
    2. 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.

 

Once you have made sure that your entity qualifies as eligible for being considered as a start-up, how can you proceed for being recognized as such? The following is the procedure of the start-up for recognition

  1. An application shall be filed online to Department of Industrial Policy and Promotion along with the following documents
    1. 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
    2. a letter of support by any incubator which is funded (in relation to the project) from GoI as part of any specified scheme to promote innovation; or
  • a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an Incubator recognized by GoI; or
  1. a letter of funding by GoI as part of any specified scheme to promote innovation; or
  2. patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.

 

 

Further, in order to obtain the income tax benefits, a start-up is required to obtain a certificate of an eligible business from the Inter- Ministerial Board of Certification which consists of the following:

  1. Joint Secretary, Department of Industrial Policy and Promotion
  2. Representative of Department of Science and Technology, and
  3. Representative of Department of Biotechnology

 

 

So what can the start-ups get after going through the above process and being recognized an eligible start-up? Let’s see the benefits, which are considerable by the way and entirely good (if they are indeed implemented as envisaged). The following benefits are envisaged by the Government of India to the eligible Starts-ups

 

Sr. No. Benefit Objective Details
01 Providing Funding Support through a Fund of Funds with a Corpus of INR 10,000 crore To provide funding support for development and growth of innovation driven enterprises One of key challenges faced by Startups in India has been access to finance. Often Startups, due to lack of collaterals or existing cash flows, fail to justify the loans. Besides, the high risk nature of Startups wherein a significant percentage fail to take-off, hampers their investment attractiveness. In order to provide funding support to Startups, 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.

 

Key features of the Fund of Funds are highlighted below:

1.      The Fund of Funds shall be managed by a Board with private professionals drawn from industry bodies, academia, and successful Startups

2.      Life Insurance Corporation (LIC) shall be a co-investor in the Fund of Funds

3.      The Fund of Funds shall contribute to a maximum of 50% of the stated daughter fund size. In order to be able to receive the contribution, the daughter fund should have already raised the balance 50% or more of the stated fund size as the case maybe. The Fund of Funds shall have representation on the governance structure/ board of the venture fund based on the contribution made.

4.      The Fund shall ensure support to a broad mix of sectors such as manufacturing, agriculture, health, education, etc.

02 Credit Guarantee Fund for Startups To catalyse enterpreneurship by providing credit to innovators accross all sections of society In order to overcome traditional Indian stigma associated with failure of Startup enterprises in general and to encourage experimentation among Startup entrepreneurs through disruptive business models, credit guarantee comfort would help flow of Venture Debt from the formal Banking System. Debt funding to Startups is also perceived as high risk area and to encourage Banks and other Lenders to provide Venture Debts to Startups, Credit guarantee mechanism through 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
03 Tax Exemption on Capital Gains To promote investments into Startups by mobilizing the capital gains arising from sale of capital assets Due to their high risk nature, Startups are not able to attract investment in their initial stage. It is therefore important that suitable incentives are provided to investors for investing in the Startup ecosystem. With this objective, exemption shall 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. This will augment the funds available to various VCs/AIFs for investment in Startups. In addition, existing capital gain tax exemption for investment in newly formed manufacturing MSMEs by individuals shall be extended to all Startups. Currently, such an entity needs to purchase “new assests” with the capital gain received to avail such an exemption. Investment in ‘computer or computer software’ (as used in core business activity) shall also be considered as purchase of ‘new assets’ in order to promote technology driven Startups.
04 Tax Exemption to Startups for 3 years To promote the growth of Startups and address working capital requirements Innovation is the essence of every Startup. Young minds kindle new ideas every day to think beyond conventional strategies of the existing corporate world. During the initial years, budding entrepreneurs struggle to evaluate the feasibility of their business idea. Significant capital investment is made in embracing ever-changing technology, fighting rising competition and navigating through the unique challenges arising from their venture. Also, there are limited alternative sources of finance available to the small and growing entrepreneurs, leading to constrained cash funds. With a view to stimulate the development of Startups in India and provide them a competitive platform, it is imperative that the profits of Startup initiatives are exempted from income-tax for a period of 3 years. This fiscal exemption shall facilitate growth of business and meet the working capital requirements during the initial years of operations. The exemption shall be available subject to non-distribution of dividend by the Startup.
05 Tax Exemption on Investments above Fair Market Value To encourage seed-capital investment in Startups Under The Income Tax Act, 1961, where a Startup (company) receives any consideration for issue of shares which exceeds 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 majority of the cases, FMV is also significantly lower than the value at which the capital investment is made. This results into 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 investment made by incubators in the Startups.

 

 

All in all, it looks like a good package aimed at spurring entrepreneurship amongst the youth and people with new ideas and direct their energies to creating new jobs instead of just getting a job. Many of the problems faced by entrepreneurs, such as lack of funding, lack of safety net, lack of access to IPR protection, etc has clearly been addressed.

 

Failure of start-ups or entrepreneurial ventures is still looked down upon in India and carries a stigma, unlike in the Silicon Valley in the US, where it is just considered a stepping stone to success. Some other laws relating to ease of doing business and closing unviable businesses will further stimulate the entrepreneurial initiatives in India.

 

We hope this will provide a good stimulus to job creation, innovation and make in India. The opportunity is great in India, now is the time to make the most of it.

 

Let a thousand start-ups bloom in India. The sun is shining on them.

 

Authors:

CS Ketan Kank CA Subhash Bathé