The Startup India Action Plan (the “Plan”) though not exactly a game changer, has been one of the flagship initiatives of the government of India, towards due recognition of the start up ecosystem and accelerating its growth momentum, by providing several benefits, as discussed in our previous article on “Startup India Policy – Update One”. For the first-time a need was felt to specifically enact plans and initiatives to encourage the technology, design and innovation driven ecosystem and to nurture innovation and startups (defined for the first time in the Plan). With the Plan getting an year old, we evaluate in this article the way the Plan has unfolded and the progress that has been made thus far.
To recapitulate briefly, a Startup has been defined as a private limited company or a partnership firm or an LLP, incorporated or registered in India not earlier than five years, with annual turnover not exceeding INR 25 crores in any preceding financial year, working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. Entities formed by splitting up, or reconstruction, of a business already in existence have been specifically stated to be not eligible for recognition under the Plan.
With respect to ‘splitting up or reconstruction’, we have been given to understand that entities formed for the purpose of carrying on same or similar business, through the same or related promoter group, whether as a stand-alone entity or not, would also come under the ambit of ‘splitting up or reconstruction’. This has become an important pointer for any corporate restructuring in the Start Up ecosystem.
The application process for getting registered and recognized as a Start Up is online and can be done through http://startupindia.gov.in/, which is the official Start Up India website launched by the Government of India. The website also enables editing applications and tracking application status, while formats for getting relevant recommendation letter from any incubator recognized by Government of India or incubator established in a post graduate college in India or letter of support from any incubator funded by the Central and the State Government or letter of recommendation from Industry Association or letter of funding of not less than 20% in equity by incubation fund/angel fund/Private equity fund/Accelerator are also provided on the website. The process to claim tax benefits includes an extra approval by inter-ministerial Board of Certification. As on date about 830 entities have been recognised across the country as startups and there seems to be a substantial growth in the interest shown in the ecosystem towards obtaining the recognition. The major reason for this push seems to be the various benefits available to recognised Start Ups. We have discussed the detailed benefits to be made available to recognised Start Ups in our previous article on “Benefits to “Start-Ups” under the Startup India Action Plan”. At a high level, the benefits available are in the lines of the following: –
- Self-Certification and compliance under 9 environmental & labour laws.
- Start Up Patent Application fast track & up to 80% rebate in filling patents.
- Public Procurement: fast track under the criteria of “prior experience/turnover” for Start Ups in all Central Government ministries/departments.
- Winding Up of a Company in 90 days under Insolvency & Bankruptcy Code 2016.
- INR 10,000 Crore Fund of funds for investment into Start-ups through Alternate Investment Funds.
- INR 2,000 Crore Credit guarantee fund for Start-ups through National Credit Guarantee Trust Company / SIDBI over 4 years.
- Tax Exemptions on Income tax for 3 years in a block of 5 years, for companies incorporated after 1 April, 2016.
- Tax Exemptions on capital gains & on Investments above Fair Market Value.
- Handholding initiatives in the form of creating a Start Up India Hub which can provide the Start Ups with easy access to knowledge and funding at one spot.
Apart from the above, the Government of India has also taken the initiative to introduce Start Up benefits under separate legislations. For instance, through a notification dated 19 July 2016, the Ministry of Corporate Affairs have amended the Companies (Share Capital and Debentures) Rules 2014 and provided flexibility to recognized Startups to issue sweat equity shares up to 50% of their paid-up capital and also to issue stock options to promoters and directors who hold more than 10% of a start-up’s equity shares, for the first 5 years from the date of incorporation. These exemptions have been welcomed by the industry as a huge relief, in the back ground of the challenges faced by early stage companies when it comes to providing sweat equity benefits in the first one year or stock option related benefits to promoters/directors holding more than 10%.
In view of the above, let us now take a look at the official Status Report dated April 15, 2017 (“Report”), which has been released by the Ministry of Commerce and Industry, Government of India summing up the progress the Plan has made in the previous year. Brief highlights of the Report are as follows: –
- As per the Report, 798 Start Ups were in total registered under the Plan. Though the number seems significant, this is just half of the Start Ups that had applied for registered as the recognition was sought by 1662 Start Ups in 2016. Only 146 Start Ups were considered for tax benefits.
- The Start Up hub has handled more than 45,000 queries from Start Ups through telephone, email and Twitter. The hub has mentored more than 350 Start Ups for incubation, funding support, on business plans, pitching support, etc. A Start Up India Online Hub is also being developed which will serve as an online platform where all the stakeholders of the Start Up ecosystem can collaborate and synergize their efforts.
- A panel of 423 facilitators for patent and design applications and 596 facilitators for Trademarks applications has been constituted for assistance in filing Intellectual Property (IP) applications and to fast track the process of patent filing and acquisition. 179 Patent applications have received the benefit of up to 80% rebate in patent fees and free legal assistance extended to 52 Start Ups. Trademark Rules, 2017 has been recently amended to provide 50% rebate in Trademarks filing fee to Start Ups.
- With regard to the tax exemptions provided, Union Budget 2017-18 has increased this period of profit-linked deductions available to the eligible Start Ups from 5 to 7 years.
- Exemption from Angel Tax: The Plan and subsequently the Central Board of Direct Tax circular dated 14 June, 2016 exempt Start Ups under the Plan from taxation under Section 56(2)(viib) if shares are issued over fair market value(FMV) in case of raising investments from domestic angel investors.
- Tax Exemption on Capital Gains: Section 54 EE has been introduced under the Finance Act, 2016 which provides for exemption of capital gain up to INR 50 lakhs arising out of transfer of long term capital asset invested in a fund of funds recognized by the Government. This is however subject to the condition that the amount remains invested for three years failing which the exemption shall be withdrawn.
- A ‘fund of funds’ of INR 10,000 crores to support innovation driven Start Ups has been established which is being managed by SIDBI. The corpus shall be released over two Finance Commission cycles, by 2025. INR 600 crore has been released to SIDBI. Total commitments stand at INR 623.5 crore to 17 AIFs.
- Setting up of Incubators: Through the Atal Innovation Mission, the guidelines for harnessing private sector expertise to set up incubators, organizing annual grand challenge for innovative solutions to problems faced by industry and those posed by Ministries as well as establishment of tinkering labs have been formulated and published on NITI Aayog’s and Start Up India’s website. 500 Tinkering Labs are to be established. NITI Aayog has selected 457 schools for establishing Tinkering Labs. NITI Aayog has approved 10 institutes to establish new incubators in the grant of INR 10 Crores each. A grant-in-aid of INR 10 Crore would be provided to each Established Incubator Centre (EIC) for a maximum of 5 years to cover the capital and operational costs in running a centre.
- Learning & Development Module: Start Up India has launched an interactive online learning and development module to educate Start Ups and aspiring entrepreneurs, through various stages of their entrepreneurial journey. 1,15,000 applicants have signed up for the course, out of which around 3,400 applicants have completed 100% of the course successfully.
- Setting up of Research Parks: 7 Research Parks will be set up as per the Startup India Action Plan with the objective to propel successful innovation through incubation and joint Research and Development (R&D) efforts between academia and industry.
- Sector wise Promotion of Start Ups: Under Biotech Equity fund, INR 1 crore each to be given to Bio-incubators. 16 Technology Business Incubators and 15 Start Up centres are being set up. INR 475 crore for 2016-18 has been earmarked under Uchhatar Aavishkar Yojana to promote industry and outcome-oriented research projects by students and 92 research proposals from IITs have been approved.
- NIDHI (NATIONAL INITIATIVE FOR DEVELOPMENT AND HARNESSING INNOVATIONS): The following 8 components under NIDHI would provide a range of funding support to Start Ups from idea to market:
– NIDHI GCC – Grand challenges and competitions for scouting innovations.
– NIDHI PRAYAS – Promoting and accelerating young and aspiring innovators and Start Ups from idea to prototype.
– NIDHI Entrepreneur in Residence(EIR) – Encouraging graduating student to take to entrepreneurship by providing support as a fellowship.
– Startup-NIDHI – Through Innovation and Entrepreneurship Development Centres (IEDCs) in academic institutions; encouraging Students to promote start-ups.
– NIDHI-Technology Business Incubator(TBI) – Converting Innovations to start-up.
– NIDHI-Accelerator-Fast tracking a start-up through focused intervention.
– NIDHI-Seed Support System (NIDHI-SSS)-Providing early stage investment.
– NIDHI Centres of Excellence (NIDHI-CoE)-A World class facility to help Start Ups go global. Read more from our previous article on “Promotion and Acceleration of Young and Aspiring technology entrepreneurs (“PRAYAS”) – Benefits for startups”.
While the above picture certainly brings hope for the boosted development of the Start Up ecosystem in India, there have also been some key and overarching concerns around the Plan that need to be discussed. Tax exemption is one of the key exemptions provided by the Plan, which however does not clarify whether the three-year exemption will apply to Start Ups once they have started earning profits or will apply to them for a period of three years from their incorporation. As making profits in the first three years is extremely ambitious for most early stage entities, the question of real and tangible tax benefit to Start Ups seem to be cropping up. Also, the requirement of 20% equity funding commitment may also be evaluated in light of its potential to put pressure on the Start Ups to take hard calls on parting with a significant equity percentage, at very early stage, in order to receive the recognition and thereby, the benefits under the Plan.
A major requirement under the Plan is that companies need to be declared as innovative businesses. However, most companies are finding it difficult to secure certifications from incubators declaring them to be so. A Start Up with an undifferentiated product or service or one that is not a significant improvement over existing ones in the market, does not qualify for certification under the Plan. This, coupled with the need for Start Ups to get certified as innovative, makes the entire process license driven and discretionary on the basis of interpretation of ‘significant improvement’. Hence, it is felt that this system of ‘licenses’ could result in corruption and misuse of recommendation/support letters.
A bird’s eye view of the above may lead one to wonder whether the excessive documentation is acting as a hindrance to the real potential that the Plan was conceived with. The Plan was introduced with good intentions of supporting entrepreneurs and their ideas. A yearly review has shown that the primary hiccups have been faced by both the Government and the Start Ups in the implementation of the Plan. However, the Government and the other stakeholders in this process have analysed the problems faced by the startups and are trying to implement the Plan in a more effective and efficient manner. The hope is that with increased awareness and reduced red tapes, going forward, the process will get streamlined and Start Up recognition will become the order of the day, to be undertaken simultaneously with entity incorporation/registration.
Authors: Kanika Satyan, Associate and Sohini Mandal, Junior Partner at NovoJuris Legal
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