Startup India Action Plan : Fact Check [Legal Perspective]

“To me Start-up India is synonymous with Stand-up India” were the words that resonated with some of the top CEOs and over 150 prospective entrepreneurs that attended the Prime Minister’s unveiling of the action plan at the tail end of a day long summit that began with Finance Minister’s announcement earlier at the launch of the initiative.

While we have all anxiously awaited these announcements, Start-up India was very clear that they had very high expectations.

Here’s a look at some of the major announcements:

1.  Tax exemptions to start-ups for 3 years and no tax on capital gains. Tax exemptions on investments above the FMV.

While these tax holidays are a welcome step in the right direction, Indian entrepreneurs will eagerly await clarity on the existing tax regime, particularly with respect to indirect taxes viz. VAT, Service Tax, etc. amidst reports of service tax evasion by few online travel portals.

2.  A fund of funds to be created by the government with corpus of Rs. 2,500 crore and later of up to Rs. 10,000 crore. Credit guarantee fund of Rs. 500 crores.

3.  Introduction of the Bankruptcy bill in the parliament as exit option to start-up within 90 days.

The present legislation that deal with bankruptcy laws in India are the Sick Industrial Companies Act (SICA), and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB) have proven to be grossly inadequate. The Insolvency and Bankruptcy Code 2015 attempts to recognise that businesses can fail for genuine reasons as opposed to those defaulters who misused the insufficiency in the present regime to circumvent the law and drag out the recovery process such as Kingfisher Airlines. A deal can be signed, sealed and delivered in just over four months’ time.

4.  Less government interference, no inspection for 3 years for labour, environmental clearances and other compliances – start-ups to follow a self-certification model for compliance.

What still remains to be seen is the implementation of this model since compliances for labour, fire safety and other clearances vary from state to state. Companies looking to expand their operations from one state to another or those that have employees plugged on to virtual networks may need to consider whether such situations warrant multiple compliances in various states.    

5.  Patent filing procedures to be simplified. Significant reduction in fees for filing Patents. Better protection for IP rights.

Technology has driven innovation and has been the cornerstone of the e-commerce boom. Better data protection policies, tighter copyright norms will bring India at par with global data protection regulations that may some of their overseas customers may already be accustomed to.

6.  Launch of a mobile app that will allow companies to register in a day. Single window clearance for clearances, approvals, registrations, etc.

Highlights from Finance Minister Arun Jaitley’s address

  1. Final break from the conventional “license raj”. India ostensibly broke away from it in 1991 but only partially which was conceived with the idea that the government would decide what businesses could be carried out, who could carry out those businesses, geographical locations and the volumes of the businesses. It was partial due to several reasons viz., lack of funding, invisible role of state governments, land permissions, foreign investment proposals, environmental clearances, political assent. The focus of the government has been to restrict the role of the state as a facilitator.
  2. This new initiative would mean eventual freedom from the State. State to provide a supportive role to entrepreneurs to provide access to capital, a friendly tax regime (through executive orders and in the forthcoming budget) and other policy support.
  3. The private sector has limited ability to create jobs and entrepreneurs will be valuable in job creation.
  4. Start-ups should be less regulated. India’s IT sector grew because there were no laws restraining them.

E-commerce activities

The DIPP, in its affidavit submitted before the Delhi High Court on 21 December, said that, the current FDI policy neither permits FDI in B2C e-commerce nor recognizes the marketplace model in e-commerce followed by companies like Flipkart, Snapdeal and Amazon.

The DIPP’s stand is that is a policy formulator and is not the appropriate forum for policing alleged violations of the present FDI norms.
Since FDI is a capital account transaction perhaps the RBI would be the appropriate authority to define the online marketplace? Until recently, the FDI policy did not include the definition of “manufacture” which was recently introduced via Press Note 12 of 2015, hopefully Indian start-ups will not have to wait that long.

Previously the RBI had clarified that all credit card payments in India would need to follow the 2 step authentication process which worked fine if the credit card user and the receiver were present in India. Uber, which aimed at providing its customers a private chauffeur experience and no delays caused by cash payments had to redesign its process in India to accept a payment wallet and also accept cash in a country a limited few have credit cards.

One has to tread cautiously and find the balance between removal of ambiguity and over regulation that we are often prone to.

To conclude a transparent regulatory environment, less interference by state, adequate redressal and minimum restriction or regulation are the key takeaways from StartupIndia launch.

[Guest article by Preeti Balwani, Partner, Rajani Associates]

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