India is gradually becoming the land of entrepreneurs! In order to tap this hidden potential and to facilitate the creation of start-ups, Start-up India was set up on January 16, 2016. Its objective was to nurture innovation and create large-scale employment opportunities in India. It had a three-pronged approach:
Create a single platform where the entire start-up ecosystem can come together and hence reduce information asymmetry.
Providing benefits and necessary support to entrepreneurs.
Engaging regional entrepreneurs in transforming their ideas into business ventures.
5 years have passed since the inception of Start-up India. It has contributed significantly to the start-up ecosystem by introducing measures which provide support to the startups and reduce the regulatory burden on them. Let us see some of the significant measures taken by Startup India:
Self-certification under Environmental and Labor Laws
Self-certification of compliances saves time and costs for startups. Keeping this rationale in view, the following measures were introduced enabling self-certification under certain laws:
(a) The Ministry of Environment, Forest and Climate Change has published a list of 36 white categories (industrial sector that have a pollution index of below 20) wherein startups under this category will be able to self-certify compliance for three laws for a period of three years, namely –
The Water (Prevention & Control of Pollution) Act, 1974;
The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003;
The Air (Prevention & Control of Pollution) Act, 1981.
(b) The Ministry of Labour and Employment has issued guidelines to state governments requiring recognized startups to self-certify themselves under the following six labour laws–
The Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996
The Inter- State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979
The Payment of Gratuity Act, 1972
The Contract Labour (Regulation and Abolition) Act, 1970
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
The Employees’ State Insurance Act, 1948
(c) The Ministry of Labour and Employment has provisioned start-ups to avail special benefits through the Shram Suvidha Portal such as increasing self-certification duration from three to five years without physical verifications.
Easing Public Procurement
A smooth process of public procurement for start-ups has been envisaged under Startup India. Following benefits are given to start-ups in matters of public procurement:
(a) All startup India recognized entities are exempt from submission of Earnest Money Deposits/Bid Security under public procurement.
(b) Relaxation of conditions in prior turnover and prior experience for DPIIT recognized startups in all government tender requests.
(c) Recognized startups are preferred bidders during public procurement process while participating in tenders on Central Portal for Public Procurement.
(d) A dedicated corner for startups to sell products and services through the Government e-Marketplace (GeM). The restrictive categories have been removed as well thus, new and innovative products can be published on the platform.
Intellectual Property Rights Support
Intellectual property rights are a must for start-ups, as they are typically driven by innovation. Startup India has introduced the following mechanisms to support start-ups in obtaining Intellectual Property Rights for their products or services:
(a) Fast tracking of startup patent applications so that they can realize the value of their IPRs at the earliest.
(b) Panel of facilitators to assist in filing of IP applications.
(c) Legal support and fast-tracking patent examination free of charges, the Central Government bears the cost and the startup only has to pay the statutory fee.
(d) Startups are provided with 80% rebate in filing of patents, bringing their cost down from INR.8000 to INR.1600.
(e) A 50% rebate also provided for filing of trademarks, reducing the cost from INR.10,000 to INR.5000.
Taxation is a huge concern for startups which are trying to establish themselves. In order to support start-ups and put them through minimum regulatory hassles, the below steps have been taken:
(a) An eligible start-up is a company or a limited liability partnership which has obtained the certificate of eligibility from the Inter-Ministerial Board, has been incorporated after April 1, 2016 but before April 1, 2021 (now extended to April 1, 2022) and has a turnover less than INR 100 crores. An eligible start-up is granted a tax holiday of three years out of the first ten consecutive years from the date of its incorporation.
(b) DPIIT-recognized start-ups are exempt from paying taxes on the amount in excess of the Fair Market Value of shares for shares which are issued above the face value.
(c) The CBDT has issued a consolidated circular on 30th August, 2019 on how to deal with matters relating to assessment of startups, time limit for completion of their pending assessments., procedure for addition made under Section 56(2)(viib) in the past assessment., outstanding income tax demands.
Fast Track Exit for Startups
Closing a company is difficult and incurs a lot of costs. In order to ease this process, a fast track exit for startups has been introduced:
(a) The tedious procedure of winding up and associated costs required a fast-track exit procedure for startups.
(b) Insolvency and Bankruptcy Code provides an easier way of exit if the startup is facing difficulties.
(c) Section 12 of the Code mandates a timeline within which insolvency resolution needs to happen, if the resolution fails, the company gets liquidated. In the meanwhile, the management of the company is taken over by an insolvency professional.
(d) Fast track insolvency resolution mechanism is also present under the Code.
(e) The Code provides for mechanism for voluntary liquidation of corporate persons.
In order to bring about an ease of doing business for the start-ups, a number of regulatory reforms were also brought about. Some key reforms are:
· Reserve Bank of India –
(i) Startups permitted to access loans under ECB framework upto USD 3 Million.
(ii) A SEBI registered fair value capital investor may contribute upto 100% of the capital of an Indian Company in any company mentioned in Schedule 6 of Notification No. FEMA 20/2000 including any startups irrespective of its sector under the automatic route.
(iii) An Indian startup having a foreign subsidiary may open a foreign currency account with a bank outside India for the purpose of crediting to it foreign exchange earnings.
(iv) SOFTEX form filled by software exporters moved online.
· Securities and Exchange Board of India (SEBI)
(i) Lock in period for investments made by an angel fund reduced to 1 year from 3 years.
(ii) Angel funds allowed to invest in overseas venture capital undertakings upto 25% of their investible corpus in line with other AIFs.
(iii) The upper limit for number of angel investors is increased from 49 to 200.
(iv) The requirements of minimum investment amount by an angel fund is reduced from fifty lac to twenty-five lac.
(v) Operating Guidelines for Alternative Investment Funds in International Financial Services Centers, issued by SEBI.
(i) Amendment to the definition of ‘startup’ – An entity shall be considered a startup upto a period of 10 years from the date of incorporation/registration and turnover of the entity for any of the financial years since incorporation/registration has not exceeded Rs.100 crore.
· Ministry of Finance, Department of Revenue
(i) For domestic companies if the total turnover or gross receipt does not exceed Rs.250 Crore then income tax shall be charged at the rate of 25% of the total income.
(ii) Definition of eligible business as stated in 80-IAC aligned with Startups definition and an exemption to eligible Startup for any 3 consecutive assessment years out of 7 years (earlier 5 years) beginning from the year in which such eligible Startup is incorporated also provided under the same.
(iii) Section 54EE introduced in Income Tax Act – 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 lac.
(iv) Amendments to Section 54GB of 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. (Can be availed upto 31st March 2021)
Condition of minimum holding of 50% share capital reduced to 25% for startups.
Condition restricting transfer of new asset being computer or computer software is to relax from 5 years to 3 years.
(v) Minimum Alternate Tax credit allowed to be carried up to fifteenth assessment year instead of ten.
(vi) Exemption from tax under the provision of Section 56(2)(viib) to startups for issue of shares above fair market value on the basis of self-declaration, the aggregate amount should not exceed Rs.25 Crore. The exemption has also been extended sub-categories of Category I AIF via introduction of specified funds in the said section.
(vii) Amendment to Section 79 of Income Tax act – eligible startups to carry forward their losses on satisfaction of any of the two conditions –
Continuity of 51% shareholding/voting power or
Continuity of 100% of original shareholders carrying voting power.
(viii) Passthrough of losses allowed to investment funds i.e. Category I and II AIF similar to pass through of income.
(ix) Amendments also introduced to Sections 156, 191 and 192 of the Income Tax Act though the Finance Act 2020.
· Ministry of Electronics and Information Technology
(i) Removal of clause from electronic development fund operating guidelines stating that if a fund draws from Fund of Funds for startups, they cannot draw from EDF and vice versa.
· Ministry of Corporate Affairs
(i) The financial statement of a startup (private company) may not include a cash flow statement.
(ii) A private company also considered a start-up for a period of five years from the date of its incorporation is also allowed to accept deposits from members without any restriction on the amount.
(iii) Exemption from procedural compliance for raising deposits from shareholders.
(iv) A private company’s (startup) annual return shall be signed by the Company secretary or the Director of the company where no such secretary exists.
(v) A private company (startup) is required to conduct at least one meeting of the Board of Directors in each half of a calendar year and the gap between the two meetings is not less than 90 days.
(vi) Rule 8, Companies (Incorporation) Rules, 2014 substituted with Companies (Incorporation) 5th Amendment Rules, 2019, which provides for new regulations on resemblance with an existing company name, new categories of undesirable names of a company and list of words which can be used only after obtaining approval.
(vii) MCA issued a notification increasing the period in which ESOPs could be granted to promoters and directors of Startups from 5 years to 10 years from date of incorporation.
(viii) CSR 2% fund can be spent on incubators funded by Central or State Government or any agency or Public Sector Undertakings.
(ix) As a part of Ease of Doing Business initiative, The MCA has launched a new Web form – SPICe+ replacing the older SPICe form.
(x) The MCA issued notification increasing the period for sweat equity shares from 5 years to 10 years from the date of incorporation.
(xi) Increased the period of issuance of convertible note from 5 years to 10 years from the date of issue.
(xii) The maximum limit in respect of deposits to be accepted from members by a private company shall not apply to a startup company of 10 years from the date of its incorporation, instead of 5 years.
To summarize, Startup India, in the five years, since its inception has brought about a number of measures to support and facilitate the start-up ecosystem. Easing of regulatory norms, granting tax holidays, enabling self-certification etc. provide a smooth and hospitable environment in which start-ups can grow. As a result of the positive steps taken by Startup India, entrepreneurship in India has burgeoned and consequently, the number of jobs generated has also increased manifold.