What are the features of government’s Startup Policy?

The Government of India has announced ‘Startup India’ initiative for creating a conducive environment for startups in India. The initiative was launched by the Prime Minister on January 16 2016. Various Ministries of the Government of India have started a number of activities for the purpose.

There are different components of the policy. First of all, there is a clear cut definition of startup. Secondly, there is an Action Plan for startup which provides different institutional arrangements for support of startups. Procedure for obtaining startup license is elaborately mentioned. The role of incubators, angel funds and venture capital funds are also illustrated under the Action Plan. Thirdly, there is the tax incentives for startups and fourthly, the government has established several funds with its own money for extending financial support to startups.

What is a startup?

Startup means an entity, incorporated or registered in India not prior to seven years, with annual turnover not exceeding Rs 25 crore in any preceding financial year, working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. According to the startup policy, following criteria should be fulfilled by a registered entity to be qualified as a startup:

  • Not prior to seven years, however for Biotechnology Startups not prior to ten years,
  • With annual turnover not exceeding Rs 25 crore in any preceding financial year, and
  • Working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation

The entity should not be formed by splitting up, or reconstruction, of a business already in existence. Once registered, the entity will cease to be a startup if its turnover for the previous financial years has exceeded Rs 25 crore or it has completed 7 years and for biotechnology startups 10 years from the date of incorporation/ registration. 

Documents to be submitted by a startup

The application for startup should be submitted to DIPP with any of the following documents:

1. A recommendation from any Incubators established in a postgraduate college in India or state governments or central government. or

2. A letter of funding of not less than 20 per cent in equity by any Incubation Fund, /Angel Fund/Private Equity Fund/Accelerator/Angel Network duly registered with SEBI.

5. A letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation; or

6. A patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of business being promoted.

Support from the Startup Action Plan

The Startup Action Plan declared by the Government on 16th January 2016 launched several supporting measures for startups including simplifying existing laws for startups.

Exemption from labour lows: Startups shall be allowed to self-certify compliance with 9 labour and environment laws (refer below). In case of the labour laws, no inspections will be conducted for a period of 3 years. Startups may be inspected on receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior to the inspecting officer.

Environment laws: In case of environment laws, Startups which fall under the ‘white category’ would be able to self-certify compliance and only random checks would be carried out in such cases.

Fast-tracking of patent applications will also be made for startups. Startups shall be provided an 80% rebate in filing of patents vis-a-vis other companies. Similarly, fast racking of IP/patent applications will be made for startups.

Tax exemption: To attract more funds, 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

Income tax exemption: Startup initiatives are exempted from income-tax for a period of 3 years.

Tax exemption is also provided for investment above fair market value. This means that even if the investment by a big investor in startup seems to be very high compared to the total value of the startup firm, capital gains tax will not be imposed on the investment.

Incubators: Incubators can be started on PPP model. The Funding pattern of incubators will be modelled on the basis of Atal Innovation Mission.

Funding support of 40% (subject to a maximum of INR 10 crore) shall be provided by Central Government for establishment of new incubators for which 40% funding by the respective State Government and 20% funding by the private entity. 

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