This article is written by Tushar Verma, Geeta Institute of Law, currently enrolled in the Ace your Internship course at Lawsikho.

Introduction

Startup India, initiated by the Government of India is a flagship initiative launched in January 2016. This initiative is taken by the government of India to boost the ecosystem for supporting innovation and startups in India. Through this scheme, the government is looking forward to driving sustainable economic development and enhance employment opportunities in India. The government of India recently announced Startup India action plan to meet the requirements of this initiative.

What are startups all about?

A startup is a small business started with the objective to solve a problem. These are the companies which are generally operated by the founders or a single person. These companies are generally offering those services which the founders think are not available or are available in an inferior quality. Startups provide jobs opportunities to the people which helps in the economic development of the society.

Recognition of a startup shall be up to 7 years starting from the date of incorporation. Secondly, a startup must not exceed the threshold of 25 crores. Remember once your startup ceases to be eligible, you should intimate this to DIPP within the period of 21 days.

Department of Industrial Policy and Promotion

Department of Industrial policy and promotion was set up in 1995. It is operational under Ministry of Commerce and Industry, Government of India. The department takes care policy formulation and implementation of the promotional and development measures for industrial sector growth.This department is also responsible for the intellectual property rights and other initiatives regarding their promotion and protection.

What is angel tax?

Companies which are closely held receive equity funds from outsiders.  These investments are held at a premium to the fair price and the amount raised which is in excess of fair value is taxable. The amount is taxable under the head “income from other sources” and taxable under section 56(ii) of income tax act. These provisions are applicable not only to the mature companies but also to the small scale startups which took their investments from the residents of India. As a mainstream source of investment for these startups are these investors government is thinking of removing these tax burden from them. Investment raised from the venture capitalists and non-residents are already out of the scope of these taxes. Now, so as to give more freedom to these startups government has removed taxes on the investment received from a resident of India.

Registration of a startup with DIPP

Most of the startups are focused on gaining revenues and maximizing their profits by using various methods which is a good thing. At the initial stage, most of the startups are bootstrapping their organizations out of their hard-earned money. One of the ways to enhance your earnings is to reduce the cost. Government retain 30% of our income in form of tax which leads to increased cost. We can save this cost for three years by simply registering our startup with the Startup India initiative.  

However, a rumour in the industry that all the startups can avail tax benefits is trending, which is a myth.  Not all startups will get tax benefits.There is a difference between startup recognition and startup recognition with tax. Some points to consider in this regard:

1. Startup recognition is granted by the department of industrial policy and promotion (DIPP) and approval in regards to tax benefits shall be provided by the inter-ministerial board of certification.
2. The tax benefit is available for both companies and LLP registered on or after 1st of April 2016 and with turnover not less than 25 crores. This provision is available under section 80 IAC of the Income Tax Act, 1961.
3. Registered partnerships are also considered under in normal startup scenario, but if you want to claim tax benefits registered partnerships are not eligible for the scheme.
4. Three years of tax benefits will be available and the startups have to choose in which lot of 7 years they want to avail the benefit. Tax benefit will remain consistent throughout the 3 years.

Steps to register your startup with DIPP

Most of the startups are focused on gaining revenues and maximizing their profits by using various methods which is a good thing. At the initial stage, most of the startups are bootstrapping their organizations out of their hard-earned money. One of the ways to enhance your earnings is to reduce the cost. Government retain 30% of our income in form of tax which leads to increased cost. We can save this cost for three years by simply registering our startup with the Startup India initiative.  

However, a rumour in the industry that all the startups can avail tax benefits is trending, which is a myth.  Not all startups will get tax benefits. Following are the steps for getting recognition:

Step 1: Incorporation of the business

Incorporating your business in Limited Liability Partnership or a Private Limited company or a Firm. You must follow the ordinary procedures as a certificate of incorporation, Pan card and other compliances related to the particular type of business. Registration must be after or in 1st April 2016.

Step 2: Registering business with the startup India scheme

Registering for a startup is a very easy process. All you need to do is upload a form online with all requisite forms startup India website. The entire process is simplified and made online by the government.

Step 3: Documents required to be upload online (upload only .pdf format)

Recommendation letter from the following:

• Any patent filed and published in patent journals available online or offline.
• Incubators who are established in post graduation colleges in India.
• Support letter from one of the startups who is funded through central or state Government authorities or any incubator which is duly recognized by the government of India.
• Letter of funding which should not be less than 20% in equity by angel or incubation fund.

Incorporation certificate of the business:

• You must upload your certificate of the incorporation of your business.

A brief description of your business:

• A description of the innovation you included in your product.

Step 4: Choose if you would like to have tax benefits

After getting all the work done you need to go through one more step of getting an approval from the inter-ministry board. It totally depends upon the ministry that they will approve your application or not. Once they approve your application then you will able to register your startup with tax benefits. Startups recognized by DIPP can avail IPR related benefits without requiring any further license.

Step 5: Self-certify your documentation

You must self-certify all your documents before filing for the recognition. Check your company is qualifying all the required conditions to avail the benefits i.e within first 7 years you can apply, 25 crore turnover must not exceed, innovation in the product is must, the idea must not be copied, your business must not result from any reconstruction or splitting.

Step 6: Getting recognition number

You are all set to apply for the recognition and on applying you will be allotted with one unique recognition number. Certificate of recognition will be issued after going through the documents submitted by you. Remember, always take much care while uploading the documents, if it is found that you have upload forged document or some documents were required but you forget to upload then you shall be liable for the fine of 50% of the paid-up capital of your startup with Rs.25000 minimum fine.

Step 7: Other areas to look over

• Patents, trademark, copyrights, design etc.

You need to pay only 80% of the fees on applying any of these i.e patent, trademark, copyright or design etc. Only some of the facilitators are qualified by the government of India to provide this discount.

• Funding

One of the major difficulty in front of these startups is that they lack in funding. The government of India with this initiative is providing them with funding so that they may not face any challenge in running their business effectively and efficiently.

How to avail tax benefits under this scheme

Now after getting knowledge about what startups with tax benefits are, we should move on to what ingredients are required to avail Tax benefits under this scheme:

• Bad news for E-commerce startups

If you are planning to start an E-commerce startup than you are not covered under this scheme. Please note this that if you want to get benefits of this scheme than your startup must have some innovative part in it.

For Example, in 2016, Oyo rooms come up with a new idea that is totally unique and with the use of technology. At that time another firm named ZO rooms came up with a similar idea just the names were differentiated. Thus they were using the same technique as of used by OYO rooms and applied for the startup India scheme. The idea did not work because only one startup can be recognized with uniqueness. If after going through the application the government officials are satisfied that the startup is having some differentiating factor than only it will get benefits.

• Your startup must be problem-solving

Your startup should focus on solving some problems that our society is facing. Your product must have that capability to solve a problem which makes our lives more comfortable.

• Incorporation of your startup

Make sure that your startup i.e Limited liability partnership or a company must be registered on or after 1st April 2016.

• Selecting “with Tax benefits” while registering

You must click on “registration with Tax benefits” while registering with startupindia.org.

• The business model must be working

Your business model must be working at the time of application. There may be chances of rejection by the incubators if your business model is not working.

• Recommendation letter from the following authorities

• Any patent filed and published in patent journals available online or offline.
• Incubators who are established in post graduation colleges in India.
• Support letter from one of the startups who is funded through central or state Government authorities or any incubator which is duly recognized by the government of India.
• Letter of funding which should not be less than 20% in equity by angel or incubation fund.

• Approval from the inter-ministerial board

After getting all the work done you need to go through one more step of getting an approval from the inter-ministry board. It totally depends upon the ministry that they will approve your application or not. Once they approve your application then you will able to register your startup with tax benefits.

Key announcements made during the startup India action plan

1. Startups shall be exempt from the payment of the income tax for three years.
2. 80% shall be rebate availed by the startups on the filing of the patent application.
3. A fast-track mechanism is also set up for patent applications.
4. Up to 3 years there will be no compliance in regards to the environmental law compliance, labour post self-certification
5. A hub for the startup India will be started with a single point of contact which can be available after site launch.
6. Total corpus of 2500 crore will be the initial fund input by the government and up to 10000 crores in next 4 years shall be poured in.
7. A mobile app shall be launched which will help the startups to register via that app within one day.
8. Exemption from the taxation of capital gain.

Conclusion

Indian government id providing enough help to the startups to cope up with the economy. Moreover, many startups have registered themselves under this startup India regime so as to get maximum benefits from the government. As the result of this scheme more and more entrepreneurs are getting motivation and they are starting up their companies and contributing towards making society more efficient and comfortable. Generating more and more jobs for the country is the reward we are getting from the startup India scheme. Startup India is one of its kind schemes.

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