This article is written by Anumeha Agrawal pursuing BA.LLB (Hons.) from Symbiosis Law School, Pune. This is an article on the Startup India Scheme initiated by the Government of India in the year 2016. It includes the eligibility criterion of a startup under the scheme, the benefits extended including the tax exemptions, relaxations in legal compliances and other promotional steps.
Table of Contents
Introduction
The Government of India announced a Startup Action Plan on January 16, 2016, intending to promote Startups in the country and to largely enhance sustainable economic growth and create employment opportunities. The step has proven significantly beneficial to budding startups in India.
Defining a startup
A startup has been defined as an entity:
- It can be a private company, a registered partnership firm or an LLP,
- incorporated or registered in India in the last five years,
- with an annual turnover in any financial year not exceeding INR 25 crore,
- working towards innovation, development, deployment or commercialization of a new product or process or service driven by technology or intellectual property,
- and such an entity is not formed by splitting up, or reconstruction, of a business already in existence.
Eligibility Criteria for Startup Recognition
A startup will be eligible if it:
- has a recommendation (with respect to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion, from an Incubator established in a post-graduate college in India; or
- supported by a Government-funded incubator (w.r.t. the impugned project) under any specified scheme to promote innovation; or
- supported by a recommendation (w.r.t. determination of innovative nature of business), in a prescribed format by Department for Promotion of Industry and Internal Trade or DIPP, from an Incubator recognized either by the government; or Entity Identification of businesses covered under the definition in Part A above DIPP
- funded by an Incubation Fund/Angel Fund/ Private Equity Fund/ Accelerator/Angel Network that promotes innovative nature of the business and is registered with SEBI; or
- funded by the Govt. under any of the specified schemes to promote innovation; or
- granted a patent by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.
Tax exemptions under Startup India Program
Income tax exemption for 3 consecutive years
The Startups are exempted from payment of income tax on their profits for 3 years, provided there is no distribution of dividend by the Startup under section 80-IAC of the Income Tax Act, 1961.
Tax exemption under section 56
Ordinarily when a company raises capital from the issue of shares which exceeds the Fair Market Value (FMV) of such shares, such excess capital is taxable in the hands of the recipient as Income from Other Sources under IT Act, 1961. Whereas in the case of Startups, where the idea is either at a stage or conceptualization or development, it is difficult to calculate the FMV of such shares. As a result, often, FMV is also significantly lower than the issuance value of the capital investment. And the tax is levied under Section 56(2)(vii)(b).
Currently, investment by venture capital funds in Startups and by incubators in the Startups is exempted from operations of section 56(2)(vii)(b). The same shall be extended to investments made in Startups.
Exemption from tax on Long-term capital gain under section 54EE
A new section 54EE of IT Act was inserted by Finance Act, 2016. The sections allow long term capital invested by eligible startups in a fund notified by the Central Government to be exempted.
The investment has to be made within 6 months from the transfer of asset and the maximum value of the investment is 50 lakhs.
The amount needs to be invested for a minimum of 3 years.
Tax exemption under section 54GB
The section 54GB allows individuals and Hindu Undivided Funds or HUFs to utilise the capital gain they have secured from a residential property to invest it in the subscription of shares of the eligible companies. The eligible startups under these schemes are also eligible for the said deduction.
Tax exemption under section 80 IAC
In 2017 this section was inserted to exempt startups from payment of income tax on their profits. This exemption is contingent on the following criteria:
- The startup must be incorporated after 1st April 2016 and before 1st April 2021
- Turnover should not exceed 25 crores.
- The exemption is only valid for 3 consecutive assessment years out of 7.
There is a proposed amendment to take effect from FY 2021-22 that states:
- The deduction will be available for 3 years out of 10 starting from the year of incorporation.
- The maximum permissible turnover is to be raised to 100 crores.
Relaxed provisions for set off and carry forward of losses
Section 79 of the Income Tax Act allows carrying forward and setting off losses by a company subject to the condition that the shareholders who held voting power when the impugned loss was incurred:
- Continue to hold those shares on 31st march of previous FY
- And such loss has been incurred in 7 years from the incorporation year of the company.
Under Finance Bill, 2017 section 79 of IT Act was amended to add tow exemptions startups eligible u/s 80-ITC:
- The change in shareholding is due to death or gift to any relative.
- Indian company becomes a subsidiary of the foreign company due to amalgamation or demerger, subject to specific conditions.
Other Benefits
Credit Availability
National Credit Guarantee Trust Company and Small Industries Development Bank of India (SIDBI) has envisaged in the budgetary Corpus of INR 500 crores per year for next four years (since 2016) as a credit guarantee mechanism for enhancing the availability of credit loans for the Startups.
Self Certification
Startups are allowed to self-certify compliance (through the Startup mobile app) with 9 labour and environment laws (refer below).
In the case of the labour laws, no inspections will be conducted for 3 years in the ordinary course of business. However an inspection may be conducted on receiving a written, credible and verifiable complaint of violation, it must be approved by at least one level senior to the inspecting officer.
As for the environment law compliances, Startups whose operations fall under the ‘white category’ (according to the criteria given by CPCB) are allowed to self-certify compliance and random checks may be carried out.
The impugned labour laws and environmental laws are:
- 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
- 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
IP Protection
Many startups have substantial IPR, the scheme provides the following:
- Fast track process of patent applications;
- A panel of facilitators that assist in IP applications;
- The fees of facilitators for all the number of IP applications are paid by the Government;
- Lastly, a rebate of 80% is given to patent applications.
Public procurement
In cases of public procurement or Government tenders in the management sector, the criteria of “prior experience” are exempted for the Startups. There are no exemptions in quality standards or technical parameters to maintain fair competition and responsible public procurement.
Grievance Redressal Cell
In August 2019, the government in a press release stated that a dedicated Grievance Redressal Cell was formed by five members of Central Board of Direct Taxation or CBDT. The cell will address the startups’ tax-related grievances.
SWOT analysis
Strengths
The Scheme has many strengths to it which have ensured its success a few of which are:
- The scheme provides a platform to young startups to get government recognition which becomes a testament of its authenticity.
- The scheme also enables the startups to have a wider exposure to the market and to access more number of investors.
- The ecosystem regarding startups in the country is very strong and good especially if it is an online portal or e-commerce platform.
- The government through this scheme has enabled the startups to utilise the country’s exceptionally diverse market of goods and services.
- The legal and procedural relaxations given under the scheme reduce the compliance burden on the startups.
Weakness
However, the scheme has not achieved the desired results due to some of the lacunas like:
- The biggest issue for any startup is funding, the proposed model under this scheme was that SIDBI will invest in Venture Capital (VC) funds which in turn would invest in startups. But, the plan failed and such kind of capital was not raised by the scheme. Hence the proposed division of funding with 15% of total corpus given by banks and other financial institutions and 85% by SIDBI also did not work.
- Another requirement under the scheme was mandatory registration of the VCs with Securities Exchange Board of India, and many major VCs are not registered with SEBI which, as a result, could not participate.
- Another significant issue with the startup is the duration it requires to become profitable especially considering the initial expenditure borne by its founders, hence the initial tax exemption of three years was inadequate. The government increased it to five years which may have a positive effect in the future now.
Opportunities
The opportunities for the scheme involve:
- Currently, the country is witnessing a boom in startups due to the increasing job dissatisfaction of the people and soaring unemployment. The situation will only worsen due to the recession following the Covid-19 pandemic. In such a situation there will be an immense number of individuals wanting to initiate their startups and such policies will prove to be extremely appreciated by the public.
- Another opportunity this scheme provides to the Government and the economy in general is it promotes and makes the dream of ‘Atma Nirbhar Bharat’ and ‘5 trillion economies’ achievable as the startups in the country have with adequate legislative support has potential to attract immense foreign investment.
Threats
- The biggest threat to a startup and entrepreneurship culture is its unconventional standing as a career opportunity and hence the lack of societal as well as market acceptance of the same. However, the culture is slowly but steadily changing and there is an increase in awareness and acceptance.
- The lack of resources is often the biggest threat in any startup, due to the party’s inexperience in the market there are bound to be initial difficulties and losses, at this time there is a need for availability of resources and mentors.
- Talent acquisition is a major issue for startups as talented individuals prefer to collaborate with larger and established organisations with whom startups cannot compete in terms of remuneration infrastructure or other perks.
Success Rate of the Scheme
The scheme has been successful in its objectives to promote entrepreneurship in the country. According to the Economic Survey of 2015-16, at time of the launch of the scheme, the number of startups were 19,000, whereas according to the DPIIT in March 2020 there are 34,026 startups registered in the country, i.e. a straight increase of 79.08% during the functioning period of the scheme.
There have been in total 266 income tax exemptions availed under the scheme and 323 startups have been funded by SIDBI.
Conclusion
An overall analysis of the scheme makes it evident that the scheme has been successful and was a much-awaited initiative considering the growth of startups in the country and the immense potential to grow further.
References
- https://www.startupindia.gov.in/content/sih/en/startup-scheme.html
- https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/Action%20Plan.pdf
- https://taxguru.in/income-tax/period-turnover-eligibility-section-80-iac-deduction-start-ups.html
- https://taxguru.in/income-tax/cbdt-constitutes-start-up-cell-redressal-grievances-related-start-ups.html,
- https://www.incometaxindia.gov.in/_layouts/15/dit/pages/viewer.aspx?grp=act&cname=cmsid&cval=102120000000037175&opt&isdlg=1&grp=act&cname=cmsid&cval=102120000000037175&opt&isdlg=1
- https://www.indiabudget.gov.in/budget2017-2018/ub2017-18/metax%20exemptionmo/memo.pdf
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