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In this blog post, Sandeep Thomas Chandy, a final year student at Jindal Global Law School, with interests in Taxation and Corporate Laws, writes on whether the Start-Up India Mission is a half-baked attempt or not.

Start-Up India Mission – A Half Baked Attempt?

On 16th January 2016, the Hon’ble Prime Minister launched his ambitious Start-Up India mission which aims to promote and nurture start-ups in India. The mission through a 19 point Action Plan offers a host of benefits to start-ups in India.

The integral part of the mission is the definition of a “start-up”. Only those entities which qualify the definition are eligible for the benefits provided by the mission. However, this definition formulated by the Department of Industrial Policy and Promotion (DIPP) which is an entry point for the entities seeking to avail the benefits is quite vague and widely worded.

Definition[1]

An entity is considered as a start-up –

  1. Up to five years from the date of its incorporation/registration,
  2. If its turnover for any of the financial years has not exceeded Rs.25 crores, and
  3. It is working towards innovation, development, deployment or commercialization of new processed or services driven by technology or intellectual property.

Explanation

  1. An entity is considered to be working towards innovation, development, deployment or commercialization of new products, process or services driven by technology or intellectual property if it aims to develop and commercialize:
    1. A new product or service or process, or
    2. A significantly improved existing product or service or process, that will create or add value for customers or workflow.

Provided that the mere act of developing:

  1. Products or services or processes which do not have potential for commercialization, or
  2. Undifferentiated products or services or processes, or
  3. Products or services or processes with no or limited incremental value for customers or workflow

Would not be covered under this definition.

 

As per the definition, an entity would be a start-up only if the product/service/process it is developing is “new”. The definition nor the explanation has failed to mention if this newness if with respect to the Indian territory or global. If the newness is global then ventures like Flipkart and Ola Cabs would have failed to satisfy the definition as their business models already existed in other countries (Amazon and Uber). But then the mission would turn out to be similar to the Make in India campaign. Therefore, a clarification is required on whether the idea is new in India or global.

The definition also contains vague terms like “innovation”, “significantly improved”, “limited incremental value” for which no clarity has been provided. Without a clarification if it would difficult for entities and incubators to get recognition and claim the benefits of the mission.

 

RECOMMENDATIONS

  1. Waiver of Statutory Fees incurred in IPR protection

Under Action Point 4, the Scheme for Facilitating Start-ups Intellectual Property Protection (SIPP) was introduced through which the Government appoints and bears the cost of IPR assistance provided to the start-ups. The objective of this scheme is currently restricted to only assisting Start-ups in protecting and commercialize their IPRs by providing them access to high-quality IP services and resources.[2]

Providing free high-quality IPR assistance would definitely be of great help to the start-ups. But the scheme should have also provided for waiving of the statutory fees incurred in IPR protection.

 

  1. Equity Crowdfunding

As part of the Start-Up India initiative, the Reserve Bank has relaxed the regulatory norms for Foreign Venture Capital Investors (FVCIs) and External Commercial Borrowing (ECB) with respect to venture qualifying the “start-up” definition. However, obtaining these sources of funding and even similar domestic funding are still quite expensive and time-consuming. This is where equity or debt-based crowdfunding acts as a saviour for bootstrapped ventures. The costs for procuring funds through crowdfunding is substantially lower than institutional funding. However, in India equity crowdfunding is illegal if the entity does not comply with Securities and Exchange Board of India (SEBI) regulations of Initial Public Offering (IPO). Complying with SEBI’s IPO regulations would make crowdfunding unattractive due to financial and compliance costs associated with it. If a start-up could afford it, then it could go for an IPO instead of equity crowdfunding.

In 2014, SEBI came out with a consultation paper on permitting equity crowdfunding in India. The model proposed by SEBI was a modified version of crowdfunding where the “crowd” was kept away and access was to be given only to accredited investors. The USP of crowdfunding model is that it allowed the common man to invest a small amount in a venture he finds interesting. By removing this USP, SEBI’s model became just a pool of institutional investors thereby making the entire model unattractive to bootstrapped start-ups. SEBI may have adopted this model to protect the small investors due to high risk associated with investing in start-ups. A better approach would be to permit the model and at the same time limit the individual exposure based on the risk appetite of the person. After all, when start-ups in other countries are preferring crowdfunding over other sources of funding, Indian start-ups too should be allowed the fruits of this model.

Global trends suggest that equity crowdfunding would surpass venture capital as the leading source of start-up funding.[3] This being so SEBI should come out with better crowdfunding model maintaining the USPs than one proposed in the consultation paper.

 

  1. Equalization Levy

In the 2016 Budget, the Government introduced Equalization Levy on advertising revenues earned by non-resident companies from India. The levy effective from June 2016, is presently imposed at 6%. As this levy is imposed over and above the Service Tax payable on the services, the net effect would be in excess of 22% causing a huge financial burden to the already bootstrapped start-ups. Though the Government has formulated this levy to be deducted from the consideration paid, the chances are that the non-resident companies would let their revenues be affected due to some domestic taxes.

Google Adwords is one of the key non-resident advertising platforms whose services fall under the ambit of this levy. In an email to Adwords customers, Google has informed that the levy along with all and any other taxes on the services provided has to be borne by the customer.[4]

A whitepaper released by Nishit Desai Associates and Internet and Mobile Association of India (IAMAI) states that small-scale technology driven companies have to depend on third parties for functions like advertising, marketing and accounting. The levy on such companies would increase the burden exponentially.[5]

Currently, Equalization Levy is required to be paid only by those companies paying consideration of Rs. 1 Lakh and above in a year. To ease the financial burden on start-ups, the Government will have to increase the cap or exempt start-ups entirely from the purview of the levy.

 

 

[1] http://dipp.nic.in/English/Investor/startupindia/Definition_Startup_GazetteNotification.pdf

[2] http://startupindia.gov.in/uploads/pdf/SIPP_IPR_Scheme.pdf

[3] http://www.forbes.com/sites/chancebarnett/2015/06/09/trends-show-crowdfunding-to-surpass-vc-in-2016/#5c2fae59444b

[4] http://www.charteredclub.com/equalisation-levy/

[5] http://www.business-standard.com/article/pti-stories/equalization-levy-detrimental-to-startup-ecosystem-experts-116122500342_1.html

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