This article is written by Himanshu Mahamuni, a student of Government Law College, Mumbai. This article analyzes various benefits provided to startups in India including finance, tax, laws and other benefits.
This article has been published by Sneha Mahawar.
Table of Contents
Start-ups are developed by entrepreneurs who aim to bring innovation in the sector of products or services. Start-ups being new in the market are vulnerable to high competition and often fail even before expanding on scalable business. Such ventures are needed to be protected and supported to grow in the marketplace. Their skills and intellectual properties are to be nurtured with various incentives such as a suitable ecosystem and financial resources. A startup recognized by the Department of Promotion for Industry and Internal Trade (DPIIT) under the Ministry of Commerce is entitled to various benefits. There are various steps taken by the government to foster entrepreneurial work. This includes various initiatives and exemptions in order to encourage innovative ideas. Various benefits and exemptions aimed at boosting start-ups are discussed in detail in this article.
This article focuses on the benefits that a startup can avail in India. The benefits include benefits in obtaining finance, the exemption in tax, flexible rules and regulations and many other benefits.
Startup India initiative
Startup India initiative was launched on the 16th of January, 2016 by Prime Minister Modi. It is a flagship initiative by the government to build a strong ecosystem, improve sustainable economic growth and generate employment opportunities. Its vision is to transform India into a country of job creators instead of job seekers. The benefits to registering under the Initiatives are as follows-
- Self-Certification based compliance;
- Tax Exemption for 3 years;
- Easy winding of company;
- Startup patent application and IPR protection;
- Easier public procurement norms;
- SIDBI fund of funds.
Some other benefits under the initiative by government schemes also include the Ayurvedic Biology Program, the Venture Capital Assistance, the Technology Development Program and the scheme for the Promotion of Innovation, Rural Industries and Entrepreneurship by their respective ministries. Startup India is also responsible for conducting various programs and providing tools and resources to startups.
DPIIT has defined which entity is to be recognized as a startup to be able to enjoy the benefits under schemes such as the Startup India initiative. Following conditions are to be met for an entity to be considered as a startup:
- Ten years have not been completed since the date of incorporation or registration.
- The entity must be a private limited company or a partnership firm or an LLP.
- Turnover of the entity shall not exceed one hundred crore rupees for any of the financial years.
- The entity should be working towards innovation, development or improvement of its business with a high potential of employment generation and wealth creation.
Setting up of incubators
Incubators offer office space, administrative support, legal compliance, training and mentoring as well as funding through angel investors or venture capitals to develop business ideas or a prototype. The resources and services are provided in exchange for an equity stake ranging from 2%-10% in it. The incubation period can be 2-3 years and its admission is rigorous.
Atal Incubation Centres (AICs) have been set up under the Atal Innovation Mission by NITI Aayog. They take applications from academic as well as non-academic institutions from both public and private sector organizations. An aid of 10,000 crores is granted under the mission for a maximum period of 5 years to support the Startup with Capital and Operational costs.
The National Science and Technology Entrepreneurship Board (NSTEDB) under the Department of Science and Technology (DST) introduced the mechanism of Technology Business Incubators (TBI). TBIs play an important role in facilitating technology-led and knowledge-driven enterprises which have also proven to improve its survival rate. Startups can utilize TBI for a period of 2-3 years. There are many TBIs set up under the ministry as well as by NIDHI. Most of these TBIs are prominent educational institutions.
The government has set up various loans and funds especially reserved for the benefit of startups. These benefits are available to startups in search of financial support. Following are the options specifically beneficial for startups.
- Funds for Startups (FFS)
The government has created an FFS at Small Industries Development Bank of India (SIDBI) with a fund of Rs. 10,000 crore which is strictly spent on the operational guidelines for startups. It is approved by the Alternative Investment Funds (AIFs) registered with SEBI. Startups who intend to borrow from FFS are obliged to invest at least twice the amount borrowed from FFS.
- CGTMSE loans
The Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme was launched by the Ministry of Micro, Small and Medium Enterprises (MSME). This scheme provides loans of up to Rs. 1 crore without collateral or surety. A Credit Guarantee Fund created under CGTMSE for startups is being set up by the government of an amount worth Rs. 500 lakh per year, for the period of four years, to provide Credit guarantee cover to banks and lending institutions as providing loans are considered risky to startups.
- MUDRA Bank
Micro Units Development and Refinance Agency Bank (MUDRA) is a public financial institution that aims to provide low rate credits to non-corporate, non-farm small/micro enterprises only. These institutions then provide loans to MSMEs through various Commercial Banks, RRBs, Small Finance Banks, MFIs and NBFCs. It can be availed by new and small businesses only who are above 18 years of age. It provides loans in three categories-
- Shishu- loans up to Rs. 50,000
- Kishore- loans up to Rs. 5 lakh
- Tarun- loans up to Rs. 10 lakh
Tax Exemptions under the Income Tax Act, 1961
Startups are already exempt from filing tax returns for 3 years from incorporation under the Startup India scheme. Along with the exemption, there are various other provisions made under the Income Tax Act, 1961 to facilitate the growth of startups. Following exemptions are given by the government.
Section 80 IAC
Section 80 IAC– Startups which are incorporated after April 1, 2016, are eligible for getting a 100% tax rebate on profit for a period of three years from incorporation. The startups recognized under the Startup India scheme whose turnover does not exceed Rs. 25 crores in any financial year up to 31 march 2021 can claim tax benefits in three out of the first seven years under this section.
Section 54EE – Long Term Capital Gains (LTCG) investment which may go up to Rs. 50 lakh, can be invested by the government’s special funds within a period of six months from the date of transfer of assets and exempt from tax on LTCG. The exemption is applicable for a period of three years.
Section 79 – If the startup founder in continuity holds 51% of shareholding/voting power or 100% of original shareholder, then the startup can carry forward its losses.
Section 56 – If a startup is recognized by DPIIT and the aggregate amount of paid-up share capital and share premium of the startup does not exceed Rs. 25 crores the startup can apply for Angel Tax Exemption post recognition.
Section 56(2)(viib) – A DPIIT recognized startup is exempted from the tax on any consideration received for the issue of shares that exceeds the Fair Market Value of such Shares. The startup has to file a declaration in form 2 to DPIIT regarding the same.
Section 115JB – The applicable rate of Minimum Alternate Tax (MAT) for startups is 18.5% along with the applicable surcharge and cess. In case a startup fails to make any profit in the first 5 years, it has been exempted from Mat.
Benefits under Companies Act
Startups are ‘to be companies’ which require encouragement from the government to flourish. The Companies Act, 2013 is proactive in realising the needs and provides the following benefits to them-
- In case a startup receives an amount of Rs. 25 lakh or more by way of a convertible note which is convertible into equity shares or repayable within a period of not exceeding five years from the date of issue, in a single tranche, from a person shall not be treated as a deposit.
- A start-up need not comply with the provisions for acceptance of deposits given in clauses a to e of section 73 of the companies act for five years from the date of incorporation
- A startup may convene at least one meeting of the board of directors in each half of the calendar year with the gap between the two meetings of not less than 90 days is sufficient.
- A promoter or a director or any person belonging to the group who holds more than ten percent of the outstanding equity shares of the company up to ten years from the date of incorporation or registration may be allotted with Employee Stock Options.
- A private company which is a startup is not required to follow the maximum limit in respect of deposits to be accepted from members for a period of five years from the date of its incorporation.
- A startup company may issue sweat equity shares not exceeding 50% of its paid-up capital up to 10 years from the date of its incorporation or registration which was earlier restricted to only 5 years.
Other benefits to a startup
Some of the other benefits to a budding start-up includes:
Simple Registration Process
The registration process of startups have been completely shifted to online through mobile apps and websites. This has made the process very easy. By filling a simple form and uploading certain documents on a website anyone can set up a startup.
Startups IPR protection (SIPP)
This scheme facilitates quick filling of IPs i.e. patents, trademarks and design by startups. The fee for filing patents is also reduced by 80% for startups. Panels of facilitators are formed to facilitate the process of filing and provide legal guidance through the entire process of application.
Research and development parks
There are already 7 research parks set up for the functioning of research purposes for startups as per the startup India action plan. These research parks are mostly prominent educational institutes of India such as IITs. This facility develops the product or service provided by the startups and brings more innovation.
Various compliance norms relating to environmental laws and labour law are simplified as well as reduced. This allows startups to save money and time spent on compliance checks. Startups are currently allowed to self-certify compliance with 9 labour laws and 3 environmental laws.
To enable the various stakeholders of a startup to meet and spread their connections, the government has proposed to conduct two startup fests annually. These fests are to be conducted both at the national and international levels. This provides the chance for budding entrepreneurs to amplify their network for further opportunities.
Easy entry and exit options
As discussed above, the entry process has been eased tremendously by online registration and lesser compliance. Along with entry, the exit options are also made easier for the startups. A startup can close or wind up its business within just 90 days from the date of application of the same.
The government of India is constantly working towards the encouragement of young minds to create and develop their ideas with many incentives to strive towards the goal. Various tax exemptions, exemption from tiresome compliances and financing are some of the positive steps recently taken for the purpose. India is one of the largest internet and apps users. It was important to digitalize the process for the simplicity of the process. When these startups grow and bring their own IPO, they are considered to be successful. Some of the successful startups that flourished in India are Paytm, Byjus, Razorpay, Upgrade, etc. The Commerce and Industry Minister Piyush Goyal recently said that simplification, facilitation and ease of doing business have helped India create more startups.
However, in a study by the IBM institute, it was found that 90% of Indian startups fail within the first five years of inception. The study said that the reason for the failure of startups was weak business models, poor planning, faulty customer insights, or lack of original ideas, focus, agility and tech capability. The venture capitalist also hesitates to invest in the startup due to a weak business model. Five basic steps to overcome the challenges suggested are “framing the challenge, creating an opportunity portfolio, managing the strategic project, connecting the plans to financials and converting the assumptions into knowledge”. India has seen a great increase in Startup success after the introduction of reforms but there still lacks awareness about it among young minds. The right approach to solve the problem in addition to the benefits given by the government may increase the entrepreneurs to grow and develop the country.
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