[FAQs] DPIIT Recognition for Startups – Eligibility | Benefits | Startup India Incentives

In order to obtain DPIIT recognition and to obtain various income-tax benefits and benefits under Start-up India, a start-up entity must satisfy the following conditions:

• It must satisfy the definition of start-up under Para 1(a) of the LSN;
• It must satisfy the Revised Guidelines for DPIIT recognition of start-ups;
• It must follow the procedure to obtain DPIIT Recognition; and
• It must obtain the requisite approvals and satisfy requisite conditions for the tax benefit.

The Government of India announced the ‘Start-up India’ initiative for creating a conducive environment for startups in India. The various Ministries of the Government of India have initiated a number of activities for the purpose. To bring uniformity in the identified enterprises for the purpose of these Government Schemes and initiatives for start-ups, it was considered necessary to define the term ‘start-up’.

The first Department for Promotion of Industry and Internal Trade (DPIIT) Notification defining a ‘start-up’ was Notification No. G.S.R. 180(E) dated 17.02.2016 (hereinafter referred to as ‘the 2016 Notification’).

Notification No. G.S.R. 501(E), dated 23-5-2017 (hereinafter referred to as ‘the 2017 Notification’) rescinded the 2016 Notification.

Notification No. GSR 364(E), dated 11.04.2018 (hereinafter referred to as ‘the 2018 Notification’) rescinded the 2017 Notification. The 2018 Notification was amended by the Notification No. GSR 34(E), dated 16.01.2019.

The Latest Start-up Notification i.e. Notification No. G.S.R. 127(E), dated 19.02.2019 has been issued to revise definition of start-ups. The Latest Start-up Notification (LSN) has superseded the 2018 Notification.

Based on the experience gained in the last 5 years, GOI has issued the Revised Guidelines for recognising a start-up, dated 21.06.2021. The said Guidelines clarify what entities will be recognised or not recognised by DPIIT.

In terms of Para 1(a) of the LSN, an entity shall be considered as a ‘Startup’ for the purposes of eligibility for DPIIT recognition and Govt. schemes for start-ups if:

1. It is incorporated as a private limited company or registered as a partnership firm or a limited liability partnership in India.
2. If it is 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.
3. It should not be an entity formed by splitting up or reconstruction of a business already in existence.
4. It hasn’t completed 10 years from the date of its incorporation/registration.
5. Its turnover for any of the financial years since incorporation/registration has not exceeded INR 100 Crores.

An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/registration or if its turnover for any previous year exceeds one hundred crore rupees.

The start-up entity should not be one of the start-up entities ineligible for DPIIT- recognition.

Startup India website clarifies as under:

• Your company must meet the following criteria to be considered eligible for DPIIT startup recognition.
• Company Age: Period of existence and operations should not be exceeding 10 years from the Date of Incorporation.
• Company Type: Incorporated as a Private Limited Company, a Registered Partnership Firm or a Limited Liability Partnership.
• Annual Turnover: Should have an annual turnover not exceeding ` 100 crore for any of the financial years since its Incorporation.
• Original Entity: Entity should not have been formed by splitting up or reconstructing an already existing business.
• Innovative & Scalable: Should work towards development or improvement of a product, process or service and/or have scalable business model with high potential for creation of wealth & employment.

In order to be treated as a ‘start-up’ under the LSN, the start-up entity has to satisfy the following conditions:

• It is incorporated or registered in India
• Date of its incorporation is immaterial – it does not matter whether it was incorporated before the date of coming into force of LSN i.e. 19.02.2019 or on or after that date
• It is a registered partnership firm or limited liability partnership or private limited company
• It is working towards innovation, development or improvement of products or processes or services, OR it is a scalable business model with a high potential of employment generation or wealth creation
• Entity not formed by splitting up or reconstruction of a business already in existence
• It has not completed 10 years from the date of its incorporation or registration
• Its turnover for any of the financial years since incorporation/registration has not exceeded INR 100 Crores
• An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/registration or if its turnover for any previous year exceeds one hundred crore rupees

The Revised Guidelines for Recognition of Start-up, dated 21.06.2021, clarify regarding the entities which will be eligible/not eligible for DPIIT recognition as under:

• Merger/Demerger/Acquisition/Amalgamation/Absorption: Resultant entity or entities formed due to merger/demerger/acquisition/amalgamation/absorption will not be recognized as Startup.

However, merger or amalgamation under section 233 of the Companies Act, 2013 between any of the following class of companies will be allowed subject to fulfilment of norms of DPIIT Notification by the resultant company:

1. two or more start-up companies; or
2. one or more start-up company with one or more small company.

• Compromise/Arrangement: Entities formed due to compromise/arrangement as provided under the Companies Act, 2013 will not be recognized as Startup.
• Conversion: Conversion of an entity from one form to another shall not be a bar for availing recognition subject to the fulfilment of condition provided in sub-section (3) of section 80-IAC of the Income- tax Act, 1961.
• Holding including foreign holding, Subsidiary including foreign subsidiary, Joint Ventures, entities incorporated outside territory Indian Territory:

1. 1. Holding/Subsidiary Companies will not be permitted for recognition. Any startup becoming holding/subsidiary of any company after recognition will be derecognized.
   2. Any entity formed by Joint Venture will not be recognized. Any Startup entering into any Joint Venture will be derecognized.
   3. Entities incorporated outside India will be ineligible for recognition.
   4. Shareholding by Indian promoters in the startup should be at least 51%, as per Companies Act, 2013 and SEBI (ICDR) Regulations, 2018.

• Name Change: Changes in the name of a recognized Startup necessitated under the relevant provisions of the applicable Act will be permitted. The benefits will be applicable starting from the original date of incorporation/registration or commencement of business by the original entity, whichever is earlier.
• CIN/LLPIN Change: Changes necessitated in CIN/LLPIN due to (a) change in domicile State, or (b) due to conversion as in para-3 above, (c) change in industry/sector subject to cancellation of existing certificate, shall be permitted subject to approval obtained as per the relevant act. The benefits will be applicable starting from the original date of incorporation/registration or commencement of business by the original entity, whichever is earlier. Changes in CIN/LLPIN for any other reasons will not be permitted.
• Incorporating additional entities: Incorporating additional entities having similar address with same production line/services and at least one common director/designated partner/partner will not be recognized as startup.
• Common directorship/partnership: Recognition of an entity having common director/designated partner/partner with any other entity shall be allowed to the extent permissible under the provisions of the Companies Act, 2013. Related party transaction shall not be allowed except transactions on arm’s length basis.
• Regulatory Areas: Entities operating in domains specifically prohibited by law shall not be recognized.
• Sole Proprietorship: A sole proprietorship is not eligible to apply for recognition. If a sole proprietorship changes its type of entity into a type permissible for recognition, then the recognition will be granted from date of commencement of business of the sole proprietorship.

No. Only RPFs, LLPs and Pvt. Ltd. Cos. incorporated in India are eligible for DPIIT recognition as a start-up [Para 1(a) of LSN] Entities incorporated outside India will be ineligible for recognition. [Para 4(iii) of the Revised Guidelines for Recognition of start-ups, dated 21.06.2021]

To fall within the definition of ‘start-up’, entity must be incorporated as a private limited company in India or registered as a partnership firm or a limited liability partnership in India. This is clear from the definition of ‘start-up’ in Para 1(a) of the LSN.

Further, Para 1(e) of LSN defines ‘limited liability partnership’ as shall have the same meaning as assigned to it in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008’. The said clause (n) defines ‘Limited Liability Partnership’ as ‘limited liability partnership’ means a partnership formed and registered under this Act. This makes it clear that an LLP to be eligible to be regarded as ‘start-up’ must be formed and registered in India under the LLP Act, 2008. LLPs incorporated abroad shall not be regarded as ‘start-up’ under the LSN.

Para 1(f) of LSN defines ‘partnership firm’ to mean a firm registered under section 59 of the Partnership Act, 1932.

Para 1(g) defines ‘private limited company’ as ‘shall have the same meaning as assigned to it in clause (68) of section 2’. The word ‘company’ in the said clause (68) means company formed and registered in India under the Companies Act, 2013 or any previous companies Act in force in India.

So, from the definitions given in clauses (a), (e), (f) and (g) of Para 1 of the LSN, it is clear that the entity must be incorporated in India.