Startups in India – Evolution, Benefits, Tax Exemptions

Table of Contents: 
1. Introduction
2. Evolution of Startups in India
3. Startup policy by the Government of India
4. Benefits/Exemptions under the Companies Act, 2013
5. Tax Exemptions
6. Benefits for entrepreneurs
7. Eligibility and Procedure for Recognition of Startup
8. Mudra Bank

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1. Introduction

A Startup Company or Startup is started by founders or entrepreneurs to search for a repeatable and scalable business model.

2. Evolution of Startups in India

Startup India campaign is based on an action plan aimed at promoting bank financing for start-up ventures to boost entrepreneurship and encourage startups with jobs creation. The campaign was first announced by Honourable Prime Minister Shree Narendra Modi ji in his address from the Red Fort on 15 August in the year 2015.

The Government of India has announced the ‘Startup 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 this purpose.

To bring uniformity in the identified enterprises, an entity shall be considered as a ‘Startup’ –

(a)  Up to 10 years from the date of its incorporation/registration,

(b)  If its turnover for any of the financial years has not exceeded ` 100 Crore, and

(c)  It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

Any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘Startup’.

Thus, Startup is an entity considered to be working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. Its aim is to develop and commercialize a new product or service or process or to significantly improve existing product or service or process that will create or add value for customers or workflow.

3. Startup Policy by the Government of India

Key points relating to the Startups Policy of the Government of India are given below:

1. 1. 1. Single Window Clearance even with the help of a mobile application.
      2. 10,000 Crore fund of funds.
      3. Reduction in patent registration fee.
      4. Modified and friendlier Bankruptcy Code to ensure 90-day exit window.
      5. Freedom from mystifying inspections for 3 years.
      6. Freedom from Capital Gain Tax for 3 years.
      7. Freedom from tax in profits for 3 years.
      8. Self-certification compliance.
      9. Innovation hub under Atal Innovation Mission.
      10. Starting with 5 lakh schools to target 10 lakh children for innovation programme.
      11. New schemes to provide IPR protection to startups and new firms.
      12. Encourage entrepreneurship.
      13. Stand India across the world as a startup hub.

4. Benefits/Exemptions under the Companies Act, 2013 available to Startups

• • Financial Statement- Section 2(40):- An explanation has been inserted in Clause (40) of Section 2 of the Companies Act, 2013 which provides the definition of a Startup. It states that – the ‘Startup Company’ means a private company incorporated under the Companies Act, 2013 and recognized as start-up in accordance with the notification issued by the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry.
  • Deposit Treatment:-The Companies (Acceptance of Deposit) Rules, 2014 have been amended to provide that an amount of ` 25 lakh or more received by a startup company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding 5 years from the date of issue) in a single tranche, from a person shall not be treated as a deposit.
  • Deposit Provision:- The provisions of clauses (a) to (e) of Section 73 shall not apply to a startup company for five years from the date of its incorporation.
  • Maximum Limit of Deposit:- The upper limit on the acceptance of deposits has been enhanced to 35% of net worth instead of earlier 25%.
  • Employee Stock Option Plan:- Startups are allowed to issue Employee Stock Options to promoters working as employees.
  • Sweat Equity Shares:- The limits with regard to sweat equity that can be issued by a start-up company from 25% of paid-up capital to 50% of paid-up capital.
  • Annual Return:- The annual return of a startup company may be signed by the company secretary, or where there is no company secretary, by the director of the company.
  • Board Meeting:- For start-ups, convening at least one meeting of the board of directors in each half of a calendar year with the gap between the two meetings of not less than 90 days is sufficient to meet the requirement of section 173(5) of the Act.

5. Tax Exemptions available to Startups

Following tax exemptions for the startups had been introduced that was made effective from 2017-18. The proposed incentives and exemptions are:

• • Exemption u/s 80-IAC of Income-tax Act,1961:- The Startup is eligible for getting 100% tax rebate on profit for a period of 3 years. The startups recognized under the Startup India policy can now claim tax benefits in three out of the first 10 years.
  • Exemption under Capital Gains:- Long term capital gains (LTCG) will be invested by the Government’s special funds. The investment may go up to ` 50 lakh and the exemptions will be applied for 3 years.
  • Criteria for availing Capital Gains Benefit:- If the individual holds 50% equity then the company may utilize the invested amount for buying assets before the due date of filing the return.
  • Reduced tax rate for Manufacturing Company:- Finance Minister has also proposed reduced tax rate for the new domestic manufacturing companies setup on or after 1st March, 2016. Reduced tax rate is 25% plus surcharge plus cess.
  • Reduced tax rate for Small Company:- The domestic companies who hold turnover less than INR 5 Crore in the FY 2014-15 will be liable for 29% tax along with surcharge and other cess.

6. Benefits available to Entrepreneurs in Establishing Startups

To promote growth and help Indian economy, many benefits are being given to entrepreneurs establishing startups.

(1)  Simple Process: Government of India has launched a mobile app and a website for easy registration for startups. Anyone interested in setting up a startup can fill up a simple form on the website and upload certain documents. The entire process is completely online.

(2)  Reduction in Cost: The Government also provides lists of facilitators of patents and trademarks. They will provide high quality Intellectual Property Right Services including fast examination of patents at lower fees. The government will bear all facilitator fees and the startup will bear only the statutory fees. They will enjoy 80% reduction in cost of filing patents.

(3)  Easy Access to Funds: ` 10,000 Crore fund is set-up by Government to provide funds to the startups as venture capital. The Government is also giving guarantee to the lenders to encourage banks and other financial institutions for providing venture capital.

(4)  Tax Holiday for 3 Years: Startups will be exempted from income tax for 3 years provided they get a certification from Inter-Ministerial Board (IMB).

(5)  Apply for Tenders: Startups can apply for Government Tenders. They are exempted from the “prior experience/turnover” criteria applicable for normal companies answering to Government Tenders.

(6)  R&D Facilities: Seven new Research Parks will be set up to provide facilities to startups in the R&D sector.

(7)  No Time-consuming Compliances: Various compliances have been simplified for startups to save time and money. Startups shall be allowed to self-certify compliance (through the Startup mobile app) with 9 labour and 3 environment laws.

(8)  Tax Saving for Investors: People investing their capital gains in the venture funds set up by Government will get exemption from capital gains. This will help startups to attract more investors.

(9)  Choose your Investor: The startups will have an option to choose between the VCs, giving them the liberty to choose their investors.

(10) Easy Exit : In case of exit, a startup can close its business within 90 days from the date of application of winding-up.

(11) Meet other Entrepreneurs: Government has proposed to hold 2 startup fests annually both nationally and internationally to enable the various stakeholders of a startup to meet. This will provide huge networking opportunities.

7. Eligibility and Procedure for Recognition of Startup

7.1 Eligibility

(i)  Upto a period of ten years from the date of incorporation/registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.

(ii)  Turnover of the entity for any of the financial years since incorporation/registration has not exceeded one hundred crore rupees.

(iii)  Entity 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.

7.2 Procedure for Recognition

(a)  A Startup shall make an online application over the mobile app or portal set-up by the DPIIT.

(b)  The application shall be accompanied by –

(i)  a copy of Certificate of Incorporation or Registration, as the case may be, and

(ii)  a write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation

(c)  Decision of DPIIT:- The DPIIT may, after calling for such documents or information and making such enquires, as it may deem fit, –

• recognise the eligible entity as Startup; or
• reject the application by providing reasons.

8. MUDRA Bank

Micro Units Development and Refinance Agency Bank (or MUDRA Bank) is a public sector financial institution in India. It provides loans at low rates to Micro Finance Institutions and Non-Banking Financial Institutions which then provide credit to MSMEs. It was launched by Prime Minister Narendra Modi on 8 April, 2015.

It will provide its services to small entrepreneurs outside the service area of regular banks, by using last mile agents. About 5.77 Crore small businesses have been identified as target clients using the NSSO survey of 2013. Only 4% of these businesses get finance from regular banks. The bank will also ensure that its clients do not fall into indebtedness and will lend responsibly.

The bank will classify its clients into three categories and the maximum allowed loan sums will be based on the category:

Shishu : Allowed loans up to ` 50,000 (US $ 780)

Kishore : Allowed loans up to ` 5,00,000 (US $ 7,800)

Tarun : Allowed loans up to ` 10,00,000 (US $ 16,000)

Those eligible to borrow from MUDRA bank are:

• • Small manufacturing unit
  • Shopkeepers
  • Fruit and vegetable vendors
  • Artisans

The basic criteria of age should be 18 years old. Loan under the scheme of the Pradhan Mantri Mudra Bank Loan will be available if and only if it is for commercial and business purposes and not for personal purposes.

At the most, borrower can buy vehicle from Mudra loan, given that it is used for commercial purposes. Lastly, this loan is for new business and is only applicable for small business owners.