With an innovative idea, efficient team, stable business model, sufficient funding and the right timing, you have got yourself a Start- Up! Change is the only constant and Start-Ups are the way to bring this change: Meru Cab to Ola, Orkut to Facebook, Messengers to WhatsApp, Grocery stores to Grofers, Big Bazaar to Flipkart, DineIn to Zomato and so many others. The market has become ever-evolving and highly competitive, hence, if you have recently built a Start-Up or are brainstorming its formation, it is essential to understand some basic concepts.
With a view to flourish the ‘Make in India’ movement, the Government of India in 2016, introduced the “Start-up India campaign” wherein the latest notification was issued on 19th February, 2019. The Government launched a dedicated web-portal for Start-Ups, which facilitates registration formalities and provides a platform for all stakeholders in the Start-up ecosystem to interact amongst each other, exchange knowledge and form successful partnerships in a highly dynamic environment. If you have established an Indian entity, before you proceed with the application for Start-Up, you need to check for the following.
|✔ Entity Type:
A Private Company (being most preferred vehicle for Start-Ups) or Registered Partnership Firm or LLP, can make an application for recognition as a Start-Up. If you are looking to establish an Indian entity, you can weigh your options here . Please note, an entity formed by splitting up or reconstruction of an already existing business, will not be eligible to be recognised as a Start-Up.
|✔ Innovative Objective:
The entity must be established with an object to work 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.
An entity can be considered as a Start-up for a period of ‘up to 10 years’ from the date of its incorporation or registration i.e not more than ten years should have lapsed since its inception.
The Annual Turnover of the entity for any of the financial years since its incorporation, should not have exceeded Rs. 100 crores.
Once you have identified whether your entity fulfils the above eligibility criteria, you are probably interested in the benefits that the Government offers to Start-ups. The Government endeavours to reduce the regulatory burden on Start-ups, which allows them to focus on their core business with minimum compliance costs.
The benefits provided to Recognised Start-ups are as under:
|★ Self- Certification
Start-ups shall be allowed to self-certify compliance under 6 Labour Laws and 3 Environmental Laws through a simple online procedure.
|★ Patent Application & IPR Protection
Patent applications shall be fast-tracked for examination so that their value can be realised sooner. Further, up to 80% rebate in filing patents vis-a-vis other companies is provided to Start Ups.
|★ Tax Exemptions*
Section 80 IAC of Income Tax Act
Recognised Start-ups, being a Private Limited Company or LLP, incorporated after 01.04.2016, can apply to avail tax holidays i.e 100% tax rebate, for 3 consecutive financial years out of its first ten years since incorporation.
Recognised Start-ups, being a Private Limited Company, with investment in immovable property not more than INR 10 lakh and should not be advancing loans or capital contributions to other entities, except in the ordinary course of business, can apply to claim exemption from **Angel Tax.
|★ Easier Public Procurement Norms
Recognised Start-ups are exempt from requirement of earnest money deposit, prior turnover and experience requirements in government tenders.
|★ Reduced Penalties under Companies Act, 2013
Section 446B of the Companies Act, 2013 is amended to provide for lesser monetary penalties on certain Companies including Small Companies, for non-compliance of any provision of the Act.
Penalty shall not be more than one-half of the penalty specified subject to a maximum of Rs. 2,00,000/-.
|★ Easy Winding up
As per the Insolvency and Bankruptcy Code, 2016, Start-ups with simple debt structures, or those meeting certain income specified criteria can be wound up within 90 days of filing an application for insolvency.
*Available to start-ups which satisfy the criteria as stipulated in the said notification. A start-up that fulfils the criteria, can make an application to the Central Board of Direct Taxes (CBDT) in Form-1 with requisite documents. CBDT may recognise the eligible entity as Start-up or reject the application by providing reasons.
**Angel Tax is levied on the capital raised via the issue of shares by unlisted companies (private or public) from an Indian investor if, the share price of issued shares is seen in excess of the fair market value of the company. The excess realization is considered as income and therefore, taxed accordingly.
Apart from the above benefits, the Government launched various schemes to support Start-ups, you can find the schemes here .
An application can be made over the mobile app or on the Start-up India web- portal, and upon approval of application by DPIIT, along with:
a copy of Certificate of Incorporation or Registration, as the case may be; and
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.
The DPIIT may, after calling for such documents or information and making such enquires, as it may deem fit, —(a) recognise the eligible entity as Start-up; or (b) reject the application by providing reasons.
On approval of application, the entity becomes a ‘Recognised Start-up’, with various acceleration, incubator/mentorship programmes and access to resources like Learning and Development Program, Government Schemes, State Polices for Start-ups, and pro-bono services.
In order to ease and accelerate the flow of foreign investment in Indian start-ups, the Indian Government allows start-ups to issue equity or equity linked instruments or debt instruments to Foreign Venture Capital Investors (FVCI) against receipt of foreign remittance, as per the Schedule VII of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. FVCI can invest in securities issued by a start-up, irrespective of the sector in which the start-up is engaged. This contribution in start-ups can be up to 100% of the capital i.e 100% FDI under Automatic Route (in permissible sectors). A Start-up Company can also issue ‘Convertible Notes’ to persons resident outside India, subject to compliance of certain conditions. The start-up company issuing convertible notes shall be required to furnish reports as prescribed by the RBI.
ECB or External commercial borrowings are loans, in the form of buyer’s credit, suppliers’ credit, securitized instruments availed from foreign lenders by Indian borrowers. ECB can also be converted into equity. ECBs are classified as: Foreign currency denominated ECB and Indian Currency denominated. Unlike venture debt or FDI, ECBs are essentially a loan availed by a startup from recognised non-resident entities such as foreign commercial banks and other institutions. AD Category-I banks support Start-Ups in raising funds through ECB under the automatic route, subject to adherence to RBI’s prescribed frameworks.