By CA Rajendra Khandelwal

Startup India- An Overview

Startup India is a flagship initiative of the Government of India, intended to build a strong eco-system for nurturing innovation and Startups in the country that will drive sustainable economic growth and generate large scale employment opportunities.

The Government through this initiative aims to empower Startups to grow through innovation and design.

Startup means

an entity, incorporated or registered in India

not prior to five years,

with annual turnover not exceeding Rs 25 crore in any preceding financial year,

working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

Exclusions:

Such entity is not formed by splitting up, or reconstruction, of a business already in existence.

An entity shall cease to be a Startup if its turnover for the previous financial years has exceeded Rs 25 crore or

It has completed 5 years from the date of incorporation/ registration.

Note: Entity means a private limited company, or a registered partnership firm or a limited liability partnership.

Turnover is as defined under the Companies Act, 2013.

A Startup shall be eligible for tax benefits only after it has obtained certification from the Inter-Ministerial Board, setup for such purpose.

An entity is considered to be working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property if it aims to develop and commercialize

A new product or service or process, or

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 products or services or processes which do not have potential for commercialization, or

undifferentiated products or services or processes, or

products or services or processes with no or limited incremental value for customers or workflow would not be covered under this definition.

 

Recognition as a startup

The process of recognition as a ‘startup’ shall be through mobile app/portal of the Department of Industrial Policy and Promotion.

Startups will be required to submit a simple application with any of the following documents:

a recommendation (with regard to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion (DIPP), from any Incubator established in a post-graduate college in India; or

a letter of support by any incubator which is funded (in relation to the project) from Government of India or any State Government as part of any specified scheme to promote innovation; or

a recommendation (with regard to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion, from any Incubator recognized by Government of India; or

a patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of business being promoted.

a letter of funding of not less than 20 per cent in equity by any Incubation Fund/Angel Fund/Private Equity Fund/Accelerator/Angel Network duly registered with Securities and Exchange Board of India that endorses innovative nature of the business.

Department of Industrial Policy and Promotion may include any such fund in a negative list for such reasons as it may deem fit; or

a letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation; or

 

Startup India- Action Plan

In order to meet the objectives of the initiative, Government of India has announced an Action Plan that addresses all aspects of the Startup ecosystem.

With this Action Plan the Government hopes to accelerate spreading of the Startup movement:

From digital/ technology sector to a wide array of sectors including agriculture, manufacturing, social sector, healthcare, education, etc.; and

From existing tier 1 cities to tier 2 and tier 3 cities including semi-urban and rural areas.

Action Plan is divided across the following areas:

Simplification and Handholding

Funding Support and Incentives

Industry Academia Partnership and Incubation

 

Compliance Regime based on Self-Certification

To reduce the regulatory burden on Startups thereby allowing them to focus on their core business and keep compliance cost low.

Startups shall be allowed to self-certify compliance (through the Startup mobile app) with 9 labour and environment laws.

In case of the labour laws, no inspections will be conducted for a period of 3 years. Startups may be inspected on receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior to the inspecting officer.

 

Startup India Hub

To create a single point of contact for the entire Startup ecosystem and enable knowledge exchange and access to funding

Many Startups do not reach their full potential due to limited guidance and access.The Govt. has taken various measures to improve the ease of doing business and is also building an appropriate environment for these Startups.

The “Startup India Hub” will be set up and it will:

Work in a hub and spoke model and collaborate with Central & State governments, Indian and foreign VCs, angel networks, banks, incubators, legal partners, consultants, universities and R&D institutions

Assist Startups through their lifecycle with specific focus on important aspects like obtaining financing, feasibility testing, business structuring advisory, enhancement of marketing skills, technology commercialization and management evaluation

Organize mentorship programs in collaboration with government organizations, incubation centers, educational institutions and private organizations who aspire to foster innovation.

To all young Indians who have the courage to enter an environment of risk, the Startup India Hub will be their friend, mentor and guide to hold their hand and walk with them through this journey.

 

Rolling-out of Mobile App and Portal

The mobile App/portal has been made available from April 01, 2016 on all leading mobile/smart devices’ Platforms.

This Mobile App/Portal shall serve as the single platform for Startups for interacting with Government and Regulatory

Mobile App to provide on-the-go accessibility for:

Registering Startups with relevant agencies of the Govt.

Tracking the status of the registration application and anytime downloading of the registration certificate.

Filing for compliances and obtaining information on various clearances/ approvals/ registrations Required

Collaborating with various Startup ecosystem partners.

Legal Support and Fast-tracking Patent Examination at Lower Costs

To promote awareness and adoption of IPRs by Startups and facilitate them in protecting and commercializing the IPRs by providing access to high quality Intellectual Property services and resources, including fast-track examination of patent applications and rebate in fees.

The scheme for Startup Intellectual Property Protection (SIPP) shall facilitate filing of Patents, Trademarks and Designs by innovative Startups.

The valuation of any innovation goes up immensely, once it gets the protective cover of a patent. To this end, the patent application of Startups shall be fast-tracked for examination and disposal, so that they can realize the value of their IPRs at the earliest possible.

Startups shall be provided an 80% rebate in filing of patents.

Relaxed Norms of Public Procurement for Startups

To provide an equal platform to Startups (in the manufacturing sector) vis à vis the experienced entrepreneurs, companies in public procurèment

Typically, whenever a tender is floated by a Government entity or by a PSU, very often the eligibility condition specifies either “prior experience” or “prior turnover”. Such a stipulation prohibits! impedes Startups from participating in such tenders.

In order to promote Startups, Government shall exempt Startups (in the manufacturing sector) from the criteria of “prior experience! turnover” without any relaxation in quality standards or technical parameters.

Faster Exit for Startups

The Insolvency and Bankruptcy Bill 2015 (“IBB”), has provisions for the fast track and / or voluntary closure of businesses.

In terms of the IBB, Startups with simple debt structures or those meeting such criteria as may be specified may be wound up within a period of 90 days from making of an application for winding up on a fast track basis.

On appointment of the insolvency professional, the liquidator shall be responsible for the swift closure of the business, sale of assets and repayment of creditors in accordance with the distribution waterfall set out in the IBB. This process will respect the concept of limited liability.

Providing Funding Support through a Fund of Funds with a Corpus of Rs. 10,000 crore

Government will set up a fund with an initial corpus of INR 2,500 crore and a total corpus of INR 10,000 crore over a period 4 years

The Fund will be in the nature of Fund of Funds, which means that it will not invest directly into Startups, but shall participate in the capital of SEBI registered Venture Funds.

Key features of the Fund of Funds are highlighted below:

The Fund of Funds shall be managed by a Board with private professionals drawn from industry bodies, academia, and successful Startups.

Life Insurance Corporation (LIC) shall be a co-investor in the Fund of Funds

The Fund shall ensure support to a broad mix of sectors such as manufacturing, agriculture, health, education, etc.

Debt funding to Startups is also perceived as high risk area and to encourage Banks and other Lenders to provide Venture Debts to Startups, Credit guarantee mechanism through National Credit Guarantee Trust Company (NCGTC)/ SIDBI is being envisaged with a budgetary Corpus of INR 500 crore per year for the next four years.

Tax Exemption on Capital Gains

To promote investments into Startups by mobilizing the capital gains arising from sale of capital assets

Exemption shall be given to persons who have capital gains from investment in StartUps, if they invest such capital gains in the Fund of Funds recognized by the Government.

Investment in ‘computer or computer software’ (as used in core business activity) shall also be considered as purchase of ‘new assets’ in order to promote technology driven Startups.

Tax Exemption to Startups for 3 years

To promote the growth of Startups and address working capital requirements

Profits of Startup initiatives are exempted from income-tax for a period of 3 years. The exemption shall be available subject to non-distribution of dividend by the Startup.

Tax Exemption on Investments above Fair Market Value

Under The Income Tax Act, 1961, where a Startup (company) receives any consideration for issue of shares which exceeds the Fair Market Value (FMV) of such shares, such excess consideration is taxable in the hands of recipient as Income from Other Sources under section 56(2) (viib).

Currently, investment by venture capital funds in Startups is exempted from operations of this provision. The same shall be extended to investment made by incubators in the Startups.

Organizing Startup Fests for Showcasing Innovation and Providing a Collaboration Platform

To galvanize the Startup ecosystem and to provide national and international visibility to the Startup ecosystem in India

These fests would provide a platform to Startups in India to showcase their ideas and work with a larger audience comprising of potential investors, mentors and fellow Startups.

As part of “Make in India” initiative, Government proposes to hold one fest at the national level annually to enable all the stakeholders of Startup ecosystem to come together on one platform.

Launch of Atal Innovation Mission (AIM) with Self Employment and Talent Utilization (SETU) Program

The Atal Innovation Mission (AIM) shall have two core functions:

Entrepreneurship promotion through SelfEmployment and Talent Utilization (SETU), wherein innovators would be supported and mentored to become successful entrepreneurs

Innovation promotion: to provide a platform where innovative ideas are generated The main components proposed to be undertaken as part of the mission include:

Launch of Atal Innovation Mission (AIM) with Self Employment and Talent Utilization (SETU) Program

Entrepreneurship promotion:

Establishment of sector specific Incubators including in PPP mode Establishment of 500 Tinkering Labs.

Pre-incubation training to potential entrepreneurs in various technology areas in collaboration with various academic institutions having expertise in the field Strengthening of incubation facilities in existing incubators and mentoring of Startups.

Seed funding to potentially successful and high growth Startups.

Innovation promotion:

Institution of Innovation Awards (3 per state/UT) and 3 National level awards

Providing support to State Innovation Councils for awareness creation and organizing state level workshops/conferences

Launch of Grand Innovation Challenge Awards for finding ultra-low cost solutions to India’s pressing and intractable problems.

Harnessing Private Sector Expertise for Incubator Setup

Government shall encourage setting up of:

35 new incubators in existing institutions. Funding support of 40% (subject to a maximum of INR 10 crore) shall be provided by Central Government for establishment of new incubators for which 40% funding by the respective State Government and 20% funding by the private sector has been committed. The incubator shall be managed and operated by the private sector.

35 new private sector incubators. A grant of 50% (subject to a maximum of INR 10 crore) shall be provided by Central Government for incubators established by private sector in existing institutions.

Building Innovation Centers at National Institutes

In order to augment the incubation and R&D efforts in the country, the Government will set up/ scale up 31 centers (to provide facilities for over 1,200 new Startups) of innovation and entrepreneurship at national institutes, including:

Setting-up 13 Startup centers: Annual funding support of INR 50 lakhs (shared 50:50 by DST and MHRD) shall be provided for three years for encouraging student driven Startups from the host institute.

Setting-up/ Scaling-up 18 Technology Business Incubators (TBIs) at NITs/IITs/IIMs etc. as per funding model of DST with MHRD providing smooth approvals for TBI to have separate society and built up space.

Launching of Innovation Focused Programs for Students

Uchhattar Avishkar Yojana: A joint MHRD-DST scheme which has earmarked INR 250 crore per annum towards fostering “very high quality” research amongst IIT students. The funding towards this research will be 50% contribution from MHRD, 25% from DST and 25% from industry. This scheme will initially apply to IITs only.

Annual Incubator Grand Challenge

Incubators play an important role in identifying early stage Startups and supporting them across various phases of their lifecycle.

In its first phase, the aim is to establish 10 such incubators. To enable this, GOI shall identify and select 10 incubators who have the potential to become world class. These incubators would be given INR 10 crore each as financial assistance which may be used for ramping up the quality of service offerings.

 

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