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Startup India Stand up India – Action Plan Decoded

Startup India Stand up India – initiative by Government of India thru an action plan outlined in detail, with an objective to bring ease of starting up a new business for early stage entrepreneurs. Before getting into insight of the action plan, let’s understand the government’s definition of a Startup and who can enjoy these goodies.

  • A company registered in India, not older than 5 years
  • Having annual turnover less than 25 Crs.
  • Working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
  • Such entity should not be formed by splitting up, or reconstruction of a business already in existence.
  • Eligible Startup should be supported by a recommendation with regards to innovative nature of business as per the format specified by DIPP.
  • Such Startup should be from an incubator established in a post-graduate college in India or an incubator funded by GOI as a part of any specific scheme to promote innovation or funded by SEBI registered PE / VC / Angel fund or have a patent granted by the Indian Patent and Trademark Office

The company shall cease to be a Startup if its annual turnover crosses 25 Crs. Or it has completed 5 years of operations.

An Inter-Ministerial Board setup by DIPP to validate the innovative nature of the business for granting tax related benefits. Approval from the Inter-Ministerial Board shall not in any manner, limit or absolve the entities from any liability incurred in case of any misrepresentation / fraud arising from submission of such application and/ or supporting such application.

It’s important to see how this inter-ministerial board is setup, what are the processes and time lines given for granting the “Startup” tag to a company. Hope this does not become one more certificate to obtain which is lengthy, cumbersome and time consuming.

Here I have tried to simplify the action plan released by DIPP and presenting what are the goodies the government has to offer and support the Startup ecosystem in India.

Compliance Regime based on Self-certification

Startup can self-certify some of (not all) regulatory hassles like gratuity (doesn’t make any meaning as gratuity is applicable to employees completing 5 years of services with the company. Having gratuity funds in place just to comply with law doesn’t make any sense. It simply blocks capital for a long period instead of putting money in real business use.), Contract Labour, ESIC, EPF, Environment law, etc. Startups can self-certify the compliances and no investigation for first 3 years with a catch, if any complains, investigation can still take place.

Looks good, but still Startups are required to take required registrations and comply with the guidelines and processes. Startups are still required to follow all standard guidelines, rules and regulations. By giving self-certification – things are only getting delayed by 3 years and it doesn’t give any relief. Why not complete exemption from PF, ESIC, and Contract Labour related payments as well as maintenance of registers / records.

Startup India Hub

Objective is to create a single point of contact for the entire Startup ecosystem and enable knowledge exchange, access to funding, advisory, mentorship, go to market, business processes, and technology management evaluation and so on. Some of the agencies like Indian and foreign VCs, angel networks, incubators, legal partners, consultants, universities and R&D institutions, where government is planning to collaborate, are already doing such activities as a part of various Startup initiatives or by offering some commercial value. Overall it looks good. Requires more clarity on how overall engagement is going to work between the government, various agencies and Startups.

Rolling out of Mobile App and Portal

Objective is to provide a single platform for Startups for interacting with Government and Regulatory Institutions for all business needs and information exchange among various stakeholder. Overall it looks like company registration process will get simplified, complete check list will be made available and provide a platform to collaborate with VCs, academics, advisors & mentors thru a mobile platform. What about other registrations like PAN, TAN, Excise, Service Tax, VAT, CST and many more registrations / licenses to start the business? There is no reference to this query. Entrepreneurs will have to follow standard process to get a PVT. LTD. Or LLP company incorporation. I am hoping to get other licenses / registrations processes to come on this platform and make overall process of starting up a new business to become simpler and easier.

Legal Support and Fast-tracking Patent Examination at Lower Costs

Here idea is 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 Government will bear the entire cost of facilitators and give a rebate of 80% in statutory fees. This initiative will surely encourage Startups to protect their IPRs, Trademarks and copy rights. Remember, this scheme is offered on a pilot a basis and valid for a year only.

Relaxed Norms of Public Procurement for Startups

Objective is to provide an equal platform to Startups (in the manufacturing sector) vis-à-vis the experienced entrepreneurs/ companies in public procurement.

This is really fantastic move. During my earlier Startup journey, our tender applications got rejected just because the company is a Startup, not having 5 years of track record, not having turnover over 5 Crs / 10 Crs and so on. I am hoping that the policy covers other barriers like execution of similar projects worth x Crs or “profit making” and many such grey areas as well, besides turnover and prior experience in terms of no of years.

However, this relaxed norms are offered to specifically to manufacturing Startups. There is no clarity on how this will impact to Startups in technology B2B space or Startups offering technology related services in B2B space.

Faster Exit for Startups

Objective is to make it easier for Startups to wind up operations. This will encourage Startup entrepreneurs of taking risk (calculated risk) and in case of failure, the Bankruptcy Bill ensures Startups can be closed in 90 days.

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

Objective is to provide funding support for development and growth of innovation driven enterprises

The government will invest in Startups – Rs. 2,500 Crs per year over 4 years, totalling Rs. 10,000 Crs. with support from LIC. They won’t directly invest in Startups – they’ll put money into registered VC funds, where the fund has already raised an equivalent amount. Some of this is already being done, but no clarity on how well this has done. Need to see more clarity in real time on how overall scheme works in favour of Startups, but it’s a positive move.

Credit Guarantee Fund for Startups

Objective is to catalyse entrepreneurship by providing credit to innovators across all sections of society

Currently banks don’t lend to Startups due to high risk, lack of past performance and lack of collateral. The Government will help by guaranteeing some part of that lending, with a Rs. 500 cr. corpus for each of the next four years.

Currently SIDBI helps Startups to get debt up to 1 Cr without collaterals thru various nationalized banks. However, overall process is so cumbersome, slow and discourages entrepreneurs not to go for it. I hope with this move, situation changes.

Tax Exemption on Capital Gains

Objective is to promote investments into Startups by mobilizing the capital gains arising from sale of capital assets

The long term capital gains that you earn from “any source” will be exempt from tax, if you invest the gains into Startup “fund of funds”, recognized by the government. The point to highlight here is “investment in fund of funds – recognized by the government”. It means, when an investor exits a Startup with a capital gain, he has to invest like a limited partner, in the funds to funds recognized by the government to save on capital gain tax. Such gain will never reach in investors hand unless he decides to pay taxes on it. Secondly this funds will not invest directly in Startups but invest in the SEBI registered venture funds. Such investor has the chances of getting a better return by putting his gain in corpus of the fund of funds, but what about the tax liability? Hopefully when the Finance Act 2016 is passed, we will have more clarity on this matter.

Tax Exemption to Startups for 3 years

Objective is to promote the growth of Startups and address working capital requirements.

My immediate reaction is WOW….. But thinking further raises many questions. 3 years exemption from income tax, assuming from the date of incorporation, how many Startups are profitable in first 3 years itself? What about existing Startups which are 1 or 2 years old? Are they allowed to carry forward losses of 3 years and take benefit of 3 years losses later on when they are profitable? Some smart and established entrepreneurs may use this route to save on taxes. There is no clarity on 20% MAT exclusion for Startups. Here too, we will need more clarity from the government.

Tax Exemption on Investments above Fair Market Value

As per the Income Tax Act, 1961, the difference in the fair market value arrived at by a qualified chartered account and the value at which shares are allotted to an investor is treated as ‘income from other sources’ for the Startup and its subject to taxed. However, investments by SEBI-registered venture capitalists are exempted from this provision and now the government plans to treat investments by incubators in the same manner. Startups incubated by incubators will cheer up on this move. However, majority of Startups raise funding from angel investors, angel networks or thru HNIs at very high valuation by getting justifiable valuation report from a CA, as close as possible using discounted cash flow method to avoid tax on ‘income from other sources’. This is not a good practice and most of the times it increases the fair market value. This practice could have been completely stopped by giving exemption to all investments in Startups, whether by VCs, angels, HNIs, incubators or accelerators.

Other Goodies

The government has planned various other initiatives to promote Startup ecosystem in India and provide national and international visibility, fund privately run incubators, research centres, build more incubators and innovation centres for tech and non tech Startups.

The government will organise and financially support various feasts, road shows, and Startup events to bring investors, VCs, advisors, mentors, incubators and Startups on a single platform. Startups will have opportunity to launch or showcase their products, innovations, attract investors, get connected with advisors, mentors, and like-minded people. The government will use such platforms reward and recognitions to Startups.

To conclude, there are many areas where we have to wait and watch, get more clarity. Most important is get qualified status of a “Startup” by inter-ministerial board approval to get benefits of the Startup Policy. Overall the government’s intentions are positive and we look forward to see how the government sets up overall process to bring founders, mentors, angels, lawyers, consultants, incubators, policy makers, educational institutions and all other stack holder on the same page and ensure that said objective is achieved with total transparency, accountability with shortest time lines, smooth approval system.