Startup to Unicorn – Support Initiatives by GOI

Witnessing the 66% YoY growth, India is now home to 100 unicorns, worth a whopping valuation of USD 332.7B.  E-commerce, Fin-tech,  Supply Chain & Logistics, Internet Software & Services dominate the space, but sectors such as Content, Gaming, Hospitality, Data Management & analytics, etc., are also making their place.

Mensa Brands became a profitable unicorn in 2021 within 6 months of operations, making it one of the fastest unicorns in Asia.

GoI’s efforts of ease of doing business is significantly supported by startups and small businesses with Startup Action Plan, introduced in 2016, with focus on–

1. Hand holding and simplification of processes;
2. Funding support and initiatives;
3. Incubation and industry-academia partnership

An entity is regarded as a startup and eligible for certain exemptions only when it meets all the following criteria as prescribed in the notification G.S.R. Notification 127 (E) (“the notification” ):

1. Incorporation – private limited company or an LLP or a partnership
2. Turnover – less than INR 100 Crores in any of the previous financial years
3. Tenure – considered as a startup up to 10 years from the date of its incorporation
4. Objective – working towards innovation/ improvement of existing products, services, and processes and should have the potential to generate employment/ create wealth.

An entity formed by splitting up or reconstructing an existing business is not to be considered a “Startup.”

A startup has received, significant support under the following exemptions:

Exemptions under Income Tax Laws –

A. Income Tax – Section 80-IAC:

Eligible for a 100% tax holiday for 3 consecutive financial years of its first 10 years since incorporation if all of the following are met:

• It is a private limited or an LLP
• It is incorporated after April 1, 2016 but before April 1, 2021 (extended up to April 1, 2022 via the Finance Bill 2022)
• It is in the business of innovation, development, or improvement of products, processes, or services or a scalable business model with a high potential for employment generation or wealth creation

B. Long-term Capital Gains Tax – Section 54EE:

Startup can avail the exemption by investing the gains or a part thereof, up to a maximum of INR 50 lakhs, in a fund notified by the Central Government within 6 months from the date of transfer of the asset. The amount must remain invested for a period of 3 years or more to avail of the exemption.  

C. Angel Tax – Section 56:

Angel Tax is levied on the “income” earned by the Private Limited on the issue of shares for a consideration being higher than the face value.

The exception is applicable, if:

• It is recognised by DPIIT
• The aggregate amount of paid-up share capital and share premium does not exceed INR 25 crore post the proposed issue of shares

D. Carry forward and set off of losses – Section 79

A startup can carry forward its losses on adherence to any one of the following conditions:

• Continuity of 51% shareholding/voting power or
• Continuity of 100% of original shareholders

Exemptions under Companies Act, 2013 –

Below amendments were notified by MCA in G.S.R.. 583(E) dated June 13, 2017 for Startups:

1. A cash flow statement shall not be mandatory required (Section 2(40))
2. It is not required to hold 4 board meetings but shall be in compliance if 1 meeting is held in each half-year and the gap between the 2 meetings is not less than 90 days (Section 173(5))

Startups can issue 50% of their paid-up capital as sweat equity, and a waiver from regulatory filings is available for 10 years.

Self-certification by Startup –

Startups can self-certify compliance to 9 Labour Laws and 3 Environment Laws through the Startup Mobile App as identified below –

Labour Laws:

• Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act,1996
• The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979
• The Payment of Gratuity Act, 1972
• The Contract Labour (Regulation and Abolition) Act, 1970
• The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
• The Employees’ State Insurance Act, 1948
• The Industrial Disputes Act,1947
• The Trade Unions Act,1926
• The Industrial Employment (Standing Orders),1946

Environment Laws:

If the startup falls under the white category industry as identified by the Ministry of Environment, Forest & Climate Change, it may self-certify its compliance with the below environment laws:

• The Water (Prevention & Control of Pollution)Act, 1974
• The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003
• The Air (Prevention & Control of Pollution) Act, 1981

In the case of the labour laws, no inspections will be conducted for 3 to 5 years, unless a complaint is received in writing and such inspection is approved by the competent authority.

Other highpoints

• The surcharge on the sale of shares of unlisted startup firms is capped at 15%, with the tax rate remaining constant at 20%.
• Establishment of an expert committee to examine and suggest appropriate measures to boost venture capital and private equity investments in startups
• For sunrise sectors such as Climate Action, Deep-Tech, Digital Economy, Pharma, and Agri-Tech, GoI will promote thematic funds for blended finance – the government share being limited to 20% and the funds being managed by private fund managers.
• Easy winding up, within 90 days, under IBC laws
• Review of Patent applications on a fast-track basis with a reduction of 80% filing fee in filing for patents, and IPR protection
• Easier procurement norms once registered as DPIIT-recognised Startups or MSMEs.
• The Venture Capital Assistance Scheme, floated by the Ministry of Agriculture and Farmers Welfare, provides interest-free loans.
• Introduction of Aspire, a scheme for the promotion of Innovation, Rural Industries and Entrepreneurship to set up a network of technology centres and to set up incubation centres
• Issue of External Commercial Borrowings (ECB) Policy – New ECB Framework by RBI whereby a startup eligible to receive FDI can avail ECB irrespective of the fact that it is registered and recognized or not.

With such progressive norms coming into play, it is hopeful that GoI’s vision of ease of doing business will come to life sooner. Business growth is expected to lure the best talents and opportunities, helping the economy to upsurge.

This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.

Sources:

1. https://www.startupindia.gov.in/content/sih/en/startupgov/startup-recognition-page.html#:~:text=Post%20getting%20recognition%20a%20Startup,first%20ten%20years%20since%20incorporation
2. https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/198117.pdf
3. https://pib.gov.in/Pressreleaseshare.aspx?PRID=1595854
4. https://www.mca.gov.in/Ministry/pdf/ExemptionPrivateCompanies.pdf
5. https://www.mca.gov.in/Ministry/pdf/lok_unstar_3953.pdf
6. https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/startups-to-get-10-yr-waiver-from-regulatory-filings/articleshow/71915689.cms?from=mdr
7. https://economictimes.indiatimes.com/small-biz/policy-trends/how-ease-of-doing-business-can-be-made-more-effective-for-entrepreneurs/articleshow/88729965.cms
8. https://www.startupindia.gov.in/content/sih/en/startupgov/self-certification.html
9. https://economictimes.indiatimes.com/tech/startups/budget-2022-23-startup-founders-investors-to-benefit-from-15-cap-on-tax-surcharge/articleshow/89271377.cms