India: Government Announces Action Plan For Startups


At a day-long global workshop on startup entrepreneurship conducted by the Government of India in New Delhi on 16 January 2016, the much awaited 'Startup India' initiative has been announced by the Government to boost the startup ecosystem in India. The key policy changes introduced by the Government are discussed in this Ergo newsflash.


In recent times, Indian startups are increasingly looking to move outside India owing to various difficulties faced by them in conducting business in India such as bureaucratic processes, lengthy incorporations and liquidations, restrictions on structuring transactions, problems in early-stage funding and exits, and complying with myriad laws and regulations. With the objective of incentivising young Indian entrepreneurs to explore and pursue their business ideas in India, and to avoid the exodus of talented entrepreneurs from India, the Government's 'Startup India' Action Plan introduces a separate regulatory framework for startups, emphasising on promoting innovation and facilitating ease of regulatory compliance. The Government also hopes that the Action Plan will accelerate growth of startups in sectors other than technology such as agriculture, manufacturing, social sector, healthcare, education, etc. across India, including tier 2 and 3 cities, and other semi-urban and rural areas.

The Action Plan broadly deals with: (a) simplification of processes and handholding for startups; (b) funding support and related incentives; and (c) industry-academia partnership and incubation support to boost the startup ecosystem.

Definition of startup

Given that the existing regulatory framework does not identify or recognise startup as a separate category of business entity, the Government has proposed to specifically define a 'startup' to ensure that the regulatory benefits under the policy are only availed by those entities which meet the basic eligibility criteria.

A 'startup' has been defined as an Indian entity (i.e., private limited company, registered partnership firm, or limited liability partnership): (a) that is not more than 5 years old; (b) the annual turnover (as defined in the Companies Act, 2013) of which has not exceeded INR 25 crores in any previous financial year; (c) which is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property; and (d) which:

  • is supported by a recommendation from an incubator established in a post-graduate college in India, with regard to the innovative nature of its business;
  • is supported by a recommendation from an incubator recognized by the Government, with regard to the innovative nature of its business;
  • is funded by an incubation fund, angel fund, private equity fund, accelerator, or angel network duly registered with the Securities and Exchange Board of India (SEBI), and which endorses the innovative nature of such startup's business (Department of Industrial Policy and Promotion (DIPP) may publish a negative list of funds in this regard);
  • has been granted a patent by the Indian Patent and Trademark Office in connection with its business;
  • is funded by the Government as part of any specified scheme to promote innovation; or
  • has a project supported by an incubator funded by the Government as part of any specified scheme to promote innovation.

An entity formed as a result of splitting up or reconstruction of an existing business will not be recognised as a startup. Further, startups will be eligible for various tax benefits only upon obtaining a certification from the Inter-Ministerial Board to be set up by the DIPP.

Further, a business will be covered under the definition of 'startup' only if it aims to develop and commercialize new products, services, or processes, or significantly improve existing products, services, or processes, resulting in creation or addition of value for the customers or the workflow. The mere act of developing products, services, or processes which: (a) do not have the potential for commercialisation; (b) are undifferentiated; or (c) have no or limited incremental value for customers or workflow, would not be covered under the definition of 'startup'.

Key incentives for startups

As fledgling startups face difficulties in complying with the increasingly demanding regulatory framework in India (especially with respect to ongoing compliance, fund-raising, and liquidation), the Action Plan introduces various relaxations for startups in certain key areas as discussed below.

Self-certification based compliance regime: In order to simplify regulatory compliance, startups will be allowed to self-certify compliance with 9 specified labour and environmental laws, through a mobile application to be launched by the Government. With respect to labour laws, no inspections will be conducted for a period of 3 years, unless upon receipt of credible and verifiable complaints of violation. In connection with environmental laws, startups which fall under the 'white category' (as defined by the Central Pollution Control Board) would be eligible to self-certify compliance, and only random inspections would be carried out in such cases.

Income tax holiday period: The Government has announced that startups will be exempted from payment of income tax for a period of 3 years, subject to non-distribution of dividend by the startup. This is to facilitate the growth of startups, and assist in meeting their working capital requirements during the initial years of operations. There are news reports indicating that this period may be extended to 5 years in cases where the startup has had a non-profitable year during the first 3 years. However, no official clarification has been released in this respect yet.

Tax exemptions on investments above fair market value (FMV): The existing exemption available to venture capital funds, in relation to taxation of investments made above FMV, has been extended to incubators investing in startups.

Tax exemption on capital gains: To promote investments into startups, and support existing venture capital funds and alternative investment funds, the Government has announced an exemption from payment of capital gains tax, if the capital gains are invested in the startup fund to be set up by the Government. Further, the existing capital gains tax exemption for investments by individuals in newly formed micro, small and medium enterprises in the manufacturing sector will be extended to startups.

Relaxations with regard to patent applications: Various initiatives have been announced for protection of the intellectual property involved in the products and innovations created by startups. Patent applications submitted by startups will be fast-tracked for examination and disposal, and startups will be provided an 80% rebate of the filing fees. Further, the Government will also provide a panel of facilitators to assist in the filing of intellectual property related filings. This scheme is launched initially on a pilot basis for 1 year, and further steps will be taken by the Government at a later stage.

Relaxations with regard to public procurement: To encourage the growth of startups in the manufacturing sector, eligibility requirement of prior experience or turnover in tenders floated by Government entities and public sector undertakings will be waived for startups. However, there will not be any relaxation on the quality standards or technical parameters, and the startups will have to demonstrate capability and should have its own manufacturing facility in India.

Liquidating startups: The Action Plan states that the Insolvency and Bankruptcy Bill, 2015, which was tabled in the lower house of the Parliament in December 2015 includes provisions for fast-tracking the voluntary closures of businesses. 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. An insolvency professional will be appointed for liquidating the startup's assets, and paying its creditors within 6 months from the date of appointment.

Launching of mobile application and portal:  A mobile application and portal will be launched by 1 April 2016 to provide on-the-go accessibility for startups to assist in: (a) incorporating/registering with relevant agencies of the Government, and tracking the status of applications submitted; (b) accessing/downloading the registration certificate; (c) filing for compliances and obtaining information on various clearances, approvals and registrations required; (d) collaborating with various partners (including venture funds, incubators, academia mentors, etc) in the startup ecosystem; and (e) applying for various Government schemes under the Action Plan.

Launch of startup fund:  In order to provide adequate funding support for startups, a fund has been launched with an initial corpus of INR 2,500 crores (and a total corpus of INR 10,000 crores over a period of 4 years) which will invest in venture funds registered with SEBI. The fund will be managed by a board of private professionals drawn from industry bodies, academia, and successful startups. Life Insurance Corporation of India will be a co-investor in the fund.

Credit guarantee fund: To encourage initial funding by way of debt for startups, the Government has envisaged a credit guarantee mechanism through the National Credit Guarantee Trust Company or Small Industries Development Bank of India, with a budgetary corpus of INR 500 crores per year for the next 4 years.

Harmonisation of holding period for long term capital gains (LTCG): Prior to the launch of Action Plan by the Prime Minister, the Revenue Secretary stated that the gap between the holding period of high-risk unlisted securities (3 years) and relatively low-risk listed securities (1 year) to qualify for LTCG will be "bridged" in the Union Budget. One hopes that by this the Revenue Secretary meant reducing the holding period of unlisted securities to 1 year, and not any increase in the holding period of listed securities.

Other proposals: In addition to the above, the Action Plan sets out various others proposals for encouraging and handholding the startups. These include establishing the startup hub, organizing startup fests, annual incubator grand challenge, etc.


Innovation and entrepreneurship are cornerstones of sustained economic growth. The Government's 'Startup India' Action Plan is, therefore, a step in the right direction. This will contribute significantly to the growth of entrepreneurship and solution oriented businesses in India. Simplified regulatory procedures and relaxations with respect to legal compliance will go a long way in encouraging entrepreneurs, and creating a congenial startup ecosystem. The policy changes should, therefore, give entrepreneurs more reasons to remain and operate out of India.

Having said that, there is lack of clarity on many policy initiatives announced by the Government. The eligibility criteria prescribed under the definition of startup seem very onerous and subjective, and the requirement to obtain certification from the Inter-Ministerial Board will increase bureaucratic interaction, thereby causing delays for startups. It is noteworthy that, at the event, both the Prime Minister and the Finance Minister repeatedly emphasised upon the need to have minimum regulatory intervention in the conduct of business by startups (or for that matter, any business). However, the above requirement of making all exemptions subject to prior approval of the Government, and other items such as Government involvement in the conduct of the proposed startup hub, leads one to believe that while the Government's intention appears to be correct, the manner in which the Action Plan is proposed to be implemented may be counterproductive.

Further, incentives for attracting foreign monies in startups (both by equity and debt) are strangely missing. For instance, various exchange control issues that deter/prohibit foreign investors from investing in, or lending to, Indian startups have not been touched upon. Also, both the capital gains tax exemption (which is restricted only to investments made by individuals) and the FMV exemption (which is extended only to incubators) do not cover majority of investments into startups.

Thus, in our view, the Government will need to add more exemptions/incentives (such as those addressing exchange control issues) and remove/clarify certain items (such as the requirement to obtain prior approval of the Inter-Ministerial Board) in the Action Plan. Needless to add, all of it must be swiftly implemented to ensure its effectiveness.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.