What is the Startup India scheme?

Startup India a flagship initiative announced by the Government of India on 15th August 2015.

This initiative was launched to build an ecosystem for assisting in the growth of start-up businesses, to enable sustainable economic growth, coupled with greater large-scale employment opportunities.
This initiative also aims to enable start-ups to flourish by way of innovation and design.

Who is eligible to apply under the Startup India scheme?

An entity is eligible to apply when:

  • It is incorporated as a private limited company / partnership firm / limited liability partnership in India
  • It has less than 10 years of history i.e. <10 years have elapsed from the date of its incorporation/registration
  • The turnover for all  of the financial years, since the incorporation/ registration has been < INR 100 crores

Note: An entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘Startup'.

What are the benefits available under ‘Startup India' scheme?

Exemption under Sec 80 IAC of the Income Tax Act, 1961

A Startup can apply to avail an exemption under Sec 80 IAC of the said Act, which will result in the profits and gains from the business, to be fully exempt from tax for 3 consecutive financial years, within the first 5 years of the company's incorporation.

Exemption from Section 56 (2) (vii)(b) of the Income Tax Act, 1961 covering ‘Angel Tax'

Earlier, a company which raised funds by issuing shares to private investors, was taxed on the differential amount between the issue price of the share, and the fair market value of the same, i.e. it was a tax on the share premium over market value. However, a registered Startup is now eligible to apply for an exemption from this section. A registered Startup having a total paid-up share capital and share premium under INR 25 crores after such issue of the shares, can apply for such an exemption. This is meant to benefit small companies and encourage investors to invest in them.

Self-Certification under Indian Labour and Employment laws

A private limited company is ordinarily bound by compliance towards employee benefit schemes such as payment of gratuity, bonus, insurance cover etc.
A registered Startup can self-certify their compliance towards 6 labour laws and 3 environment laws. Such certification will remove the requirement of inspection for compliance towards such laws, for a period of 3 years from the date of recognition.

Patent & IPR Applications

A registered Startup is eligible to apply for trademarks at a significantly subsidised cost.
Similarly, when submitting a patent application, a registered Startup is required to pay a much lower amount, as compared to other entities and it will further be entitled to avail a rebate of 80% of the patent fees, after filing of a patent.

Steps for obtaining recognition under the Startup India scheme

  • An entity has to create an account on the Startup India portal (run by the Department of Promotion of Industry and Internal Trade or DPIIT), and provide details relating to the goods/ services provided by their business as well as its key personnel, its business areas, unique products/ solutions to problems  which the entity seeks to provide.
  • Upon filing up and submitting this form, a certificate recognising the entity as a Startup will be made available onto the Portal (~ within a week of form submission). This certificate does not entitle the startup to tax benefits.

Steps for obtaining exemptions under the Income Tax Act, 1961

An entity is eligible to apply for an exemption under Sec 80IAC and Section 56(2)(viib), only after it has been recognised as a StartUp.

  • This application is done through the Startup India portal.
  • The Startup has to provide data, such as its annual accounts, income tax returns of the previous financial year as well as a pitch-deck which provides detailed information relating to the Startup and its products/ services. Further, it should prepare and provide a video explaining its products and services.
  • Normally, it is recommended that a startup should have at least 1 year's audited financials and ITR to submit to the Government at this stage for the best chances.
  • After submission of the application for the exemption, it will be reviewed during a meeting held by the Inter-ministerial Board (IMB), set-up by the Government of India, which will review the application and determine whether the said Startup is entitled to receive such an exemption.
  • Owing to the large number of application being submitted, as well as the periodicity at which the IMB convenes to meet (usually only once a month), the timeline for the exemption application to be assessed can take upwards of 3 months. There is significant uncertainty about timelines at this stage of the process.

Restrictions of the Startup India scheme

A Startup intending to claim exemption from Section 56(2)(viib) will have to ensure that it has not already invested in:

  • Land or building (other than that used by the Start-up to conduct its business Shares and securities
  • A capital contribution toward another entity
  • Any motor vehicle, unless held for the ordinary business of plying/ leasing
  • Jewellery, unless held as a business stock-in-trade
  • Any other capital asset

Where a Startup has availed the exemption from Section 56(2)(viib), it cannot invest in the above-mentioned assets for a period of 7 years, from the end of the most recent financial year in which shares were issued at a premium i.e. the most recent financial year in which the exemption was used.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.