Start-up India Action Plan – Devil is the detailing (Part 1)

Start-ups in India have been witnessing a favourable environment for their growth and development. New laws are being formulated and outmoded laws are being amended to suit the best of their interests.

On 16 January 2016, Prime Minister Narendra Modi unveiled the landmark Start-up Action Plan (“Action Plan”) which set the ball rolling on the Government of India’s (“GOI”) ambitious Start-up India Movement. This initiative by the government aims to fill gaps in the economy for the growth and development of start-ups and advocates the need for the policy makers to recognise start-ups as vehicles for creating jobs and effecting a positive impact on the economy of the country. The Action Plan lists out a comprehensive set of structural and regulatory reforms that are being brought about to achieve this and since then certain efforts have been made in several directions.

However, it is important to note that all start-ups shall not be eligible for the benefits announced in the Action Plan and the proposed regulatory charges. 

For the purposes of all such schemes and specifically for start-ups seeking tax exemption, the Action Plan sets forth the definition of a “Start-up”.

Definition of Startup (only for the purpose of Government schemes)[1]:

Startup means an entity[2], incorporated or registered in India not prior to five years, with annual

turnover[3] not exceeding INR 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.

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

Provided also that an entity shall cease to be a Startup if its turnover for the previous financial years has exceeded INR 25 crore or it has completed 5 years from the date of incorporation/ registration.

Provided further that a Startup shall be eligible for tax benefits only after it has obtained a certificate of eligible business from the Inter-Ministerial Board of Certification[4] consisting of:

1. Joint Secretary, Department of Industrial Policy and Promotion,
2. Representative of Department of Science and Technology, and
3. Representative of Department of Biotechnology

Further, the Department of Industrial Policy and Promotion (“DIPP”), has vide a notification dated 17 February 2016 (“DIPP Notification”), notified the definition of “Start-up” and prescribes procedure for its recognition and registration for availing benefits of proposed government schemes.

[This is the first of a series of 6 posts that seeks to consolidate all the benefits and policy directives directed towards promoting Start-ups in India.]

[1] Identification of businesses covered under the definition:

A business is covered under the definition 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.

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.

In order for a “Startup” to be considered eligible, the Startup should

• be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an Incubator established in a post-graduate college in India; or
• be supported by an incubator which is funded (in relation to the project) from GoI as part of any specified scheme to promote innovation; or
• be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an Incubator recognized by GoI; or
• be funded by an Incubation Fund/Angel Fund/ Private Equity Fund/Accelerator/Angel Network duly registered with SEBI* that endorses innovative nature of the business; or
• be funded by GoI as part of any specified scheme to promote innovation; or
• have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.

* DIPP may publish a ‘negative’ list of funds which are not eligible for this initiative.

[2] Private Limited Company (under The Companies Act, 2013) or a Registered Partnership Firm (under The Indian Partnership Act, 1932) or Limited Liability Partnership (under The Limited Liability Partnership Act, 2008).

[3] As defined under The Companies Act, 2013.

[4] 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 entity(ies) from any liability incurred in case of any misrepresentation/ fraud arising from submission of such application and/ or supporting such application.