DIPP Notifies revised definition of Start-up

In our previous post on the Start-up India Action Plan (“Action Plan”), we discussed the various benefits announced for ‘eligible’ start-ups in the Action Plan and the regulatory changes that were proposed thereunder. We also highlighted that the Action Plan provided a definition as to what shall constitute an ‘eligible’ start-up. Further, the Department of Industrial Policy and Promotion (“DIPP”), vide notification dated 17 February 2016 notified the definition of ‘start-up’ and prescribed procedure for its recognition and registration for availing benefits of proposed government schemes.

In supersession of the definition of start-up notified earlier, DIPP has vide notification dated 23 May 2017 (“Notification”), notified various changes to the definition of a ‘start-up’. The changes are enumerated below:

Relaxation of restrictive work areas

The earlier definition recognised only entities involved in working towards innovation, development or improvement of products, processes or services as start-up for the purposes of the Action Plan. Now, vide the Notification, in addition to the above, entities having a scalable business model with a high potential of employment generation or wealth creation shall also be considered as a start-up for the purposes of the Action Plan.

Devil is in the detail: The words ‘scalable’ and ‘high potential’ are very qualitative and the Notification provides no further benchmarks to quantify the same.

Relaxation in age limit

The earlier definition recognised entities as a start-up till 5 (five) years from the date of their incorporation/registration. This definition was found restrictive and criticised by many entities. Now, vide the Notification, DIPP has eased this limit and entities are qualified to claim benefits under the Action Plan for up to 7 (seven) years from the date of their incorporation/registration. Further relaxation has been provided for entities in the biotechnology sector and they can avail benefits under the Action Plan for up to 10 (ten) years from the date of their incorporation/registration.

Devil is in the detail: Though this is a welcome move, entities in other sectors where the momentum of growth may be as slow or slower than in the biotechnology sector may find this relaxation unfair.

Relaxation in the registration process

Earlier, entities were required to furnish recommendation letters issued by specified incubators / specified letters of funding / proof of patent filed and published in the journal by the Indian Patent Office, towards being recognised as a start-up for the purposes of the Action Plan. Now, vide the Notification, the registration process has been simplified. Entities are only required to submit an online application on the DIPP mobile app/portal along with their certificate of incorporation/registration, a write-up about the nature of business highlighting how is it working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation and any other relevant details as may be required.

Devil is in the detail: This is a welcome move indeed. However, one will have to wait and see if these relaxations will have any detrimental effect by giving recognition to start-ups only based on a self-submitted ‘write-up’ about the nature of their business. Entities may seek professional help and submit superlative write-ups, but may not be able to practically uphold their business promises.

Extension of tax benefits

Earlier, under the Action Plan, start-ups could claim tax exemptions for any 3 (three) years out of first 5 (five) years of their incorporation/registration. Now, start-ups can claim tax exemptions for any 3 (three) years out of first 7 (seven) years of their incorporation. This had already been announced by the Finance Minister Arun Jaitley in his Budget Speech on 1 February 2017 and has now been notified vide the Notification.

Devil is in the detail: Start-up entities registered as partnership firms are excluded from being able to claim such tax exemptions. Further, requirement to obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification as constituted by the DIPP remains.

These changes have been brought about by the government with a view to boost employment opportunities and enhance the start-up environment which seems to be undergoing a cooling-off period after its earlier boom. DIPP is of the view that these changes will further expand the start-up culture in India and create a way to build a nation of job creator rather than job seekers.