What is a Startup, Startup India Scheme and benefits of setting up a startup in India

What is a Startup?

A Startup is a body-corporate that meets the following conditions:

1. It falls under categories as prescribed under G.S.R. Notification 127(E); and
2. is recognised as startup by, and is registered with, the Department for Industrial Policy and Promotion (DIPP).

Categories as prescribed under G.S.R. Notification 127(E) are as under:

1. Age of body corporate: The date of certificate of incorporation should not exceed 10 years;
2. Type of body corporate: The body corporate should be either a Registered Partnership Firm, a Limited Liability or a Private Company. Thus, a simple or unregistered partnership firm is not eligible to become a startup.
3. Annual Turnover: The annual turnover of the body corporate should not exceed INR 100 crore for any of the financial year since incorporation;
4. Origin of Entity: The body corporate should have been originally formed or incorporated by the existing promoters. Thus, a body corporate formed by reconstruction or split-up of the existing business is not eligible to become a startup.
5. Innovative and scalable: The body corporate should be working towards innovation / improvement of existing products, services and processes and should have failproof development or improvement plans scalable with high potential for the creation of wealth and employment.

Startup India Scheme

Startup is the brain-child of our beloved Prime Minister, Mr. Narender Modi, which got germinated in the year 2016. On a clarion call to the whole world by our Prime Minister to invest in India, the Central Government initiated the Startup India Scheme in 2016. The primary objective of the Startup India is the promotion of startups, generation of employment, and wealth creation. The Central Government, under the Startup India Scheme, has initiated several programs for building a robust startup ecosystem and transforming India into a country of job creators rather than job seekers. These programmes are mentored by the Department for Industrial Policy and Promotion.

Benefits available to a Startup on recognition or registration with DIPP

The following benefits are available to a body corporate when it is recognised by or registered with the Ministry of Labour and Employment, in the Department of Industrial Policy and Promotion (DIPP), under the Startup India Scheme:

1. Incubation and Industry partnership: The Department has created numerous incubators and innovation labs, events, competitions and grants for bodies corporates recognised as startup;
2. Simplification and handholding: The Department has introduced easier compliance, legal support, fast tracking of patent applications and a website to remove information asymmetry and easy exit process for failed startups;
3. Funding and incentives: A startup on recognition gets exemptions on income tax and capital gains tax. The Department has created a fund of INR 2500 crore to infuse more capital into the startup ecosystem and a credit guarantee fund of INR 500 crore under the scheme.
4. The Department has recognized Startups that are within 5 years of incorporation which are allowed to self-certify compliance for 6 labour laws and 3 environmental laws through a simple online procedure.
5. Labour Laws: There will be no inspection for a period of 5 years under the following labour laws. The startups will be inspected only on a genuine (verifiable) written complaint to the inspecting officer.

• The Payment of Gratuity Act, 1972;
• The Employees’ State Insurance Act, 1948;
• The Employees’ Provident Fund Miscellaneous Provisions Act, 1952;
• The Contract Labour (Regulation and Allotment) Act, 1970;
• The Building and Other Constructions Workers (Regulation of Employment and Conditions of Service) Act, 1996;
• The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979.

6. Environment Laws: For startups falling under the ‘white category’ as per the Central Pollution Control Board would be able to self-certify compliance under the following environment laws, baring random checks:

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

7. Patent and IPR Registration: The Department has introduced following facilities for startups with the objective to reduce the cost and time taken for a startup to acquire a patent and IPR making it financially viable for startups to protect their innovations and encouraging them to innovate further:

• Fast Tracking: Under the Scheme DIPP has facilitated that the applications by startups for Patent and IPR registration will be fast tracked so that the value can be realized sooner;
• Panel of Facilitators: The facilitators will assist the startups in the filing of their Patent and IPR registration applications;
• Facilitation Cost: The entire fees of the facilitators for any number of patents, trademarks or designs that a startup may file will be borne by the Central Government under the scheme and the startups are to bear only applicable statutory filing fees.
• Rebate: Statups shall be provided with 80% rebate in filing fees of patents and IPRs.

8. Tax Holiday for initial 3 years out of 10 years: The startups on registration with Income Tax Department under the Ministry of Finance are entitled to tax holiday for 3 years (out of the total period of 10 years from incorporation) under section 80 IAC and section 56(2)(VIIB) of the Income Tax Act, 1961. The eligibility criteria, registration process and documents required to be submitted to ITD are given below:

Eligibility Criteria for tax holiday under section 80 IAC:

• The startup must have been incorporated on or after 1^st April, 2016.
• Only Private Limited Companies or Limited Liability Partnership (and not unregistered partnership firm) is eligible for tax holiday.
• Only entities recognised by DIPP are eligible for tax holiday.

Eligibility Criteria for tax holiday under section 56 (2)(vii)(b)

• Startup should not be investing in specified asset classes.
• Startup should not be investing in immovable property, transport vehicles above INR 10 Lakh, loans and advances, capital contribution to other entities except in the ordinary course of business.

Point to note u/s 56(2)(vii)(b)

• Consideration of shares received by eligible startups shall be exempt upto INR 25 crore in aggregate.
• Investments into eligible startups by accredited investors non-residents, AIFs (Category I) and listed companies with net worth more than INR 100 crore or turnover more than INR 250 crore shall be exempt.
• Investments into eligible startups by listed companies with net worth more than INR 100 crore or turnover more than INR 250 crore shall be exempt.

Registration Process:

1. Open Startup India Portal and register
2. After registration, apply for DIPP recognition
3. After registration with DIPP access the section 80IAC application.
4. Fill in all details, upload requisite documents and submit the application
5. For registration under section 56 (2)(VIIB), access section 56 application
6. Fillin all details, upload requisite documents, if any, and submit the application.

Documents required

1. Memorandum of Association -for Private Limited Company only
2. Partnership Deed -for LLPs only
3. Board Resolution for Pvt Ltd Co. & Resolution for LLP
4. Annual Accounts of the startup for the last 3 financial years for Pvt Ltd Cos
5. ITRs for last 3 financial years in case of LLPs.

Check up your Dashboard for the status of your application. It can be found on the top-right corner of the page after logging in. You can reach out to DIPP by email dipp-startups@nic.in for any clarification or enquiry.

9. Easy exit or winding up of the body corporate: AND in case, a startup, circumferenced by circumstances, on a business failure decides to shut down or wind up its operations. The entrepreneur is allowed to
10. Take benefit of merging or amalgamating with any Indian company by taking fast track route under section 234 of the Companies Act, 2013, read with rul3 25 of relevant rules; or
11. Take benefit of fast track winding up under section 59 read with section 234 of IBC, 2016.

Thus a startup is allowed reallocate its capital and other resources to more productive avenues faster. The entrepreneurs are allowed to experiment with new and innovative ideas without facing complex exit procedures where their capital is stuck up in business failure. Under IBC 2016, start ups with simple debt structures, can be wound up in 90 days of filing the application for insolvency. An insolvency professional (IP) is appointed for the startup who can be in charge of the startup including liquidation of its assets and paying its creditors within six months of such appointment. It is then the responsibility of the IP to the closure of the business, sale of its assets and repayment to its creditors in accordance with the distribution waterfall set out in Insolvency and Bankruptcy Code, 2016.

Conclusion:

Startup India a brainchild of our Prime Minister Mr. Narender Modi which has brought impetus to the entire world to invest in India with an objective of winning fame wealth and bring prosperity to India eradicating unemployment to some extent. New entrants are granted a tax-holiday for three years and the Central Government has provided a fund of INR 2500 crore for startups as well as a credit guarantee fund of Rs. 250 crores. Within the campus of various schemes introduced by DIPP under the umbrella of ‘Startup India Scheme’ startups have gathered momentum and attracted foreign investments worth lakhs of billion USDs ultimately brining overall prosperity to India.