Startup in India

As a result, several regional startup hubs have mushroomed across India in the last five years, fueling sector-based innovation in IT, AI, finance, healthcare, biotechnology, agriculture, and logistics, to name a few. 

India is now the world’s third largest technology startup hub; a reported 1,000 new companies were incorporated in 2017 alone.

In this article, we briefly discuss federal government initiatives that support startups as well as key legal and financial considerations when setting up such a venture in India.

Startup India Action Plan

Economic goals are a

• t the core of the Modi government, which include the ease of doing business, promoting foreign investment, job creation, promotion of skill development, and entrepreneurship. Towards this, a national policy framework for startups was launched in February 2016 called the Startup India Action Plan.

Under this plan, new startups in India can avail of regulatory and tax benefits, capital gains tax exemption, as well as access to government funding if they fulfill certain criteria.

A self-certificat

• ion compliance system is also in place with respect to key labor and environment laws, whereby there will be no inspections for the first three to five years of the launch of the venture.

Other benefits include reduction in patent registration fees by 80 percent and trademarks filing fees by 50 percent as well as free legal assistance; simpler entry and exit norms; protection of intellectual property rights (IPR); and facilities to promote entrepreneurship among women and SC/ST communities.

18 Indian states have formulated startup policies since October 2014: Andhra Pradesh, Assam, Bihar, Chhattisgarh, Goa, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Odisha, Punjab, Rajasthan, Telengana, Uttar Pradesh, Uttarakhand, and West Bengal.

The Department of Industrial Policy and Promotion (DIPP) published a status report on the Startup India scheme on April 6, 2018 which may be accessed here.

India’s definition of a startup 

As per Indian legal norms, a business entity is identified as a startup for up to seven years from its date of incorporation. This eligibility period is extended to ten years for the biotechnology sector.

A startup firm also needs to meet the following criteria set by the DIPP to access government benefits:

• The firm’s turnover does not exceed US$3.84 million (Rs 25 crores) in any preceding financial year (US$1 = Rs 65.02).
• Its headquarters is in India.
• It is recognized as working towards innovation, development, deployment, and commercialization of new products, processes, or services driven by technology or intellectual property. The government also considers such ventures to be startups if they meet above criteria and propose a scalable business model with a high potential to generate employment or create wealth.

These provisions and timelines are subject to change, and startups and investors should be alert to regulatory and legal developments announced by the government.

The latest official notification, dated April 11, 2018, explaining the definition and eligibility criteria for startups applying for regulatory and tax benefits may be accessed here.

Legal requirements to establish a startup

For a corporation, entity, or a business to be termed as a startup, it must be established under either of the following legal frameworks:

• Registered under the Companies Act, 2013;
• Registered under Section 59 of the Partnership Act, 1932, as a partnership firm; or,
• Registered under the Limited Liability Partnership Act, 2002, as a limited liability partners.
• This legal definition means that Sole Proprietorship Firms are not under the Startup India scheme.

Tax benefits under ‘Startup India’ scheme

The Finance Act of 2016 provided startups with an income tax exemption for three years in a block of five years, if they are incorporated between April 1, 2016 and March 31, 2019.

Under the Finance Act of 2017, this period of profit-linked deductions was extended to eligible startups for seven years.

Other tax breaks include:

• Exemption of capital gains up to US$76, 914 (Rs 5 million) arising out of the transfer of long term capital assets invested in a fund notified by the federal government (Section 54 EE of the 2016 Finance Act).
• Exemption from ta
• x on capital gains arising out of sale of residential house or a residential plot of land if the amount of net consideration is invested in equity shares of an eligible startup for utilizing the same for purchase of specified asset (Section 54 GB of
• Exemptions on investments above fair market value, introduced on June 14, 2016 for investments made in startups.
• Funds from angel investors or family and friends – domestic funds not registered as venture capital (VC) funds  or funds raised from VC firms set up for the very purpose of backing startups, will not be taxed on their investments into a startup firm.

To avail these benefits, the entity must obtain a certificate from the Inter-Ministerial Board of Certification. The board consists of the following members:

• Joint Secretary, Department of Industrial Policy and Promotion;
• Representative of the Department of Science and Technology; and,
• Representative of the Department of Biotechnology.

Startup compliance in India: Self-certification regime

Compliance norms for startups in India have been eased to enable them to focus on their core business.

Startups falling under the list of 36 ‘white’ category industries will not require environment clearance under three environment laws:

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

The Ministry of Skill Development and Entrepreneurship (MSDE) has also issued an advisory to states to allow startups to self-certify compliance for a period of one year with the Apprenticeship Rules, 1992 and Apprenticeship Act, 1961.

As per the advisory issued by the federal labor ministry on December 1, 2016, startups may self-certify compliance under six labor laws. The tenure of compliance of self-certification has since been increased from three to five years.

26 states in India have accepted this system of compliance – Andhra Pradesh, Assam, Chhattisgarh, Chandigarh, Daman and Diu, Delhi, Gujarat, Himachal Pradesh, Mizoram, Odisha, Punjab, Tripura, West Bengal, Uttar Pradesh, Haryana, Jharkhand, Madhya Pradesh, Maharashtra, Tamil Nadu, Telangana, Uttarakhand, Rajasthan, Karnataka, Bihar, Andaman and Nicobar, and Arunachal Pradesh.

How to establish a startup in India?

First, the business must be incorporated as a Private Limited Company or a Partnership Firm or a Limited Liability Partnership (LLP).

The entity must follow the normal procedures as required for the registration of any businessentity in India – obtain certificate of incorporation or partnership registration, PAN, and other compliances.

Incorporating a company through Simplified Proforma for Incorporating Company electronically (SPICe -INC-32), with eMoA (INC-33), and eAOA (INC-34) is now the default option in India and most companies are required to be incorporated through SPICe only.

Second, the business entity must be registered as a startup on the online portal: Startup India.

Registering as a startup in India: Documents to be uploaded online

1. A letter of recommendation or support.

Any one of the following documents can be submitted, in PDF format:

• A recommendation, in the format specified by the DIPP, from an incubator established in a post-graduate college in the country;
• A letter of support from any central or state government funded incubator to promote innovation;
• A recommendation, in the format specified by the DIPP, acknowledging the innovative nature of business, from an incubator recognized by the central government;
• A letter of funding of not less than 20 percent in equity by any incubation or angel fund/private equity fund/accelerator or angel network that is duly registered with the Securities and Exchange Board of India (SEBI) that endorses its innovative nature of business;
• A letter of funding by the central or state government as part of a scheme that promotes innovation; or,
• A patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of business being promoted.

2. Incorporation certificate or registration certificate in case of a partnership firm.

3. Brief description of the innovative nature of the entity’s product or service offering.

4. Answer whether the entity is interested in availing tax benefits.

5. Self-certification of conditions specified in the official definition – as mentioned above.

6. Self-certification that the entity applying for startup status is not the result of splitting up from an existing business entity.

Once the application is uploaded, a recognition number will be immediately issued to the startup. The certificate of recognition will be released upon the examination of all the documents submitted.

If the appropriate documents are not uploaded or are found to be forged, a fine on the applicant will be levied, equivalent to 50 percent of the paid-up capital of the startup and not less than US$384 (Rs 25,000).