“Startup India is a flagship initiative launched by the Government of India, vide notification dated 17th February, 2016, to build a strong ecosystem that is conducive for the growth of startup businesses, drive sustainable economic growth and generate large scale employment opportunities. The Government, through this initiative, aims to empower startups to grow through innovation and design."
An entity shall be considered as a ‘startup’, subject to the following conditions:
- If it is incorporated as a private limited company or registered as a partnership firm or a limited liability partnership in India for up to a period of ten years from the date of incorporation/ registration.
- If its turnover for any of the financial year since incorporation/ registration has not exceeded INR 100 crore.
- If it is working towards innovation, development or improvement of products or processes or services, or it is a scalable business model with a high potential of employment generation or wealth creation.
An application for recognition as a startup shall be made online on a portal, set up by DIPP.
On a very first note, a startup shall create its login with the basic details such as name, email id and contact number.
After creation of user ID and password, the below mentioned steps are to be followed to get the recognition under startup scheme:
- Login to the portal https://www.startupindia.gov.in. A page will be displayed, as follows:
- Fill the basicdetails of the entity, such as CIN, Name of entity, Incorporation date, PAN, etc.
- Post filling these details, select industry, sector and category very carefully because it will reflect your business activities. These details should match with the memorandum of association of the company.
- Fill the complete registered address of the entity, in the following manner:
- Fill the details of authorized representative, such as name, contact details, etc., as shown below:
- Fill the details of directors/partners, as per data available on MCA portal. A page will be displayed, as follows:
After reaching this step, a startup should be readily available with the following information to complete the application:
- How many employees the startup has?
- At which stage the startup is, at present?
- Has the startup applied for any IPR?
- Is the startup creating an innovative product / service / process or improving an existing product / service / process?
As we mentioned earlier, a startup should be working towards innovation, development or improvement of products or processes or services.
At this step, you have to select the stage of your startup, as shown below:
Let us brief you about the stages as well:
- Ideation:At this stage, a startup has an idea and experience about a particular product or service, which is different from any other manufacturer or service provider.
- Validation: At this stage, the startup has created a MVP (Minimum Viable Product) in the market for its innovative products/ services.
- Early traction: Once the MVP is created, it means the startup must have acquired some permanent customers and is now in growing stage, earning revenues.
- Scaling: After the startup has created a monopoly for its products/ services in the existing market, it can scale up to new markets by exploring other products/ services.
After filling all the above mentioned information, the startup needs to enter its activities. A page will be displayed, as follows:
- The startup has to now do the self-certification.
- Supporting documents, such as Certificate of Incorporation (COI), etc., are to be uploaded.
After uploading the above mentioned documents, the entire application is to be reviewed and the process is completed on clicking the final submit button.
On the basis of the documents and information submitted, DPIIT may ask for further documents and information as it may deem fit to process the application.
After vetting of the documents and making further enquires, DPIIT may:
- recognize the eligible entity as a startup; or
- reject the application by providing valid reasons.
Once, your application gets approved by DPIIT, an acknowledgement of the same shall be sent to the registered email address along with registration certificate.
The Government of India is providing several benefits to recognized startups, under the Startup India initiative, such as tax exemption, easy winding of company, startup patent application & IPR protection and self-certification, etc.
These benefits have been explained in detail below:
Income tax exemptions:
A DIPP recognized startup shall be eligible to apply to the Inter-Ministerial board for full deduction on the profits and gains from business for three consecutive assessment years, subject to the fulfillment of the following conditions:
- It should be a private limited company or a limited liability partnership;
- It should be incorporated on or after 1st April 2016, but before 1st April 2021; and
- It should be engaged in innovation, development or improvement of products or processes or services, or a scalable business model with a high potential of employment generation or wealth creation.
An application for the exemption shall be filed online in Form 1, after getting recognition as a startup.
The system will automatically display the name, address of the registered office and email ID of the entity.
Attachments to be filed along with Form 1
- Annual accounts of the startup for the last three financial years
- Copies of income-tax returns for the last three financial years
Angel Tax is the direct income tax levied on startups for the funds raised through angel investors. It is levied on the value more than what is seen as the ‘Fair Value’ or ‘Fair Market Value’. It is taxed at approximately 30% rate.
Angel Tax is levied on startups under the head ‘Income from Other Sources’ (IFOS), under section 56(2)(viib), when:
- Funds are raised via share capital;
- Investment is more than INR 10 crore, including share capital and premium; and
- Valuation is seen to be higher than its ‘Fair Value’ or FMV i.e. ‘Fair Market Value’.
Section 56(2)(viib) of the Income Tax Act provides for taxation of the share premium, that is above the fair valuation of shares, as “other income". As startups are valued on the basis of the business potential of their ideas, which could change with time, they find it hard to justify the share premium received. Due to levy of angel tax, there is a sharp decline in angel funds raised by startups. There has been a dip in investment volumes by angel networks, from INR 33.7 crore in Q1 FY’17 to INR 12.4 crore in Q1 FY’18.
Startups are going to bring a lot of innovation to the country and therefore, are supported in every possible manner. The government has eased the process for startups to seek income tax exemption on investments made by angel investors.
The conditions for claiming the exemption are as follows:
- The startup should be recognized by DIPP, by way of an online application, under the Startup India initiative.
- The aggregate amount of paid-up capital and share premium of the startup, after the proposed issue, should not exceed INR 25 crore.
Provided that in computing the aggregate amount of paid up share capital and share premium of INR 25 crore in respect of shares issued to any of the following persons shall not be included
(a) a non-resident; or
(b) a venture capital company or a venture capital fund;
Provided further that considerations received by such startup for shares issued or proposed to be issued to a specified company shall also be exempt and not be included in computing the aggregate amount of paid up share capital and share premium of INR 25 crore.
It has not invested in any of the following assets─
- building or land appurtenant thereto, being a residential house, other than that used by the startup for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
- land or building, or both, not being a residential house, other than that occupied by the startup for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business;
- loans and advances, other than loans or advances extended in the ordinary course of business by the startup where the lending of money is substantial part of its business;
- capital contribution made to any other entity;
- shares and securities;
- a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds INR 10 lakh, other than that held by the startup for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;
- jewelry, other than that held by the startup as stock-in-trade in the ordinary course of business;
- any other asset, whether in the nature of capital asset or otherwise, of the nature specified in section 56 of the Act.
Provided the startup shall not invest in any of the assets specified in sub-clauses (a) to (h) for the period of seven years from the end of the latest financial year in which shares are issued at premium.
In the end, we can sum up by saying that at one instance, the government is initiating programs like StartUp India and StandUp India to promote startups in our country, while on the other hand, such stringent tax laws act as a deterrent to the entire ecosystem. It’s time that the ministry strike a balance between collecting revenue and safeguarding growth oriented sectors of the economy. As on 17th December, 2018, 14, 476 entities are recognized by DIPP as startups.