Parents of a young graduate from a premium Indian Institute, after getting to know that their daughter will go for her own venture and not go for a placement, would just have said “Sarvanash”. However, this is surely going to change as the Prime Minister himself has yesterday come up with the much awaited Startup India Action Plan

Parents of a young graduate from a premium Indian Institute, after getting to know that their daughter will go for her own venture and not go for a placement, would just have said “Sarvanash”. However, this is surely going to change as the Prime Minister himself has yesterday come up with the much awaited Startup India Action Plan, in tune with the “Startup India – Standup India” announced from the revered Red Fort during the Independence Day speech 5 months back.

India’s Strength is its entrepreneurial spirit which differentiates it from many other markets. It is already the fastest growing Startup Ecosystem in the world and 3rd largest globally. The action plan, if executed in the way it has been proposed, can turn out to be game changer for the Country and the Startup ecosystem and make India Number one in innovation and entrepreneurship. The action plan speaks about catering to several tax and regulatory difficulties faced by startups. The prime focus of the Startup India Policy has been on:

  • Promoting Innovation, Make in India and Entrepreneurship as a whole

  • Making compliance and procedures relating to starting up and maintaining a business simple and more entrepreneur friendly

  • Ensuring that enough investible fund is pumped into the ecosystem to keep things rolling

Who is a Startup?

The government for the first time has defined a Startup. An entity being a Private Limited Company or a Limited Liability Partnership, incorporated in India not prior to 5 years, with annual turnover not exceeding Rs. 25 Cr in any of the 5 financial years and working towards innovation, development or commercialization of new products, processes or services driven by technology or intellectual property shall be termed as a Startup.

The key highlights on the Tax and Regulatory front, which would make life easier for the startups, are as follows:

  1. Compliance Regime based on Self Certification –To reduce regulatory burden on Startups thereby allowing them to focus on their core business and to keep compliance cost low, the government has proposed a simple app based Self certification regime and lowering of regulatory formalities laws, wherein no inspections shall be held for first three years in case of the following labor and environmental laws:

  • The Building and Other Constructions Workers’ (Regulation of Employment & Conditions ofService) Act, 1996

  • The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979

  • The Payment of Gratuity Act, 1972

  • The Contract Labour (Regulation and Abolition) Act, 1970

  • The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952

  • The Employees’ State Insurance Act, 1948

  • The Water (Prevention & Control of Pollution) Act, 1974

  • The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003

  • The Air (Prevention & Control of Pollution) Act, 1981

  1. Tax Exemptions to Startups for Three Years – With a view to stimulate the development of Startups in India and provide them a competitive platform, it has been proposed that the profits of Startup initiatives should be exempted from income-tax for a period of 3 years. This fiscal exemption shall facilitate growth of business and meet the working capital requirements during the initial years of operations. The exemption shall be available subject to non-distribution of dividend by the Startup. This seems to be in line with the exemptions available in Singapore and will support starting up in India, rather than weighing options of incorporating outside India.

  2. Tax Exemptions on Capital Gains – Investments in Startups is a risky affair. To promote investments in startups by mobilizing capital gains from sale of capital assets, the government has proposed capital gain exemptions on investment of capital gains in fund of funds recognized by the Government. This will help with more investible funds being available for investments into startups. The government has also proposed that the existing capital gain tax exemption for investment in newly formed manufacturing MSMEsby individuals shall be extended to all Startups. Currently, such an entity needs to purchase “new assets” with the capital gain received to avail such an exemption. Investment in ‘computer orcomputer software’ (as used in core business activity) shall also be considered as purchase of ‘newassets’ in order to promote technology driven Startups.

  3. Tax Exemptions on Investments above Fair Market Value (FMV)– At present, all investments in a Company, over and above its FMV is taxed in the hands of the Company under the head of other sources of Income. This provision was introduced in the Income Tax Act, to control black money being routed through sham Companies. Currently, investment by Venture Capital funds is exempted from this and government has proposed extending this to investments made by incubators.

  4. Rolling out of one stop Mobile App and Portal – To serve as a single platform for Startups for interacting with Government and Regulatory Institutions for all business needs and information exchange among various stake holders. This shall be simple and one stop destination for all registrations, clearances, status tracking and compliance.

  5. Faster Winding for Startups – Given the innovative nature of Startups, a significant percentage fails to succeed. In the event of abusiness failure, it is critical to reallocate capital and resources to more productive avenues andaccordingly a swift and simple process has been proposed for Startups to wind-up operations. Thiswill promote entrepreneurs to experiment with new and innovative ideas, without having the fear offacing a complex and long-drawn exit process where their capital remain interminably stuck.The Insolvency and Bankruptcy Bill 2015 (“IBB”), tabled in the LokSabha in December 2015 hasprovisions for the fast track and / or voluntary closure of businesses.In terms of the IBB, Startups with simple debt structures or those meeting such criteria as may bespecified may be wound up within a period of 90 days from making of an application for winding up ona fast track basis. In such instances, an insolvency professional shall be appointed for the Startup, whoshall be in charge of the company (the promoters and management shall no longer run the company)for liquidating its assets and paying its creditors within six months of such appointment. Onappointment of the insolvency professional, the liquidator shall be responsible for the swift closure ofthe business, sale of assets and repayment of creditors in accordance with the distribution waterfallset out in the IBB. This process will respect the concept of limited liability.

  6. Legal Support and Fast-tracking Patent Examination at Lower Cost- Intellectual Property Rights (IPR) are emerging as a strategic business tool for any business organization to enhance industrial competitiveness. Startups with limited resources and manpower, can sustain in this highly competitive world only through continuous growth and development oriented innovations; for this, it is equally crucial that they protect their IPRs. The scheme for Startup Intellectual Property Protection (SIPP) shall facilitate filing of Patents, Trademarks and Designs by innovative Startup. To promote awareness and adoption of IPRs by Startups and facilitate them in protecting and commercializing the IPRs by providing access to high quality Intellectual Property services and resources, including fast-track examination of patent applications and rebate in fees.

Other Proposals extremely helpful for Startups and the Ecosystem are as follows:

  1. Startup India Hub – A single point of contact for the entire Startup Ecosystem enabling knowledge exchange and access to funding

  2. Relaxed Norms of Public Procurement for Startups – To provide an equal platform to Startups in Manufacturing sector, vis-à-vis experienced companies

  3. Funding support through a Fund of Funds with a corpus of INR 10000 Crore – To provide funding support for development and growth of innovation driven Startups

  4. Credit Guarantee Fund for Startups – For providing venture debt funding through banks and financial institutions

  5. Organizing Startup Fests for Showcasing Innovation and providing a collaboration platform

  6. Launch of Atal Innovation Mission (AIM) with Self-employment and Talent Utilization (SETU) Program

  7. Harnessing Private Sector Expertise for Incubator Setup

  8. Building Innovation Centers at National Institutes

  9. Setting up of 7 New Research Park Modeled on the Research Park setup at the IIT Madras

  10. Promoting Startups in the Biotechnology Sector

  11. Launching of Innovation Focused Programs for Students

  12. Annual Incubator Grand Challenge  

However, a Startup to be considered eligible for the government schemes should either have a patent granted by the Indian Patent and Trademark office or recommended or funded by DIPP/GOI or approved/Funded by a recognized Incubator. This may also involve a registration in prescribed format.

You may get in touch with the author on his website taxmantra.com and get more information.

You can download the action plan here


LetsVenture thanks Alok Patnia, Founder of Taxmantra.com for his contribution. Alok is an expert on the issues related to taxation and has incredible insights pertaining to business startup issues such as choosing the right business entity etc. He also has vast experience in the field of business maintenance services such as accounting, auditing, company law compliances, service tax and other related fields.