This write up is to drive away some of the hot topic regarding one month old Government Initiative drive/ Policy “START UP INDIA ACTION PLAN 2016”, initiative led by Honble Prime Minister Shri Narendra Modi.

This write up deals with

  • What is start up?
  • Is this the same as we start up any new venture to get eligible for benefits of the government?
  • Difficulties or tough road for taking benefits under Govt Start up India Action Plan
  • Income Tax exemptions for 3 yrs for Startups
  • Appreciable Notings on Startup India Action Plans

What is Start up Eligibility as per Government Startup Policy to take various benefits (including Tax Exemptions), it should satisfy Point No 1 to 5 AND any of the Point 6 to 10 from below :‐

1. It should be either Private Limited Company/Limited Liability Partnership/Partnership Firm

2. It should not be older than 5 yrs

3. It’s Turnover is less than INR 25Cr

4. It should develop an INNOVATIVE product which should add to the Value of customers and should be of commercial use

5. It has applied and got approval from DIPP (Dept of Industrial Policy & Promotion) that the firm has Innovative product (i.e Certification from DIPP)

6. Get Validated/recommendation letter from Incubator in Post Graduate Indian College

7. Get Validated/Recommendation letter by Incubator funded by Govt of India

8. Get Validated/Recommendation letter by Incubator recognised by Govt of India

9. Funded by any Incubation fund/Angel fund/PE Fund/Accelerator/Angel Network

10. Has Patent granted by Indian Patent and Trademark Office related to business

Difficulties/Road blocks

1. As per Definition Startup should be working towards Innovation, Development and Deployment or Commercialisation of New Products, Processes or Services driven by Technology or Intellectual Property. (Here lies the thrust to convince the Govt officials/Incubation centres (Specially govt recognised or operated)/Govt Departments etc which may involve lot of complications/issues which the time will tell)

2. Start up must aim to develop and commercialise either New Product/Services/Process OR significant improvement in existing products or services or processes in the current market which would create further value or add value to customers or workflow, thus companies with similar line of business already there in market place will not get any benefits unless major differentiation is done in Process/product or service.

For example recently OYO Rooms started with Unique model of business by young entrepreneur with the use of technology, another firm called ZO rooms was also following with same model, thus going by definition the ZO Rooms will not be falling within NEW product/services unless there is process or technological differentiater is seen and made the govt official convinced about the same (which would be challenging task)

3. It should not be by way of Splitting up, reconstruction of existing business.

Thus company which is into Product Licensing business and venturing into customised product offering on website/retail/wholesale basis to expand licensing business, same would be treated as expansion of existing business and would not be considered as startup as defined by Govt.

4. Certification from DIPP or setup body for validation of Innovative nature of the business to be obtained. Nothing is to be elaborated on this point as we all know how difficult it is (at the time of STARTUP of the business as an entrepreneur) to deal with Govt. This may involve additional time or effort or people effort who can deal with Govt and drag their focus from Innovation, doing business to liason with Govt officials/organisations.

3 Yrs Tax Exemptions

We have been having inquiries by so many new startup or business units who have incorporated Pvt Ltd Companies, LLP etc recently that whether we would get exemption under Startup Scheme of Govt? – Going by unofficial survey carried out by our team, it is presumed that around 70% startup will not be eligible or may not be inclined to take benefits under this scheme.

Surprisingly the Government came out with 3 yrs of Tax Exemption for Startup, however the kitty of the Govt will not be affected much as currently also considerable startups as of today does not fall in tax paying criteria due to LOSS ☺☺, so they end up either paying tax under MAT. So for first 3 yrs, we don’t see much profitability only for startup as it involves good amount of R&D, Commercialisation, Advertisement, Setup cost which eats out profits and ends up with either loss or minimal profits which makes sense not to get into the foot of Govt to take Tax Exemption.

3 Yrs Tax Exemption under Startup India Action Plan is subject to Non Distribution of Dividend by Startup… Has anybody seen dividend distribution in 3yrs of time by any Startup in last 10yrs?? Hardly one can count them on fingures I guess, so the condition is redundant practically.

Appreciable Notings !!

1. Rebate of 80% in Filing of Patents (for pilot basis for one year with extendable clause)

2. Fast track patent application processing

3. Facilitators (Empanelment by Controller General of Patents, Designs and Trademarks) who would help filing Patents, Trademarks etc for which cost would be borne by Central Government.

4. In case of Labour Laws, no inspection will be conducted for 3 yrs, In case of Environment laws, startup falling in White Category would be able to self certify and only random checks would be carried out, thus making lesser compliance cost to startups.

5. Capital Gain Tax exemption shall be given if they have invested such Capital Gains in funds of Funds Recognised by the Government.

6. Prior Experience/Turnover criteria to be done away for Startup (in Mfg sector) for Govt tendering and Public procurements

7. Easy exit for Startup with simple debt structure or those with certain criterias will be allowed for wind up the business in 90days from application made for winding up business.

8. Investment by Venture capital funds in Startups will be exempt from tax for consideration which exceeds the fair market value of such shares.

About Author – Jyot Shukla is CA, CS & CAIIB having more than 10 yrs of Post Qualification experience in the areas of Finance, Accounts, Banking and Fund Raising. He may be reached at jyotshukla@gmail.com

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Category : Income Tax (20862)
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Tags : Government Policy (1298) Startup India (57)
  • Mansi Garg

    I think so this tax exemption of 3 years is spread over a term of 5 yrs and not just ‘first 3 years’.