In a lay man language, a startup company (startup or start-up) is an entrepreneurial venture which is typically a newly emerged business that aims to meet a marketplace need by developing a viable business model around an product, service, process or a platform. A startup is usually a company designed to effectively develop and validate a scalable business model.
On April 17, 2015, the Ministry of Commerce and Industry released a notification to define ‘startups’ for the very first time. There were many points that were consistent from the speech given by Prime Minister Narendra Modi during the unveiling of the ‘Startup India, Standup India’ policy. According to the government notification, an entity will be identified as a startup, if it meets the criteria prescribed in the notification.
Recently, on April 11, 2018, DIPP has once again come up with notification, redefining the Start Up and as per the notification an entity shall be considered as a Startup:
1. Upto a period of seven years from the date of incorporation/registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India. In the case of Startups in the biotechnology sector, the period shall be upto ten years from the date of its incorporation/ registration.
2. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded Rs. 25 crore
3. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
Here, it is pertinent to note that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
Further, an entity shall cease to be a Startup on completion of seven years from the date of its incorporation/ registration or if its turnover for any previous year exceeds Rupees 25 crore.
In respect of Startups in the biotechnology sector, an entity shall cease to be a Startup on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds Rs. 25 crore.
The process of recognition of an eligible entity as startup shall be as under:
(i) A Startup shall make an online application over the mobile app or portal set up by the Department of Industrial Policy and Promotion.
(ii) The application shall be accompanied by—
(a) a copy of Certificate of Incorporation or Registration, as the case may be, and
(b) a write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.
(iii) The Department of Industrial Policy and Promotion may, after calling for such documents or information and making such enquires, as it may deem fit, —
(a) (b) recognise the eligible entity as Startup; or
reject the application by providing reasons.
In order to obtain tax benefits, a Startup being a private limited company or a limited liability partnership incorporated on or after 1st day of April 2016 but before 1st day of April 2021 may obtain a certificate from the Inter-Ministerial Board of certification, for this one has to make application in Form-1.
Section 80-IAC provides for 100% tax exemption on profits earned from “eligible business” by “eligible startup”. This exemption is for 3 consecutive financial years out of 7 financial years starting from year in which startup is incorporated either as a Company or as an LLP.
Clause (viib) of sub-section (2) of section 56 of the Income Tax Act provides for issuance of shares at a price more than the fair market value of the shares by the start up. The provision, understandably introduced to curb a menace, started hurting start-ups when they sought funds based on their business potential justifying a share valuation much higher than the statutorily computed FMV.
1. A Startup being a private limited company shall be eligible to apply for approval for the purposes of clause (viib) of sub-section (2) of section 56 of Income Tax Act (exemption from income tax on investments above fair market value made by angel investors), if the following conditions are fulfilled:
a) the aggregate amount of paid up share capital and share premium of the startup after the proposed issue of shares does not exceed ten crore rupees,
b) the investor/ proposed investor, who proposed to subscribe to the issue of shares of the startup (hereinafter in this notification referred to as “investor”) has, —
(i) the average returned income of twenty five lakh rupees or more for the preceding three financial years; or
(ii) the net worth of two crore rupees or more as on the last date of the preceding financial year, and
2. The startup has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11UA of the Income-tax Rules, 1962.
3. The application for approval shall be made in Form-2.
The present notification is a welcome step of the government. With the widening scope of startup definition, more startups would be able to claim the benefits, which will encourage the new minds in coming days and it will also help the government in building a strong eco-system for nurturing innovation and Startups in the country that will drive sustainable economic growth and generate large scale employment opportunities in the country.
(Author is a Company Secretary from Noida and can be contacted at email@example.com)