Startup Action Plan
September 19, 2016 by Vikash Jain
Startup Action Plan is initiated by PM Narendra Modi which intends to build strong business environment, promote economic growth and boost employment opportunity in the country.The start-up policy will provide an easier way to entrepreneurs to set up new business networks.
The focus of this policy is on the following:
- Easier set up, operation, and closing of the business.
- Opportunity to unsuccessful entrepreneurs to shut down his Business in a few days without risk to the entrepreneur’s personal property.
- Additional support to business entrepreneurs having new innovative business ideas.
WHAT IS STARTUP
Under this scheme startup means, an entity which is in its initial or developing stage but 5 years have not elapsed from the date of its Incorporation/Registration. These entities shall offer product and services that are not offered before, in the market. Basically these are the entities which work towards innovation, development, deployment or commercialization of new Products, processes or services driven by technology or intellectual property.
Under this scheme annual turnover of startup in any preceding financial year must not exceed INR 250 million (approx. 3,751,500 USD).
“Entity” means Private Limited Company, Limited Liability Partnership (LLP), Registered Partnership Firm and One Person Company. It is needless to say that the most common structure would be a Private Limited Company. Neither an unregistered entity like a proprietorship firm nor a public limited company is considered an eligible entity for startup.
- Such entity should not be formed by splitting up, or reconstruction, or a business already in existence.
- An entity is considered to be working towards said products and services if it aims to develop and commercialize:
HOW TO REGISTER FOR STARTUP:-
To qualify as an eligible startup, the entrepreneur should register the entity as follows:
- Register an entity as i.e. Private Ltd Company, LLP, Partnership Firm, One person Company.
- Obtain letter of recommendation or letter of funding from incubators or any other authorities as prescribed by DIPP (Department of Industrial Policy and Promotion).At present India has 68 incubators which are recognized under this scheme who can issue letter of recommendation. This letter of recommendation is a kind of certificate which acknowledges that the product is innovative.
- File an application to DIPP to recognize as startup (along with the attachment of letter of recommendation) through the mobile app or the portal of DIPP.
[Additionally, to avail the tax benefits under startup one has to obtain a certification from “Inter-Ministerial Board”. Further details on this have been covered elsewhere in this blog]
BENEFITS TO STARTUP UNDER COMPANIES ACT, 2013 (AMENDMENTS)
- An amount of INR 2.5 million (approx. 37,515 USD) or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding five years from the date of issue) in a single tranche, from a person shall not be treated as deposit. This is a major relief as there are some stringent guidelines w.r.t deposits under the Companies Act.
- During the period of first 5 years from the date of its incorporation, a startup company may issue sweat equity shares up to a maximum of 50% of their paid-up capital. As per the current restrictions, company cannot issue sweat equity within 1 year from the date of commencement of business. Also, upto a maximum of 25% of the paid up capital can be issued by way of sweat equity.
- Start-ups are also permitted to issue stock options during the first 5 years from the date of their incorporation to their promoters and to directors who hold more than 10% of the start-up’s equity shares. Currently, the companies are prohibited from issuing stock options to the above category of persons.
TAX BENEFITS PROVIDED UNDER THE SCHEME
- Startup profits not taxable for first three years:-
Profit generated by startups will not be taxable for any 3 consecutive years out of first 5 years.
As per Finance Act 2016, Section 80IAC of Income Tax Act, 1961 allows 100% deduction for eligible startup. The deduction of 100 % is allowed for 3(three) consecutive assessment years and assessee can chose the start year of 3(three) consecutive years out of 5(first) five year.
Here, the startup needs to satisfy a different set of eligibility criteria.
- Eligible Criteria to avail the Income Tax benefits
- Startup is incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2019;
- The total turnover of business of startup does not exceed INR 250 million (approx. 3,751,500 USD) in any of the previous years beginning on or after the 1st day of April, 2016 and ending on the 31st day of March, 2021;
- Start up has to obtain certificate from Inter-Ministerial Board at the time of incorporation.
- No capital gain tax for startups
Long term capital gain shall be exempt if invested in specified assets (units of fund formed by government under startup action plan) within a period of 6 month from the date of transfer.
- Investment made on or after 1st April, 2016 in the specified assets does not exceed INR 5 million (approx. 75,030 USD) in any financial year.
- The amount investment in the specified assets shall not be transferred for a period of 3 years.
- Tax Exemption on Investments above Fair Market Value:-
Shares issued by startup above the fair market value to venture capital fund, incubators and angel investor are exempted from the capital gain tax above the fair market value. Current Income Tax law provides that if shares are issued by a company at a price which s higher than the fair value of the share, the additional amount received by the company towards share premium account is treated as notional gain and is taxable.
OTHER BENEFITS FOR A STARTUP
- Patent fees for startups to be reduced by 80 per cent:-
Patent fees for startups have been reduced by 80 per cent. Further, startups will be helped through facilitation centers by lawyers to file patents application without any charges.
- No inspection under certain Labour & Environment Laws for 3 years:-
Though the Startup companies will have to comply with all the applicable Labour laws but there shall be no inspections by the Department for the first 3 years. Self-declaration by the Startup company w.r.t various compliances will suffice. This relaxation is with respect to nine Labour laws (e.g. Payment of Gratuity, Contract Labour and Industrial Dispute Act etc.) and three Environment laws for a period of three years from the date of setting of unit.
Startup company may however be inspected on the basis of written application with the relevant Department of the Ministry and that too on the basis of credible and verifiable complaint of violation.
- INR10,000 Cr fund for startups @ 2500 Cr. each year for the first 4 years:-
In order to provide funding support to startups, the Government has set up a dedicated fund of INR100 billion to provide both equity and debt support, where INR25,000 million will be provided each year for the first four years.
- A credit guarantee fund for startups:-
A credit guarantee mechanism will help startups raise debt funding through the formal banking system through National Credit Guarantee Trust Company (NCGTC)/SIDBI, which has an annual corpus of INR. 5000 million for the next four years.
- Faster exit for startups:-
Startup policy has provided an easier process to wind up the startup which fulfils the prescribed conditions. These provisions are contained in The Insolvency and Bankruptcy Code, 2015. Startups may be wound up within a period of 90 days by making of an application for winding up on a fast track basis.
The value of an idea lies in the using of it. Hence, the Govt. has provided a platform to start a business from an idea. Keeping in mind all the complexity to start a new business, Government has launched startup action plan. To start a business, entrepreneurs always worried about funding facilities, registration process, Taxation, legal compliances, consequence of failure of business etc. Therefore Government has provided suitable provisions for startup. The main motive of the Government is to create innovative business environment in India. So, it’s a lucrative platform where a person can convert its ideas into a business.