India offers numerous incentives aimed at encouraging the growth of startups.
These include a network of entrepreneurs, investors, and incubation centres; collaboration with research facilities and mentorship programmes; tax and fiscal advantages; and patent rights reform.
Startup investments are also encouraged; the government recently repealed the angel tax, and the central bank relaxed restrictions on international venture capitalists wanting to invest in Indian startups.
As a result, over the past decade, numerous regional startup hubs have sprouted up across India, fuelling sector-based innovation in finance, IT, AI, healthcare, agriculture, biotechnology, logistics, etc.
If we go by the number of startups and unicorns, India now has the third-largest startup ecosystem in the world.
This blog will elaborate on the Startup India Scheme, a Government of India initiative. We will learn how the scheme is helpful for startups and the vital financial and legal factors one should pay attention to when starting a business in India.
What is a startup?
A startup is typically defined as a business that is newly conceived, usually small, and founded on an idea to remedy a market problem.
What distinguishes a startup from other businesses is that the former provides a product or service that isn’t available in the exact way elsewhere.
The key word here is “innovation.” The company either creates a new product or redevelops an existing product or service into something better.
The Startup Initiative is gaining popularity in India. The Government of India has launched several programmes and promoted the Startup India scheme to grow the Indian economy and attract talented entrepreneurs.
As a result, a large number of Unicorns and successful start-ups are fast emerging in India today.
According to Indian legal standards, a business entity is considered a startup for up to seven years from the day of incorporation. For the biotechnology sector, the eligibility period has been extended to ten years.
To access government benefits, a startup company must also satisfy the following criteria by the Department of Industrial Policy and Promotion (DIPP):
The above regulations and timelines are susceptible to change, and entrepreneurs and investors should be on the lookout for any legal or regulatory developments that the government announces.
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What is the Startup India scheme?
On January 16, 2016, Prime Minister Narendra Modi launched the Startup India Scheme.
Under the scheme, several programmes have been developed to support entrepreneurs, build a revolutionary business ecosystem, and generate more jobs as a part of its efforts to eliminate unemployment.
The Industrial Policy and Promotion Department organises programmes managed by the Startup India Team.
The scheme’s most notable features are as follows:
Benefits of the Startup India scheme
The Startup India Scheme provides several advantages to startups, explained below as well. However, to take advantage of these benefits, the DPIIT must establish an entity as a startup.
1. Self Certification
The self-certification procedure alleviates the regulatory burden on new businesses. To be eligible for self-certification, startups must be recognised by DPIIT and have been in operation for at least five years.
The following are the advantages of self-certification:
- Through a streamlined online application process, startups can self-certify compliance with environmental and labour laws, including:
- The Employees’ State Insurance Act, 1948
- The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
- The Contract Labour (Regulation and Abolition) Act, 1970
- The Payment of Gratuity Act, 1972
- The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979
- The Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996
- The Water (Prevention & Control of Pollution) Act, 1974
- The Air (Prevention & Control of Pollution) Act, 1981
- The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003
- No inspections of labour laws will be conducted for five years unless the inspecting officer receives a written, verifiable, credible complaint of rule violation.
- In the context of environmental laws, white-category startups recognised by the Central Pollution Control Board could even self-certify compliance through random checks.
2. Tax exemption under section 80IAC
Eligible startups are granted an income tax exemption for three fiscal years within the first ten years of incorporation.
The company must be DPIIT-registered and must either be a private limited or a limited liability partnership company. It should have been registered on or after April 1, 2016.
To get this benefit, all you need to do is register your startup on the Startup India portal and apply for DPIIT recognition. Select the section 80 IAC exemption application on the portal, fill in the details, upload the following documents, and click the ‘Submit’ button.
- Startup annual accounts for the previous three fiscal years
- Memorandum of Association for LLP Deed/Pvt Ltd
- Board resolution
- IT returns for the previous three financial years
3. Exemption under Section 56
The following exemptions are available to DPIIT-registered private limited companies under Section 56(2)(VIIIB) of the Income Tax Act (H3).
The startup should not invest in certain asset classes or transport vehicles worth more than ten lakh rupees, immovable property, capital contributions to other entities, loans, or advances.
- This section exempts listed companies making investments in startups with a net worth greater than 100 crores and a turnover greater than 250 crores.
- Non-residents, accredited investors, listed companies, and Category I AIFs with a turnover of more than $250 million and a net worth of more than $100 million will be exempt from the tax.
- Received startup shares will be exempt up to a limit of Rs. 25 crores.
To take advantage of these benefits, simply apply for DPIIT recognition through the Startup India Portal by completing the Section 56 Exemption application form. The startup company will be notified by email once the registration has been activated.
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4. Easy dissolution of failed businesses:
According to the Insolvency and Bankruptcy Code of 2016, startups with simple debt structures can be wound up within 90 days of applying for insolvency.
Within six months of being appointed, an insolvency professional can take control of the company, including asset liquidation and payment to creditors.
The insolvency assistant is in charge of overseeing the sale of acquisitions, the closure of businesses, and the repayment of creditors.
5. Patent Application and IPR Application
This enables startups to obtain a patent quickly and easily. It aids in:
- Expediting patent applications
- Assistance with the filing of intellectual property applications
- The cost of facilitation is borne by the government
- 80% off on the cost of filing patent applications
These are the advantages that will enable your company with streamlined procedures, legal assistance, necessary funding, and industry support.
Startup Registration: how to register a startup in India
To register your startup, follow these steps.
Step 1: Incorporate your company
You must first incorporate your company as a Private Limited Company, a Partnership firm, or a Limited Liability Partnership under the MCA.
You must complete all of the standard practices for any business registration, such as acquiring a certificate of incorporation/partnership registration, a PAN, and other required compliance.
Step 2: Register your business with Startup India
The company must then be registered as a startup. The entire procedure is completed online and is simple. All you have to do is visit the Startup India website, fill out the form with information about your business, and upload certain documents.
Step 3: Upload the documents
- You must submit the registration application along with either one of the following:
- A recommendation letter concerning the innovative nature of the business from an established incubator in an Indian post-graduate college approved by the UGC, in the format specified by the Department of Industrial Policy and Promotion (DIPP); OR
- A letter of support from an incubator that has been funded for the project by the Government of India under a specified scheme to promote innovation; OR
- A letter of recommendation from a government-approved incubator regarding the innovative nature of the business in the DIPP format; OR
- A letter of funding from any Incubation Fund/Angel Fund/Private Equity Fund/Accelerator/Angel Network which is not less than 20% in equity that is duly registered with SEBI and supports the business’s innovative nature; OR
- A letter of funding from the Government of India or a State Government as part of any specified scheme that promotes innovation; OR
- A patent filed and published in the Journal by the Indian Patent Office in areas concerning the nature of the business
- You must upload your company’s/LLP’s certificate of incorporation or certificate of registration in case of a partnership
- A brief description of your products’/services’ innovative nature
Step 4: Determine whether you want to take advantage of tax breaks.
Startups are exempt from paying income taxes for three years. However, to receive these perks, they must be recognised by the Inter-Ministerial Board (IMB).
Startups recognised by the DIPP of the Government of India can now directly benefit from IPR benefits without the need for extra certification from IMB.
Step 5: You must self-certify that you meet the following requirements.
- Your new company must be registered as a Private Limited Company, Partnership firm, or Limited Liability Partnership.
- Your company must be registered in India within the next five years.
- Annual revenue must be less than 25 crores.
- Innovation is required- the company must be working on creating something new or significantly improving existing technology.
- Your company must not be the result of the dissolution or reconstruction of another company.
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Step 6: Obtain a recognition number as soon as possible.
When you apply, you will be given a recognition number for your startup. Following the examination of all of your documents, the certificate of recognition will be issued.
However, use caution when uploading documents. Suppose on further verification, it is discovered that the necessary document was not uploaded, that the incorrect document was uploaded, or that a forged document was uploaded.
In that case, you will be fined 50% of your startup’s paid-up capital, with a minimum monetary penalty of Rs. 25,000.
Step 7: Other concerns
a) Registration of patents, trademarks, or designs
If you require a patent for your invention or a trademark for your business, you can quickly access any of the government-issued facilitators. You will only have to pay the statutory fees, resulting in an 80% fee reduction.
One of the most challenging problems for many startups is obtaining financing. Entrepreneurs fail to entice investors due to a lack of experience, security, or existing cash flows. Furthermore, many investors are put off by the high-risk nature of startup companies, as a large percentage fail to take off.
To provide funding assistance, the government has established a fund with an initial corpus of Rs. 2,500 crores and a cumulative corpus of Rs. 10,000 crores for four years (i.e. Rs. 2,500 crores per year). The Fund is similar to a Fund of Funds in that it will not invest directly in startups but will take part in the capital of SEBI registered Venture Funds.
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Frequently asked questions (FAQs)
Q1. How do I apply for funding through the Startup India programme?
Connecting with incubators and the government through the Startup India Network can assist in obtaining funding through the Startup India Scheme.
Q2. What are the advantages of this plan?
Some advantages include self-certification, tax exemption, the ability to easily wind up failing ventures, and assistance with startup patent applications.
Q3. Who qualifies for Startup India?
The startup must be registered as a partnership, limited liability partnership, or private limited company.
Q4. What is the Startup India scheme?
This is a government of India initiative to promote startup culture and ensure an inclusive startup ecosystem in India.
On a concluding note
Startup India is developing an ecosystem to promote and nurture entrepreneurship throughout the country. This is based on an action plan aimed at encouraging bank financing for start-up ventures to boost entrepreneurship and encourage job creation through startups.
Hopefully, you now have a clear understanding of the Startup India Scheme, Startup India Loan, and Startup India Scheme Benefits, and you can register for the same by following the instructions.