In a landmark event on 16th January 2016, PM Modi announced Startup India Action Plan. This is seen as the starting point of dialogue between the Startup Ecosystem and policy makers. This kind of high profile event has not even been witnessed even in the most startup friendly nations like Israil or Silicon Valley.
Perhaps this is the most exciting time for the Indian #Startups with government announcing compliance simplification + mentoring + fund allocation of Rs.10,000 crores dedicated for the Startup Ecosystem. PM Modi said “I see startups, technology and innovation as exciting and effective instruments for India’s transformation.”
As tax consultants and practitioners, we need to be sensitized and updated about this wave called startups which is fast changing the scenario around the country. It’s uprooting not even the established concepts but bringing the traditional businesses out of comfort zone. Look at OYO Rooms whose name PM Modi referred in his speech. Ritesh, a 21 years old boy could make an inventory of 14,000 rooms in 80 cities of India. While his closest competitor, which is surprisingly Taj Hotels set up by iconic conglomerate, is having inventory of 9,000 rooms!!
Let us look at the broad guidelines of “ #Startup India Action Plan”
Startups are seen as great means towards sustainable economic growth and large scale employment generation.
The objective of Action Plan is to:
- Spread startup system from technology sector to other wide array of sectors
- From big cities to semi urban and rural areas
The Plan seeks to remove the difficulties faced by startups such as:
- Time consuming and difficult regulatory compliances
- Long drawn closure in case of failure
- Lack of credit and funding
The Plan also seeks to provide impetus to startups by:
- Promoting awareness and adoption of IPR
- Tax exemptions
- Encouraging innovation through incubation and mentoring
The Action Plan
The Action Plan is divided across the following areas:
- Simplification and handholding
- Funding support and incentives
- Industry-Academia partnership and incubation
- A non-intrusive model shall be brought in place which will be “self certification” driven for 9 labour and environment laws. There will be no inspection for three years under labour laws. The self-certification will be thru Startup mobile app. Pollution control shall also be driven by self-certification in case of “white category” businesses.
- A Mobile App will be made available from 1st of April 2016 :
- To register a startup
- For compliances via self certification
- For collaborating with startup ecosystem partners
- For applying for various eligible schemes
- The Insolvency and Bankruptcy Code 2015 will make it faster and easier for startups to wind up. The bill is currently under the scrutiny of the joint committee of the parliament. The bill provides for permission for startups to wind up within 90 days of application. On receiving such permission, an insolvency professional will be appointed to liquidate assets and pay off creditors within 6 months
- Startup India Hub will be set up to create a single point of contact for startups. The hub will collaborate with central and state government, VCs, angel networks, banks, incubators etc. The hub will assist startups through advisory and mentorship programs.
- To promote awareness and adoption of IPRs, the government will facilitate legal support and fast-track patent examination. For effective implementation of the scheme, the Controller General of Patents, Designs and Trademarks (CGPDTM) shall empanel a panel of “facilitators”. Entire fee of facilitators will be borne by Govt.
- From 1st of April 2015, PSUs are mandated to procure at least 20% of their requirements from the MSMEs (Micro Small and Medium Enterprises).To ensure level-playing field for the Startups in manufacturing space, government shall exempt them from “prior experience / turnover” criterion. However, there will be no compromise on the quality and other allied conditions.
- Government will set up a fund with an initial corpus of INR 2,500 crore and will make it INR 10,000 crore over a period 4 years. The fund will be in the nature of fund of funds. It will not invest directly into startups, but shall participate in the capital of SEBI registered venture funds. The maximum investment in a fund by this FOF is capped at 50% of its size. This fund shall be professional managed and LIC will be a co-investor.
- Credit guarantee mechanism through National Credit Guarantee Trust Company (NCGTC)/ SIDBI is being envisaged with a budgetary corpus of INR 500 crore per year for the next four years. This will help startups get debt funding.
- Income tax exemption on capital gains shall be given to persons who invest such capital gains in the fund of funds recognized by the Government. At present capital gain exemption is available for investment in manufacturing MSMEs. This exemption will be extended to startups.
- With a view to stimulate the development of Startups in India and provide them a competitive platform, profits of Startup will 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.
- Currently, investment by venture capital funds in Startups is exempted from operations of the provisions of Sec 56 (2) (viib). This section taxes excess of share issue amount in excess of its fair market value. The exemption shall be extended to investment made by incubators in the Startups. This shall encourage seed level investments in the Startups.
- Rebate up to 80% on patent filing fees.
- To bolster the Startup ecosystem in India, the Government is proposing to introduce Startup fests at national and international levels. These fests would provide a platform to Startups in India to showcase their ideas and work with a larger audience comprising of potential investors, mentors and fellow Startups.
- Launch of Atal Innovation Mission (AIM) with Self-Employment and Talent Utilization (SETU) Program. The idea behind this program is innovation promotion and entrepreneurship promotion. This envisages starting of specialized incubators, tinkering labs, strengthening the exiting incubation facilities, organizing the state and national award.
- To encourage innovation by young students in science and technology, interesting schemes like “Innovation Core” for schools, “NIDHI” for running competitions in innovation and Ucchatar Avishkar Yojana for R & D, especially for students of IITs, have been proposed.
- To help set up incubation facilities with public private partnership. The plan is to set up 35 new incubators in existing institutions and 35 new private sector incubators. Govt. will provide funding support to these incubators.
- To set up 7 new Research Parks for joint R&D efforts with academia and industry partnership
- To promote bio-entrepreneurship. This will be achieved by setting up bio-incubators and bio-tech equity fund
- To launch Incubator Grand Challenge to create world class incubators.
Reaction to the Action Plan
While in general, startups have welcomed the action plan as a good beginning, some criticism has followed.
The excitement of several startups was contained once they knew of the definition of startups in order to claim tax exemption. A startup must satisfy the following 6 conditions
- It must be a private limited company, LLP or Partnership firm
- It should not be more than 5 years old
- Turnover below 25 Crore
- Should develop an innovative commercial product
- Should obtain certification from inter-ministerial Board set up by DIPP to validate innovative nature of business
- Should fulfill one of the six conditions of recommendation or funding
The tax exemption for 3 years during first 5 years of operations is also seen generally meaningless as most of the startups do not make any profit during initial years.
According to iSPIRIT 34 items were listed as key irritants. Out of these 34 items, only eight have been resolved , while action has been promised on 15 of them and 11 of them have been left high and dry.
The plan to invest 10,000 crore in fund of funds has received criticism mainly on these two counts :
- Tax payers money will be invested in very high risk enterprises
- The size of fund is too small to be of any significance in promoting local venture capital industry
It must be noted that at present, venture funds in India are either foreign firms (Sequoia Capital, Accel Partners and Matrix Partners ) or local firms (Kalaari Capital, Nexus Venture Partners and Helion Venture Partners) who raise over 90% of their capital from foreign institutional investors
Opportunities for tax professionals
The effort to launch a Startup Action Plan is a laudable piece of work by the Government. There may be several lacunae or lack of clarity at this stage, with time more clarity and amendments are sure to follow.
With this, there will be several new opportunities for the tax professionals in the time of looming startup ecosystem. Some of these are :
- Registration and approval of the Startups and Funds under various laws
- Transaction advisory to handle various tax laws, under new innovative models.
- Structuring and modeling of entities for the incubators and funds
- Claiming of tax exemptions for Startups
- Claiming of tax exemption from Capital Gains for the Funds
- Advisory on the funding and Investor Relationship Management
Finally some interesting tweets
Best Start-up event I have ever attended. Thank you #StartupIndia. Congrats @amitabhk87 for a truly amazing launch!
#StartupIndia Zero tax on startup profits in 1st 3 years. Could see @Flipkart in audience wasn’t unduly excited with that.
Dr. Subhash Chandra
To transform India to a nation of job creators we must make our startup system strong. Great #StartupIndia initiative by @narendramodi.
Editor : CA Dinesh Tejwani
Please feel free to reach me at [email protected] for further queries if any.