Government includes non-tech companies under Startup India program

(Analysis of latest notification no. G.S.R. 501 (E) dated 23th May 2017 issued in supersession of Gazette Notification No G.S.R. 180 (E) of Government of India dated 17th February, 2016)

Government includes non-tech companies under start-ups

Entities having a scalable business model, which has a 'high' potential of employment generation or wealth creation, can now be eligible for recognition as a start-up. Earlier, only if the activities of an entity were innovative and driven by technology or intellectual property could it be considered as a start-up by the department of industry policy and promotion (DIPP).

Recognition as a start-up by the DIPP is required forget various concessions, such as reduction in patent application fees, fast-tracked patent process and even a tax holiday. The earlier restrictive definition had left out many entities who were not technology-centric.

Under an earlier notification of the DIPP, one of the conditions to qualify as a start-up was that the entity should "be working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property". This definition stands amended by the DIPP in its notification dated May 23 (Notification No. G.S.R. 501 (E) being issued in supersession of Gazette Notification No G.S.R. 180 (E) of Government of India dated 17th February, 2016) - Copy attached.  

Now entities having "a scalable business model with a high potential of employment generation or wealth creation" could also qualify for recognition as a start-up by the DIPP.

This expansion in definition will give a chance to entities in the non-tech space to apply to the DIPP. The moot issue is how the criteria of 'high' employment will or wealth creation be determined? The online process of application via an app or DIPP's portal is also useful. These relaxations are welcome. However, employment generation or wealth creation is subjective and specific to each start-up and the business it is in. The government needs to clarify if it will be assessed on a case-to-case basis or will there be some benchmarks."

The DIPP has also extended the period of existence for qualifying as a start-up. An entity will be considered as a start-up if it is incorporated not prior to seven years (or 10 years for those in the biotechnology sector). Under the earlier notification, the business entity was required to have completed five years or less from the date of its incorporation.

As earlier, the legal structure of the entity can be a private company, a partnership firm or a limited liability partnership. There is also no change in the turnover criteria, which must not exceed Rs. 25 crore for any of the financial years since incorporation.

The Finance Act, 2016 has made provision for start-ups to get income tax exemption for three years in a block of five years, if they are incorporated between April 1, 2016 and March 31, 2019. The Budget 2017-18 has increased the period to three years in a block of seven years. According to official statistics, 932 entities have been recognised as start-ups till date by the DIPP. Of these, 23 have been approved for availing tax benefits by the inter-ministerial committee as of early May.

MINISTRY OF COMMERCE AND INDUSTRY
(Department of Industrial Policy and Promotion)
NOTIFICATION
New Delhi, the 23rd May, 2017

G.S.R. 501 (E) This notification is being issued in supersession of Gazette Notification No G.S.R. 180 (E) of Government of India dated 17th February, 2016.

Definition

An entity shall be considered as a Start-up:

a) 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; and

(Same as it was earlier)

b) up to seven years from the date of its incorporation/ registration; however, in the case of Start-ups in the biotechnology sector, the period shall be up to ten years from the date of its incorporation/ registration; and

(Earlier it was Up to five years from the date of its incorporation/registration for all)

c) If its turnover for any of the financial years since incorporation/ registration has not exceeded Rupees 25 crores; and

(Same as it was earlier)

d) If it 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.

(Earlier it was for working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property)

Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a 'Start-up'.

Explanation

1. An entity shall cease to be a Start-up on completion of seven years from the date of its incorporation/ registration or if its turnover for any previous year exceeds Rupees 25 crores. However, in respect of Start-ups in the biotechnology sector, an entity shall cease to be a Start-up on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds Rupees 25 crores.
2. Turnover is as defined under the Companies Act, 2013.

Process of recognition

The process of recognition as a 'Start-up' shall be through an online application made over the mobile app/ portal set up by the Department of Industrial Policy and Promotion. Entities will be required to submit the online application along with the Certificate of Incorporation/ Registration and other relevant details as may be sought. Start-ups also have to submit a write-up about the nature of business highlighting how is it working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.

Tax Benefits

In order to obtain tax benefits, a Start-up should -

1. Be a private limited company (as defined in the Companies Act, 2013) or a limited liability partnership (as defined under the Limited Liability Partnership Act, 2008) which is incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2019, and
2. Be working towards innovation, development or improvement of products or processes or services, or should be a scalable business model with a high potential of employment generation or wealth creation, and
3. Obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification as constituted by Department of Industrial Policy and Promotion from time to time.

Recognising the need to encourage innovation in India, innovativeness shall be considered from a domestic standpoint.

Provided that the mere act of developing:

1. Products or services or processes which do not have potential for commercialization, or
2. Undifferentiated products or services or processes, or
3. Products or services or processes with no or limited incremental value for customers or workflow would not make a Start-up eligible for tax benefits.

Revocation

Subsequently, if such recognition is found to have been obtained without uploading the relevant documents or on the basis of false information, DIPP reserves the right to revoke the recognition certificate and certificate of an eligible business for tax benefits immediately without any prior notice or reason.