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The Government of India has, vide Notification dated 17.02.2016, announced "Start up India" initiative for creating a conducive environment for Start ups in India.

An Entity (a Pvt. Ltd. Co. or a registered Partnership Firm or a LLP) shall be considered as Start up if:

  • incorporated or registered in India not prior to five years,
  • with annual turnover not exceeding ₹ 25 crore in any preceding financial year, and
  • working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

However, such entity shall not be formed by splitting up or reconstruction of an existing business

NOTE: An entity is said to be working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual; property if it aims to develop and commercialize:

  1. A new product or service or process; or
  2. Significantly improved existing product or process or service, which will create or add value for customers.

The Central Government has provided the following incentives to promote Start ups in India:

A. Compliance Regime based on Self-Certification

  • Startups allowed to self-certify compliance (through the Startup mobile app) with 9 labor and environment laws.
  • No inspections will be conducted for a period of 3 years.
  • May be inspected on receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior to the inspecting officer
  • In case of environment laws, Startups to fall under the ‘white category’.
  • Self-certify compliance and only random checks would be carried out in such cases

B. Legal Support and Fast-tracking Patent Examination at Lower Costs 

The scheme for Startup Intellectual Property Protection (SIPP) shall facilitate filing of Patents, Trademarks and Designs by innovative Startups and envisages as under:

  • Fast-tracking of Startup patent applications.
  • Panel of facilitators to assist in filing of IP applications
  • Central Government shall bear the entire fees of the facilitators for any number of patents, trademarks or designs that a Startup may file, and the Startups shall bear the cost of only the statutory fees payable.
  • Startups shall be provided an 80% rebate in filing of patents vis-à-vis other companies.

C. Relaxed Norms of Public Procurement for Startups

Effective from April 1, 2015 Central Government, State Government and PSUs have to mandatorily procure at least 20% from the Micro Small and Medium Enterprise (MSME).

In order to promote Startups, Government exempts Startups (in the manufacturing sector) from the criteria of “prior experience/ turnover” without any relaxation in quality standards or technical parameters. The Startups will also have to demonstrate requisite capability to execute the project as per the requirements and should have their own manufacturing facility in India.

D. Faster Exit for Startups

In terms of the Insolvency and Bankruptcy Code 2016, Startups with simple debt structures or those meeting such criteria as may be specified may be wound up within a period of 90 days from making of an application for winding up on a fast track basis.

E. Tax Exemption to Startups for 3 years

The GoI has, after section 80-IAB, inserted w.e.f. 01.04.2017 a new section, namely:-

Section 80-IAC: It states that where the gross total income of an assessee, being an eligible Start up, includes any profits and gains derived from eligible business, there shall, in accordance with & subject to the provisions of this section, be allowed, in computing the total income of assessee, a deduction of 100% of the profits and gains derived from such business for 3 consecutive assessments years.

The said deduction may, at the option of the assessee, be claimed by the assessee for any 3 consecutive years out of five years beginning from the year in which the eligible start up is incorporated.

F. Tax Exemption on Investments above Fair Market Value 

The central Government has notified the ‘Classes of persons’ for the purpose of clause (ii) of the proviso to clause (viib) of the sub-section (2) of the section 56 of the Income Tax act’ 1961, as being the ‘person’ defined u/s 31(2), being a resident, who make any consideration exceeding the face value for issue of shares of a ‘Start-up’ company, i.e. any consideration received for shares of the ‘Start-up’ Company as exceeds the fair market value of the shares, in any previous year, from any person being a resident, shall not be chargeable as income from other sources of the said “start-up’ company.

G. Capital gain on transfer of residential property not to be charged

Section 54GB has been amended to provide that any capital gain arising from the transfer of a long-term capital asset, being a residential property (a house or a plot of land), owned by the eligible assessee shall be exempt if such assessee utilizes the net consideration for subscription in the shares of an eligible Start-up.

H. Regulatory relaxations for start-ups by RBI 

Reserve Bank of India vide Press Release dated February 2, 2016, had announced that in case of start-ups, to facilitate ease of doing business, certain permissible transactions under the existing regime shall be clarified.

The author is a Chartered Accountant and can be reached at The author does not assume any responsibilty whatsoever. 


Published by

Ajay Pradeep Bansal
Category Income Tax   Report

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