is defined as a company or project initiated by an entrepreneur to seek, develop, and validate a scalable business model. Entrepreneurship is referred to all new businesses, including self-employment and businesses that never intend to become registered, whereas a startup refer to the new business that intend to grow large beyond the solo founder.
India is the 3rd largest startup system all over the world globally and is expected to witness year-over-year (YoY) growth of consistent 12-15%. The Indian Government defined a startup as an entity less than seven years young with an annual turnover below Rs. 250 million and headquartered in India.
Meaning of Startup in India
An organization will be considered as Startup, if it is incorporated in India as private limited company (defined in the Companies Act, 2013) or registered as partnership corporation (registered u/s 59 of the Partnership Act, 1932) or LLP (under Limited Liability Partnership Act, 2008).
It is pertinent to note that an organization created by splitting up or reconstructing existing commerce will not be considered a 'Startup'.
The Government has introduced number of schemes to promote startups. GOI has launched the scheme viz Startup India registration under DIPP (Department of Industrial Policy and Promotion) under Ministry of Commerce and Industry.
This scheme supports Startups by providing various benefits to the registered entity. The benefits include financial as well as non-financial benefits. To register under this scheme, the entity must fulfil the criteria specified.
The benefits include:
- Administrative and tax benefits.
- Government helps for startup funding.
- Self-certification compliance framework concerning 6 Labour Laws and 3 Environmental Laws through a simple online procedure. (Startups would be excluded from any inspections of the place of business for upto 3-5 years).
- Qualified to incorporate an 80% reduction in patent registration fees and a 50% reduction in the trademark filing.
- It is benefitted by FOC legal help in conjunction with simplified entry and exit norms and protection of Intellectual Property Rights (IPR).
- Easy winding up of company.
- Tax Exemption under 80IAC for startups (only a private limited company or a limited liability partnership) incorporated on or after 1st April 2016 but before 1st April 2021.
- Startups will be exempted from income tax for 3 years provided they get a certification from Inter-Ministerial Board (IMB).
- Startups can also meet with various other startups through this platform.
- Helps in getting Fund from investors.
- Easier public procurement norms.
- A startup can close its business within 90 days from the date of application of winding up.
- Startups can apply for government tenders. They are exempted from the “prior experience/turnover” criteria applicable for normal companies answering to government.
- People investing their capital gains in the venture funds setup by government will get exemption from capital gains. This will help startups to attract more investors.
- After this plan, the startups will have an option to choose between the VCs, giving them the liberty to choose their investors.
Eligibility to obtain Registration for Startup
The following conditions must be satisfied in order to obtain the registration for a Startup:
- Being incorporated/registered in India for less than 7 years & biotechnology startups upto 10 years from its date of incorporation.
- Annual turnover not more than R.s 25 crores in any of preceding FYs.
- It aims to work towards development, deployment, innovation, or commercialization of new products, or services driven by the technology or intellectual property.
- It is not formed by reconstruction or private limited company a business already in existence.
- It must obtain certification from Inter-Ministerial Board.
- It can be incorporated as registered partnership firm, private limited company, or an LLP.
Process of Registration
The Startup can be registered as explained below:
- Partnership Firm: To commence a partnership firm, the parties have to draft partnership deed where the firm's T&C shall be mentioned and explained briefly and it should be registered with the registrar of firms.
- Limited Liability Partnership Firm (LLP): As the name indicates, it is a partnership firm with an additional feature i.e. the partner’s liability is limited. For income tax purposes, LLPs & partnership firms are treated at par. The registration authority for LLPs is Ministry of Corporate Affairs.
- Private Ltd. Company: This is the most preferred structure for the businesses that plan to grow big, get investments by way of equity, want to get FDI, wish to share ownership with employees through ESOP, etc. The significant advantage of the Private Limited structure is the segregation of management from ownership. Directors form the management of company, and shareholders are owners of the company.
Online Registration Process
- Login on the Startup India Portal (www.startupindia.gov.in)
- Enter the requisite details and other details of Directors and the Partners.
- Upload requisite documents and the self-certification in manner prescribed.
- File incorporation/registration certificate of the company.
Tax Exemptions to Startups
Three-year tax holiday in a block of 7 years
The startups which are incorporated after April 1, 2016, is eligible for getting a 100% tax rebate on profit for 3 years in a block of seven years provided that annual turnover is not more than Rs. 25 crores in any FY. This will help the startup to meet their working capital requirements during the initial years of operation.
Exemption from tax on LTCG:
A new section 54EE has been inserted in IT Act for the eligible startups to exempt their tax on long-term capital gain (LTCG) if such a long-term capital gains or a part thereof is invested in the fund notified by the CG within 6 months from the date of transfer of the asset. The maximum amount that can be invested in the specified long-term asset is Rs 50 lakh. The said amount shall be remained invested in the selected fund for three years. If withdrawn before three years, then exemption will be revoked in year in which money is withdrawn.
Tax exemption on investment above fair market value
The Govt has exempted the tax being levied on investments above the fair market value in eligible startups. Such assets include investment made by resident angel investors, family or fund which are not registered as venture capital funds. The investment made by incubators above fair market value is exempt as well.
Tax exemption to Individual/HUF on the investment of long-term capital gain in equity share of Eligible Startups.
The existing provisions under Section 54GB of IT Act allows exemption from tax on long-term capital gains on the sale of residential property, if such profit is invested in the small or medium enterprises as defined under Micro, Small and Medium Enterprises Act. Further, this section has been amended to include exemption on capital gains invested in eligible startups.
Thus, if an individual or HUF sells a residential property and invests capital gain to subscribe to the 50% or more equity shares of eligible startup, then tax on long term capital will be exempt provided that such share is not sold or transferred within five years from date of its acquisition. The startup shall also use the amount invested in purchasing assets and should not transfer the asset purchased within five years from its purchase date.
This exemption will boost investment in eligible startups and will promote their growth and expansion.
Set off carrying forward losses and capital gains allowed in case of change in the shareholding pattern.
- The carry forward of losses in respect to eligible startups is permitted, if all shareholder of such company who had shares carrying voting power on last day of the year in which the loss was incurred continue to hold share on the previous day of the PY in which such losses is to be carried forward. The restriction of holding 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in the case of eligible startups.
the Indian government recognizes the importance of startups and has introduced various schemes and benefits to support their growth. Startups can enjoy administrative, tax, and financial benefits, as well as simplified compliance frameworks. They also have access to funding, legal help, and easier public procurement norms. Additionally, startups are eligible for tax exemptions, including a three-year tax holiday, exemptions on long-term capital gains, and investment above fair market value. The government's initiatives aim to foster a favorable environment for startups, encouraging their development, innovation, and contribution to the Indian economy.
Experience the benefits of registering your startup with Startup India! Unlock tax exemptions, government funding, simplified compliance, and more. Our streamlined online registration process makes it easy to get started. Don't miss out on the opportunities to grow and succeed. Register your startup today with us, drop mail at firstname.lastname@example.org
The information provided in this blog is for general purposes only and should not be considered as professional advice