Laws Opening The Doors For Start-Up In India
Keywords:- Start-up, Indian start-ups, finance, funding, capital, eligible start-ups
Author – Riya Garg
- Introduction
- Role of Finance in Development of a Start-up
- Conditions for Becoming an Eligible Start-up
- Benefits of Start-up India
- Other Measures to Promote Start-ups
- Conclusion
Introduction
Start-ups are the future of India. In fact, India is the third largest start-up ecosystem in the world. Although the coronavirus (COVID-19) pandemic affected the Indian economy hard, the start-up environment grew in contrast to the national recession. As on June 3, 2021, over 50,000 start-ups have been recognized as start-ups by the DPIIT. Out of this 19,896 were recognized as early as since April 1, 2020. Unfortunately, the majority of these start-ups fail to make it big. One of the biggest reasons for the same is the failure to secure investments.
Role of Finance in Development of a Start-up
Finance is crucial for companies, and obtaining sufficient quantities is usually a challenge. A timely inflow of finance is required for business scaling. A recent report reveals that about 85% of the new companies are ‘underfunded’ indicating potential failure in the future. In recent years, large Indian companies including the Tata conglomerate and the founders of Flipkart had ventured into investing in small businesses. Many companies known by their brand names benefitted from funding and saw significant growth over the last decade. Eventually they became common household names. Ride-hailing business Ola, lodging chain OYO, digital payment provider Paytm, as well as online food app Swiggy are among them.
Conditions for Becoming an Eligible Start-up
The Indian government is aware of the role of these start-ups in country’s economy. Thus, they have made serious efforts to extend support to them. Prominent among them would be the Stand-up India campaign launched in 2016, by the government of India. It was established with an aim to promote and support the start-ups in India by providing bank finances. The scheme provides a number of benefits as well as exemptions to ‘eligible start-ups’. However, before discussing about them, it is necessary to know what qualifies as an ‘eligible’ start-up. For a start-up to be recognized as ‘eligible’ for availing benefits under the scheme, the following conditions should be met:
- Should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership. It can be incorporated in various forms such as company including a one-person company, limited-liability partnership or a partnership firm
- Should have a turnover of less than INR 100 Crores in any of the previous financial years since its incorporation
- Should not have completed 10 years since the date of its incorporation. Start-ups in the biotechnology sector have been provided an extended period of three more years from its incorporation. But there are certain further stipulations like the turnover for any of the financial years since incorporation has not exceeded ₹25 crores (as per the Companies Act). Further, the entity is working towards innovation, development or improvement of products or processes or services. If it is a scalable business model with a high potential of employment generation or wealth creation it is also ₹25 crores
- Should be working towards innovation/ improvement of existing products, services as well as processes. It should also have the potential to generate employment/ create wealth
Benefits of Start-up India
Moreover, an entity formed by splitting up or reconstruction of an existing business shall not be considered a “Start-up”. Some of the key benefits of Start-up India are as follows:
- To reduce the patent registration fees.
- Improvement of the Bankruptcy Code ensuring a 90-day exit window.
- To provide freedom from mystifying inspections as well as capital gain tax for the first 3 years of operation.
- To create an innovation hub under the Atal Innovation Mission. The GoI launched the Atal Innovation Mission to promote entrepreneurship through Self-Employment and Talent Utilization (SETU). It is a platform where innovators would be supported and mentored to become successful entrepreneurs.
- Targeting 5 lakh schools along with the involvement of 10 lakh children in innovation-related programs.
- To develop new schemes that will provide IPR protection to start-up firms.
- Encourage entrepreneurship throughout the country.
- Promote India as a start-up hub across the world.
Other Measures to Promote Start-ups
Other measures taken by the government that promote start-up culture in India are:
Make in India
The “Make in India” policy recommends holding a “Start-Up fest” at the national level every year. It brings all stakeholders in the start-up ecosystem together on one platform.
Incubator
Incubator set up by PPP – Incubators are organizations set up with the specific goal of assisting entrepreneurs with building and launching their start-ups. Incubators provide a variety of value-added services (office space, utilities, administrative and legal support, and so on). They also frequently make grants, debt, and equity investments. In order to ensure professional management of Government-sponsored or funded incubators, it will create a policy and framework for setting-up of incubators across the country in public-private partnerships. The incubator shall be managed as well as operated by the private sector.
Section 54 (G) (B) of the Income Tax, 1961
It offers an exemption of tax on capital gains made by selling a residential property or a piece of land. It also includes investing the sum in equity shares of a start-up company. This exemption was available for investments made only till 31 March 2019. As per the latest amendment, the exemption is now extended until 31 March 2021.
Certain start-ups which are incorporated between the 1st day of April, 2016 and the 1st day of April, 2019 (now extended by two more years to 1st day of April, 2021) are also eligible for tax benefits. A certificate of an eligible business from the Inter-Ministerial Board of Certification of Department of Industrial Policy and Promotion is a pre-requisite for availing the benefits. The definition of “eligible business” under the Income Tax Act has been now expanded. It means a business carried out by an eligible start-up engaged in innovation, development or improvement of products, processes or services. It also includes a scalable business model with a high potential of employment generation or wealth creation.
Labour Laws
Start-ups essentially need compliance of the prevailing labour laws. To ease the labour law compliances the Ministry of Labour & Employment has allowed the start-ups to self-certify compliance under various Labour Laws. It includes The Payment of Gratuity Act, 1972, The Employee’s State Insurance Act, 1948, The Contract Labour (Regulation And Abolition) Act, 1970, Employees’ Provident Funds & Miscellaneous Provisions Act, 1952, The Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 and The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979). It has increased the tenure of compliance of self-certification under the Labour laws from 3 to 5 years. Also, certain type of Start-ups will not require certain environment clearances under some Environmental Acts.
Reduced Patent Fees
Reduced patent fees (rebate up to 80% of ordinary expenses) for patent applicants will undoubtedly stimulate innovation under the Start-ups Intellectual Property Protection Act. Start-ups will receive a 50 percent discount on trademark filing fees under the new revised Trademark Rules. It’s also a good idea to provide patent and trademark facilitators. The Ministry of Corporate Affairs has notified sections 55 to 58 of the Insolvency and Bankruptcy Code, 2016, to expedite the insolvency resolution process. Also, the fast track process covers a Start-up (other than a partnership firm) as per government policy.
Encourage Finance for Start-ups
To further encourage investments in start-ups by Foreign Venture Capital Investors (FVCI), the regulatory provisions have been accordingly amended. It includes Schedule 6 of Foreign Exchange Management (Transfer or Issue of security by a person resident outside India) Regulations, 2000. It is also inclusive of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Third Amendment) Regulations, 2016. A FVCI may contribute up to 100 percent of the capital of an Indian company engaged in any activity mentioned in Schedule 6 of Notification No. FEMA 20/2000. This is inclusive of start-ups irrespective of the sector in which it is engaged, under the automatic route. Start-ups can issue equity or equity-linked instruments or debt instruments to FVCI against receipt of foreign remittance, as per the FEMA Regulation.
Indian Start-up with Overseas Subsidiary
Indian start-ups with an overseas subsidiary can open a foreign currency account with a bank outside of India. It can also deposit foreign exchange earnings from exports/sales produced by the start-up or its overseas company into the account. The balances which represent exports from India shall be repatriated to India. This will be done within the period prescribed for realization of exports, in Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 dated January 12, 2016.
Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) has also allowed Indian start-ups to raise funds through a ‘Convertible Note’. It is an instrument issued by a start-up company. As an Evidence of receipt of money initially as debt, which is repayable at the holder’s option or which is convertible into equity shares of the start-up company. It needs to be done within a period not exceeding five years from the date of issue on the occurrence of certain specified events. This is as per the other terms and conditions, within a period not exceeding five years. A person residing outside of India can buy these convertible notes.
The ones that are issued by an Indian start-up company for a single tranche of Rs. 25 lakh or more can be easily bought. However, a start-up operating in a sector that requires government approval for foreign investment can only offer convertible notes to people who live outside of India with such approval.
Government Loan Schemes
The government has initiated a few loan schemes to provide collateral-free debt to aspiring entrepreneurs. It is done to help them gain access to low-cost capital. The schemes include Start-up India Seed Fund Scheme as well as SIDBI Fund of Funds.
Conclusion
A sound knowledge of all the legal intricacies in starting and managing the start-ups can help a long way to scale up the start-ups which will in turn result in the overall growth of the Indian economy.
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This Write-up is edited by Somprikta Banerjee
