Government of India’s flagship initiative met with an enlarged definition of startup under the purview of Startup India, Stand up India. The Ministry of Commerce and Industry vide its notification G.S.R 501(E) dated May 23, 2017[1] broadened the definition of a startup for the purpose of government schemes taking into account long gestation period in establishing startups. Further, startups would no longer need a letter of recommendation from an incubator or an Industry Association for either recognition or for claiming tax benefits under the Startup India program. This move could be seen as a positive step to improve the ease of doing business in India, and promoting entrepreneurship in India to build the India story. The present notification is in supersession of the earlier notification dated February 17, 2016[2].

Bringing in the “New”

As per the present notification, a Private Limited Company organized under the Companies Act, 2013, a Partnership Firm registered under the Partnership Act, 1932, or a Limited Liability Partnership organized under the Limited Liability Partnership Act, 2008, can now be recognized as a Startup upto a period of seven years instead of the earlier stipulated five years from the date of incorporation or registration; for startups in Biotechnology sector the gestation period is extended to 10 years. Therefore, these startup companies would continue to enjoy their privileged status until the completion of their respective startup gestation period, and by fulfilling the below mentioned criteria during their gestation period -

  1. If it is working toward innovation, development or improvement of product or process or service or an accessible business model with great prospective of employment generation or wealth creation.
  2. Wherein, the turnover3 for any financial year since incorporation should not exceed INR 25 crore (USD 3884702 approx.). Herein, the term turnover should be read in consonance with Section 2 (91) of the Companies Act, 2013, where it is defined as the aggregate value of the realization of amount made from the sale, supply, or distribution of goods, or on account of services rendered, or both, by the company during a financial year.

However, it must be noted that, no recognition will be granted to entity or entities formed from splitting or reconstruction of an entity already in existence.

Ease in Process

Online applications aim to improve upon the ease of governance and expediting the administration process. The present notification is in line with the previous 2016 notification and reiterates that the entity willing to be recognized as startup must apply online through mobile app/portal set up by Department of Industrial Policy and Promotion (hereinafter referred to as the ‘DIPP’). Application has to be submitted along with a Certificate of Incorporation/Registration with other relevant details as may be required. The entity has to provide the details about how it is working towards innovation, development, improvement of product or process or service or its scalability in terms of employment and wealth generation.

As per the notification, the startup recognition will cease once the entity’s turnover exceeds INR 25 crore (USD 3884702 approx.) or completes seven years (Ten years in case of Biotechnology startups) of incorporation, whichever is earlier.

Tax Boons

For the purpose of claiming tax benefits, the startup must be incorporated after April 01, 2016, but before April 01, 2019. It must be engaged toward development, innovation, improvement of products or process or service or must have high potential of employment generation or wealth creation. However, it may be noted that the definition of startup includes a partnership firm, registered under Section 59 of the Partnership Act, 1932, but tax benefits are only provided to Private Limited Companies and Limited Liability Partnerships as per the present notification.

Entity is also required to obtain a certificate of eligible business from Inter-Ministerial Board of Certification as constituted by DIPP.

However, no startup recognition for the purpose of tax benefit would be given if a startup is engaged in developing

  1. Products or services or processes which don’t have potential for commercialization.
  2. Undifferentiated products or services or processes
  3. Products or services or processes with no or limited incremental value for customers.

Revocation of Startup Status

As per the present notification, DIPP reserves the right to rescind the startup status of an entity without furnishing any prior notice to the party concerned. Therefore, if recognition is found to have been obtained without uploading the necessary documents, or on false premises, the same may result in revocation of the startup status of the entity if deemed fit by DIPP.

Therefore, as a relentless exertion to facilitate a comfortable startup ecosystem, the above changes can be seen as a robust effort and a welcome move by the government to guarantee ease of starting new businesses that would eventually encourage creation of jobs in the country.