Startups: The Trial Blazers
In the Union budget 2022, the government proposed to give further fillip to start ups to enable them sustain and continue their phenomenal rise in the last decade.
In the backdrop of the incentives for start-ups proposed in the Union budget, a look at the phenomenal rise of the “start-ups”.
Definition of Startup
The Department for promotion of Industry and Internal Trade (DPIIT) vide its Notification dated 19th February 2019 states that an entity shall be considered as a start-up.
- For a period of 10 years from the date of its incorporation, if it is incorporated as a Private limited company (under Companies Act, 2013) or Partnership Firm (under the Partnership Act, 1932) or an LLP (under the Limited Liability Partnership Act, 2008);
- If the Turnover does not exceed Rs. 100 crores;
- Entity is working towards innovation, development or improvement of products/processes / services or if it has a business model with high potential of employment generation or wealth creation.
(i) An entity formed by merger or re-construction of an existing business shall NOT be considered as a Start-up.
(ii) Any entity shall cease to be a start-up on completion of 10 years from its date of incorporation OR its turnover for any previous year exceeds Rs. 100 Crores. (either of the condition to be satisfied)
Governing / Nodal authority
The Department for promotion of Industry and Internal Trade (DPIIT) is the nodal authority governing the registration and compliance of Start-ups. The DPIIT is entrusted with the “Start-Up India” initiative of the current government.
Registration of Start-ups
- The process of registering Start-ups is governed by the DPIIT. The Start-ups shall be registered under the “Start-up India” initiative.
- An application has to be made either on the portal or through a mobile application with the relevant documentation such as certificate of incorporation and a write up about how the proposed entity is involved in innovation or employment generation or wealth creation.
- The DPIIT, at its discretion may require additional documents and either recognize the entity as a start-up or reject it. A certificate of registration of Start-up shall be issued to the said entity.
- If the DPIIT finds that the said entity has obtained the registration of start-up using fraudulent documents or information, the DPIIT has the right to revoke the registration.
Tax benefits for Start-ups
I Section 80- IAC of the IT Act 1961
Start-ups incorporated between FY 2016-17 and FY 2021-22, can claim 100% tax rebate for a period of 3 years out of the first 10 years. This was introduced in the Union Budget 2018.
Note: The Union Budget 2022 has extended the 100% tax rebate by one more year. Therefore, tax exemption can now be claimed by start-ups for 4 years (as against 3 years) out of its first 10 years.
II Section 56 (2) (vii) (b) of the IT Act 1961
While raising capital through issue of shares, income earned on differential amount between fair market value of such shares and the amount of premium at which it is issued is taxable at an exorbitant rate of 30.9%. This proved detrimental to the growth of the start-up eco system. Hence, Union budget 2019 exempted start-ups from paying angel tax.
A registered / recognized Start-up may apply for getting Angel tax exemption.
Start-ups through the years
The “Start-up India” initiative was launched in 2016. Though initially, they grew at a slow pace, as of February 2022, more than 64,000 start-ups were recognized by the DPIIT on their website.
Statistics show that in the pandemic years, Start-ups have not only performed well, several of them defied the pandemic to become unicorns in 2021. From fin tech and ed-tech to beauty products and baby products, several unicorns were valued at USD1 Billion.
Start-ups & Union Budget 2022
The Union Budget 2022 was based on core pillars of health and medical infrastructure, financial inclusion, digital economy and energy & climate change. A series of measures were introduced to promulgate development in these focus areas / sectors. The government proposed to integrate some key developmental policies with the start –up ecosystem in such a way both benefit. A look at some key measures:
- Facilitate investment through NABARD to finance start-ups for agriculture and rural enterprise, provide machinery on rental basis and facilitate agri and farm technology for FPOs and farmers.
- 25% of the Budget to be earmarked for defence, R&D. The sector will be opened up for private players including start-ups in consultation with DRDO. A nodal agency wold be set to monitor the same. This is being done to reduce imports and become more self- reliant in the defence sector.
- Allocate more funds and promote participation of start-ups in sunrise sectors such as drones, space and artificial intelligence (AI).
- Start-up manufacturing companies can avail concessional tax of 15% if they commence manufacturing or production (u/s 115BAB of the IT Act 1961) upto 31st March 2024. Hitherto it was for a period of 3 years (upto 31st March 2023). The Union Budget 2022 has extended it by one more year.
- Capping the Long term capital gains (LTCG) arising from any type of transfer of asset to 15%. This will give a boost to investment in start-ups by individuals / promoters.
- Setting up an expert committee to put in place a regulatory framework for Venture capital and private equity investment. This has been done in order to encourage investments into start-ups.
Start-ups: blazing their way towards India 100
The government recognises the all-pervasive role of the Start-ups in shaping the economy of the country over the next quarter century. It proposes to integrate the start-up ecosystem with digital and financial technology, health and energy/climate sector. This is the very core of the budget 2022.