Update: Action Plan on Start-up India

[The
following post is contributed by Bhushan
Shah and Neha Laxman
from Mansukhlal Hiralal & Company]
At the Global Workshop for
Start-ups in Delhi, the Government very recently announced
an Action Plan to promote and provide a conducive environment for Start-ups. The
primary objective of the Action Plan is to (i) ease the process for young
Indians to begin, sustain and develop home-grown businesses; and (ii)
driving
sustainable economic growth and generating large scale employment opportunities. At this stage this is merely an Action Plan and still has
to get translated into law.
The following are the key
announcements made by the Government through the Action Plan:
           

Definition of Start-up:
A start-up means an Indian entity (i.e. private limited company, registered
partnership firm, or limited liability partnership): (i) incorporated or formed
in the preceding five years; (ii) with an annual turnover not exceeding Rs 25
crore in any preceding financial year; and (iii) working towards
innovation,
development, deployment or commercialization of new products, processes or
services driven by technology or intellectual property. Caveats: (i) The
Start-up must not be formed by splitting up or reconstruction, of a business
already in existence; and (ii) An entity once recognized as a Start-up shall
cease to be one if five years have elapsed since its incorporation or if its
annual turnover exceeds Rs 25 crore.

Compliance regime based on
self-certification
: In order to simplify the regulatory
compliance, start-ups have been exempted from labour and environmental inspections
in most circumstances  and they can now
self-certify compliance through the start-up mobile application for certain
labour and environmental laws. No labour inspections shall be conducted for a
period of three years for a start-up unless a strong and verifiable complaint
is received and approved by a senior labour official. In the case of
environmental laws, a start-up which fall under the ‘white category’ (as
defined by the Central Pollution Control Board) can self-certify compliance and
only random checks shall be carried out in such cases.

Tax Exemption on
Capital Gains Tax
: Tax exemptions shall be given
to persons who have earned capital gains during the year, if they have invested
such capital gains in the Fund of Funds, i.e. it will not invest directly into
start-ups, recognized by the Government. In addition, existing capital gain tax
exemption for investments in newly formed manufacturing MSMEs by individuals
shall be extended to all start-ups.

Tax Exemptions to start-ups
for 3 years
: In order to facilitate the growth of start-ups and enable
them to meet their working capital requirements in the initial years, the
Government has decided to exempt start-ups from paying
income-tax
for a period of 3 years.

Tax Exemption on
Investments at above Fair Market Value
:
Currently, investments made by venture capital funds in start-ups are exempted
from income tax. The Action Plan states that the same shall be extended to
investments made by incubators in the start-ups.

Start-up Mobile App
and Portal
: The Government is launching a Start-up Mobile Application,
which shall be made available on 1 April 2016, enabling entrepreneurs to
register their start-ups on the Application through a single form, thereby
enabling them to circumvent lengthy regulatory processes.

Patent Protection:
In order to protect the Intellectual Property Rights (IPR(s)) of the start-ups, the Government aims to institute a panel
of facilitators who shall assist start-ups with the filing and protection of
patents, providing advice on different IPRs, etc.
Under
this scheme, the Central Government shall bear the entire fees of the
facilitators for any number of patents, trademarks or designs that a start-up
may file, and the start-ups shall bear the cost of only the statutory fees
payable. Start-ups shall also be provided an 80% rebate in filing of patents
vis-a-vis other companies.

Relaxation in public
procurement criteria
: A tender is
floated by a Government entity / PSU generally has eligibility condition
specifies either ‘prior experience’ or ‘prior turnover’. Such a stipulation
prohibits/ impedes Start-ups from participating in such tenders.

The Government shall exempt start-ups in the manufacturing
sector from the criteria of prior experience/ turnover without any relaxation
in quality standards or technical parameters. However, the start-ups will have
to demonstrate the requisite capability to execute the project as per the Government
requirements and should have their own manufacturing facility in India.

Ease of Exit: Insolvency
and Bankruptcy Bill, 2015 provides for certain start-ups to be wound up within
a period of 90 days from making of an application for winding up on a fast
track basis. This shall make it easier for failed start-ups to exit the market
and allocate capital to more productive avenues.

Start-up India Hub: The Government plans to institute a Start-up India Hub to help
start-ups to network with the Government organizations, venture capital’s, etc.,
to assist and advise start-ups and to conduct mentorship programmes. Thus,
Start-up India Hub will be a single all encompassing point of contact for
start-ups, providing handholding and assistance.

Funding Support of Rs 10,000
crores
: In order to provide funding support to start-ups,
the Government will set up a fund with an initial corpus of Rs 2,500 crores and
a total corpus of Rs 10,000 crore over a period 4 years, managed by select
professionals from the private sector . The fund will be in the nature of Fund
of Funds i.e. it will not invest directly into start-ups, but shall participate
in the capital of SEBI registered Venture Funds.

Credit Guarantee Fund
for Start-ups
: To encourage banks and other lenders
to provide Venture Debts to start-ups, a credit guarantee mechanism through
National Credit Guarantee Trust Company / Small Industries Development Bank of
India is being envisaged with a budgetary corpus of Rs 500 crore per year for
the next 4 years.

Start-up Fests:
The Government plans to hold both national and international start-up fests to
enable entrepreneurs to showcase their work and network with other stakeholders
from the start-up ecosystem.

Other Initiatives and
Promotion
: Besides the above benefits, the Government has also
announced other series of incentives which include (i) Atal Innovation Mission
for
Entrepreneurship promotion,
innovation promotion, etc.; (ii) Harnessing Private Sector Expertise for
Incubator Set-up; (iii) Setting up of Innovation Centres for promoting research
and development; (iv) Setting up of Research Parks with various IITs ; (v) Promotion
of Start-ups in the Biotechnology Sector; (vi) Innovation Focused Programmes
for students; (vii) Carrying out Annual Incubator Challenge for creation and
identifying of world class incubators in India; etc.

Comment: The Government’s
Start-up India Action Plan will certainly bolster innovation and encourage
young Indians to set up businesses. However, it will be interesting to see how
the language of the Action Plan gets translated into a government notification
and law. If the Government is able to successfully implement the Action Plan,
it will certainly bode well for economic growth and growing investor confidence
in India.
Bhushan Shah and Neha Laxman

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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