Sunday, January 24, 2016

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

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