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Stepping Stones for Start-ups in India

April 26, 2022

By Rupin Chopra and Apalka Bareja

What is a start-up?

The Department for Promotion of Industry and Internal Trade (DPIIT) vide its notification no. G.S.R. 127(E)[1], renders the definition for a “start-up” in India as under:

An entity shall be considered as a Startup:

  1. Upto a period of ten years from the date of incorporation/ registration, if it is incorporated as a private limited company or registered as a partnership firm or a limited liability partnership LLP in India.
  2. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded INR 100 Crores;
  • Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

That an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.

Learn more about Start-ups here.

For successful operation and running of a start-up, there are certain intrinsic factors that a start-up should adhere to such as the business structure, employees management, legal compliances. Some intrinsic points have been discussed as under:

Registration of Start-ups in India

One of the first and most important step for an entity that satisfies the aforesaid parameters listed for eligibility should be registering the start-up.

Why should a Start-up be registered?

  1. Tax Incentives: Eligible start ups can be exempted from paying income tax for three consecutive financial years out of their first ten years since incorporation. For a start up to be eligible for this, the following criteria needs to be met:
  2. The entity should be a DPIIT recognized start up;
  3. Only Private Limited Companies or Limited Liability Partnerships are eligible for tax exemption under Section 80IAC;
  4. The start up should have been incorporated after 1st April, 2016.

Eligible start ups will be allowed a 100% tax rebate on profit, provided their annual turnover doesn’t exceed 25 crores. This is integral for start ups to meet their working capital needs.

  1. Long Term capital gains exempted: Exemption can be availed if such capital gains are invested in such funds as notified by the Government of India. By virtue of the newly added Section 54 EE in the Income Tax Act, eligible start ups can exempt their tax on long-term capital gains if such long-term capital gains or a part of it is invested in a fund notified by the central government within a period of six months from the date of transfer of the asset. The maximum amount that can be invested is that of RS. 50 Lakh, and this benefit can be availed only if the amount remains invested in the fund for a minimum period of three years.
  2. Tax exempted on investments made above fair market value: The government has exempted the tax being levied on investments above the fair market value in eligible start ups. Such investments include investments made by resident angel investors, family or funds which are not registered as venture capital funds. Also, the investments made by incubators above fair market value is exempt.
  3. Rebate in IPR filings: Entitled to reduced Trademark and Patent filing fees in India. According to the Trademark Rules 2017, a new fee structure has been adopted for start ups, keeping in mind that they cannot afford the same fees as that of other applied the fee structure for a start up is half than that of other applicants. According to the Patent Rules Amendment of 2019, a new fee structure is given for start ups, and this classification is done on the basis of the nature of the applicant. It thoughtfully keeps in mind that start ups cannot afford high fees for filing. Therefore, fee for start up is half than that of other applicants.
  4. Easy winding up of Company: The Company can be wound up, if need be, under 90 days, under the Insolvency and Bankruptcy laws. According to the Insolvency and Bankruptcy Board of India (Fast Track Resolution Process for Corporate Persons) Regulations, 2017, has provided for the fast-track resolution of insolvency. The time given for the completion of the fast-track resolution is 90 days, as opposed 180 days in the usual Corporate Insolvency Resolution Process. A start-up as defined in the Government of India notification issues by the Ministry of Commerce and Industry is one of the eligible corporate debtors. To avail the fast-track insolvency resolution process. The process of recognition as a “Start-up” shall be through an online application made over the mobile app/ portal set by the Department of Industrial policy and Promotion. A start up shall to submit the online application and the Certificate of Incorporation/Registration along with other relevant details Start-ups also have to submit a write-up about nature of business in order to show that it is working towards innovation, development or improvement of products or process or services or its scalability in terms of employment generation or wealth creation. This is essential to ensure that the practises of the start up are in line with the initiatives of the government to boost their Start Up India initiative.
  5. Labour Law and environment law compliances: Allowed to self-certify compliance for 6 labour laws and 3 environmental laws, namely:
  6. Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996.
  7. The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979.
  8. The Contract Labour (Regulation and Abolition) Act, 1970
  9. The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
  10. The Employees’ State Insurance Act, 1948
  11. Industrial Employment (Standing Orders) Act, 1946
  12. Trade Unions Act, 1926
  13. Industrial Disputes Act, 1947

This self-certification is permitted so that start ups can familiarize themselves with new labour and environment laws and with the implementing authorities. The validity of this leeway given is for a period of three years. In these three years, there will be no inspection under labour laws for start-ups, as it is for other entities. However, even start up can be subject to inspection but only on receiving a written complaint of violations.

Start-Ups should obtain appropriate business licenses

The law and regulations in India, mandate obtaining of permissions, licenses and compliances of regulations under various laws for setting up and carrying on of businesses. For instance, to commence a restaurant, FBOs (Food Business Operations), manufacture and sell food related items, an entity has to obtain Food FSSAI license. Similarly, mandatory licenses and declarations are also to be made under the Legal Metrology Act and Packaging Rules.

To read more about Food laws and Legal metrology read here and here.

Intellectual Property Filings by Start-ups

As mentioned above, the Intellectual Property Act and Rules in India entail rebated IPR filings for start-ups in India. Additionally, the Government also has the provision of IPR facilitators, who are empanelled by the Government and assist start-ups in successful prosecution and registration of IPR.

It is crucial that any entity including start-ups adequately protect their innovations, inventions, brand name under the appropriate IP laws. On registration, the owner of IPR has the right to stop the misuse of his IPR by any third party and also enforce his rights in a Court of law in India.

In the recent past, owing to increased IPR awareness and increase in IP-intensive industries, a lot of IPR filings have been done by start-ups and MSME’s in India.

Comply with the Labour Laws

Any entity including Start-ups shall necessarily comply with the various labour laws prevailing in India.

To know more about labour laws in India, read here.

There are various labour laws enacted in India and to make the process more efficient for start-ups registered under the Start-up India initiative, a start-up can file a self- certification under 9 labour laws (discussed above).

Conclusion

The paper enumerates various essential factors which a start-up shall be aware about and also adhere to for  increasing the chances of effective growth for a start-up in a substantial way.

[1] https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/198117.pdf

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