Background

The Government has launched the ‘Startup India’ initiative as a part of 19 point Action Plan through which the government aims to empower startups to grow through innovation and design. Amongst many incentives bestowed through this initiative, key ones include exemption from paying income tax on profit for three years, fast-tracking of patent applications, 80% exemption in patent fees, etc.

A notification was issued by DIPP on February 17, 2016 [F. No. 5(91)/2015-BE. I] defining the term ‘startup’ and prescribing the procedure for its recognition and obtaining tax benefits. This notification is summarized as follows.

Definition of an eligible ‘Startup’

An entity shall be considered as ‘startup’:

  • Upto 5 years from its date of incorporation / registration,
  • If its turnover has not exceeded Rs.25 Crores in any of the previous financial years, and
  • It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

Other criteria for a ‘startup’

  • Entity means a private limited company, or a registered partnership firm or a limited liability partnership. Such entity cannot be formed by splitting up or reconstruction of an existing business.
  • In order to obtain tax benefits an eligible startup shall be required to obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification consisting of:
    • Joint Secretary, Department of Industrial Policy and Promotion (DIPP),
    • Representative of Department of Science and Technology (DST), and
    • Representative of Department of Biotechnology (DBT).
  • An entity shall be considered to be working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property if it aims to develop and commercialize:
    • A new product or service or process, or
    • A significantly improved existing product or service or process, that will create or add value for customers or workflow.
  • Mere act of developing products or services or processes which do not have potential for commercialization, or undifferentiated products or services or processes, or products or services or processes with no or limited incremental value for customers or workflow will not be covered under the definition of a startup.

Procedure and recognition of your startup

The process of recognition as an ‘eligible startup’ shall be through mobile app/portal of DIPP. Startups will be required to submit a simple application with any of the following documents:

  • A recommendation (with regard to innovative nature of business), in a format specified by DIPP, from any Incubator established in a postgraduate college in India; or
  • A letter of support by any incubator which is funded (in relation to the project) from Government of India or any State Government as part of any specified scheme to promote innovation; or
  • A recommendation (with regard to innovative nature of business), in a format specified by DIPP, from any Incubator recognized by Government of India; or
  • A letter of funding of not less than 20 per cent in equity by any Incubation Fund/Angel Fund/Private Equity Fund/ Accelerator/Angel Network duly registered with SEBI that endorses innovative nature of the business; or
  • A letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation; or
  • A patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of business being promoted.

Until such mobile app/portal is launched, DIPP make alternative arrangement of recognizing a ‘startup’. Once such application with relevant document is uploaded a real-time recognition number will be issued to the startup.

On subsequent verification, such recognition is found to be obtained without uploading the document or uploading any other document or a forged document, the concerned applicant shall be liable to a fine which shall be fifty per cent of paid up capital of the startup but shall not be less than Rupees 25,000.

The notification comes into force from February 18, 2016 i.e. the date of its publication in the Official Gazette.