Recognition of Startups: New DIPP Notification

Published on 17 May 2018 by Shivi

A startup is defined as a new business engaged in developing a new or improved product, service, process or platform. The crux of a startup is based on a new or innovative idea that stands out in the market. In the past decade, India has seen substantial accretion in the number of startups in multiple genres. The ‘Startup India Initiative’ has made it easier for the young businesses to have an effortless entry in the Indian marketplace.

On April 17, 2015, a notification was released by the Ministry of Commerce and Industry which laid down the definition of ‘startups’. In a similar fashion, a new notification was released by DIPP on April 11, 2018, that amended the definition of ‘startups’. Under the new DIPP notification, an entity will be considered as a startup if it falls under the following criteria:

  1. If a business is registered as a Private Limited Company under the Companies Act, 2013, as a Partnership Firm under Section 59 of the Partnership Act, 1932 or as a Limited Liability Partnership under the Limited Liability Partnership Act, 2008 up to a period of 7 years.

  2. If a business is involved in the biotechnology sector, the period is increased to 10 years from the date of business registration.

  3. The annual turnover of the entity for any financial year since its registration has not exceeded Rs. 25 crores.

  4. The 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 for employment generation or wealth creation.

However, the following entities will not be considered as a ‘startup’ under the new notification by DIPP:

  1. An entity formed by splitting up or reconstruction of an existing business.

  2. An entity that has completed seven years from the date of its incorporation

  3. If the turnover of the startup for any previous year exceeds Rs. 25 crores.

  4. A startup involved in the biotechnology sector, shall cease to be a startup on completion of ten years from the date of its registration or if its turnover for any previous year exceeds Rs. 25 crores.

How to be Recognised as a Startup?

An entity can get recognised as a startup through the following process:

  1. An online application can be filed over the mobile app or portal of the Department of Industrial Policy and Promotion.

  2. You can apply for startup recognition by visiting the Startup India website.

  3. The application must be filed along with the following documents:

    1. Copy of Incorporation Certificate.

    2. Details about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.

The Department of Industrial Policy and Promotion will make appropriate inquiries and either recognise the entity as startup or reject the application by stating the reasons for the same.

Certification under Section 80-IAC

To get tax benefits, a startup registered as a Private Limited Company or a Limited Liability Partnership on or after the 1st day of April 2016 but before the 1st day of April 2021 may obtain a certificate from the Inter-Ministerial Board of certification. To obtain this certificate, an application has to be filed in Form-1.

Section 80-IAC provides for 100% tax exemption on profits earned from “eligible business” by “eligible startup”. This exemption is for 3 consecutive financial years out of 7 financial years starting from the year in which startup is incorporated either as a Company or as an LLP.

Approval Under Section 56 of the Income Tax Act

Section 56(2)(viib) of the Income Tax Act provides for the issuance of shares at a price more than the fair market value of the shares by the startup. The provision was included to put an end to the problems faced by startups when they sought funds based on their business potential justifying a share valuation much higher than the statutorily computed FMV.

A startup registered as a Private Limited Company will be eligible to apply for approval under Section 56(2)(viib) of the Income Tax Act if the following conditions are met:

  1. The aggregate amount of paid-up share capital and share premium of the startup after the proposed issue of shares is not more than Rs. 10 crores,

  2. 1he investor/proposed investor, who proposed to subscribe to the issue of shares of the startup has:

    1. The average returned the income of Rs. 25 lakhs or more for the preceding 3 financial years, or

    2. The net worth of Rs. 2 crores or more as on the last date of the preceding financial year.

  3. The startup has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11UA of the Income-tax Rules, 1962.

  4. The application for approval is made in Form-2.

With this new notification by DIPP, more startups would come under the ambit of Startup India Scheme and will be able to claim the startup benefits. The new notification is a welcome change that will definitely increase innovation and employment opportunities in the country.

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