On April 17, 2015, the Ministry of Commerce and Industry released a notification to define ‘startups’. There were many points that were consistent from the speech given by Prime Minister Narendra Modi during the unveiling of the ‘Startup India, Standup India’ policy. According to the government notification, an entity will be identified as a startup.
- Till up to five years from the date of incorporation.
- If its turnover does not exceed 25 crores in the last five financial years.
- It is working towards innovation, development, deployment, and commercialisation of new products, processes, or services driven by technology or intellectual property.
If you are planning to structure a part of your business into a separate entity, it won't be called a startup as it already forms a part of a registered entity.
In order to obtain tax benefits, one has to obtain a certificate from the Inter-Ministerial Board of certification. The board consists of the following:
- Joint Secretary, Department of Industrial Policy and Promotion.
- Representative of Department of Science and Technology.
- Representative of Department of Biotechnology.
The notification describes the word entity as a private limited company, or a registered partnership, or a limited liability partnership firm. However, there is no mention of sole proprietorship or a one person company to be qualified as a startup.
Another observation leads to the fact that an entity shall be considered a startup only if it aims to develop and commercialise – a new product or a service or a process or significantly improves on a product or service or process which will add significant value for customers or workflow.
This also leads to the fact that there is no chance for me-too products. If you are creating another e-commerce firm, you are not liable to get the tax benefits as you will not be defined as a startup unless there is some innovation in your product or process or services.
That being said, the process of registering yourself as a startup is quite simple as one needs to register through a mobile app (which is not yet launched) or the portal of DIPP (Department of Industrial Policy and Promotion). The startups will have to submit an application along with ‘any’ of the following documents.
- A recommendation in a format specified by DIPP from an incubator established in a post-graduate college in the country.
- A letter of support from any central or state government funded incubator to promote innovation.
- A recommendation in a format specified by DIPP (with regard to innovative nature of business) from any incubator recognised by the Central Government.
- A letter of funding of not less than 20 per cent in equity by any incubation or angel fund/PE fund/accelerator or angel network duly registered with Securities and Exchange Board of India that endorses its innovative nature of business.
- A letter of funding by the Central or State government as part of any scheme to promote innovation.
- 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 app or portal is launched, DIPP will make alternative arrangements to recognise a startup. Once the application is uploaded, a recognition number will be issued to the startup in real time. If the number is found to be obtained without uploading the documents, or uploading the forged documents, a fine on the applicant will be levied, which shall be 50 per cent of the paid-up capital of the startup and not less than Rs 25,000.
The word innovation has been mentioned quite frequently and has come up many times in the notification. However, the definition of the word startup has been loosely coined and thus reflecting ambiguity on the same scale. The involvement from government and the fact that the incubators should be funded or recognised by the governments creates a huge scope for corruption.
You can access the government notification here.