Government Incentives for Startups

Prime Minister Narendra Modi unveiled a slew of incentives to boost startups in January as part of the Startup India Initiative. A corpus of Rs. 10,000 Crore corpus for innovation-driven enterprises, an Rs. 500 crore per year credit guarantee mechanism and 3-year break from paying income tax on profits were introduced. Capital gains tax exemption for start-ups was also introduced along with a range of incentives which are enumerated below.

Action Plan for Startups

An action plan to help entrepreneurs so that they play a transformative role in India's development was unveiled. Businesses to date had to comply with various central and state laws pertaining to labour and the environment. Non-compliance with these laws would result in severe penalties and fines. In order to do away with these complex procedures, startups would now be able to self-certify their compliance requirements with nine labour and environmental laws without being inspected periodically as is the norm currently and receive faster approvals. Compliance would be checked only if there is a written complaint against the startup. Startups will obtain an 80 per cent rebate in patent registration fees compared to other companies to protect intellectual property. Startups are high-risk ventures and about 90 per cent of startups fail currently. In case, a startup fails, working off a faster exit arrangement is also take place in case an entrepreneur wants to close his business. A business would be able to wind up within 3 months and for this purpose, suitable provisions will be made in the Bankruptcy and Insolvency Bill in the parliament.

Tax Exemption

'Entrepreneur-friendly taxation regime' would be introduced for startups to ease the tax burden on them. Tax exemption under three different schemes has provided as part of the action plan. According to Budget 2016, it has been proposed to insert a new Section 54EE to provide an exemption from capital gains tax if the long term capital gains proceeds are invested by an assessee in units of specified funds subject to the condition that the amount remains invested for three years failing which the exemption shall be withdrawn. It permits the limit of investment in the units of the fund is up to Rs. 50 lakhs. It also proposes to amend section 54GB so as to provide relief to an individual willing to set up a company by selling a residential property to invest the shares of such company. The section would provide that long term capital gains arising on account of transfer of a residential property is tax-free if the investments of such capital gains in subscription of shares of a company which qualifies to be an eligible start-up. A startup would be eligible to obtain these exemptions only after obtaining certification from the Inter-Ministerial Board, which has been instituted for this purpose. This board would assess the innovative nature of the business to grant the exemptions. A detailed note on the eligibility criteria for startups. In order to provisions that are in sync with the current trend of startups wherein the usage of technology is primarily with computer software and hardware for the core asset base owing to the nature of the business activity, on amending section 54GB in which the expression "new asset" includes computers or computer software in case of technology-driven start-ups so certified by the Inter-Ministerial Board of Certification.

Other Incentives

Other incentives include a new scheme for intellectual property rights protection and faster registration of patents. The government also intends to set up facilitation centres for the provision of free legal advice and other support to small business to help them with compliance requirements. Procurement norms are also proposed to be relaxed in order to ensure that startups are able to participate and compete with established businesses. Policies to enable women entrepreneurs, sector-specific incubators and the establishment of bio clusters for the biotech sector are some of the other highlights. Incubators investments that are above the fair market value are exempt in line with the current exemption available to venture capital funds to invest in startups above the FMV. Funding support upto Rs. 10 crores to set up new incubators while individual states and the private sector would provide 40 per cent and 20 per cent respectively.

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Frequently Asked Questions

Common questions about Government Incentives for Startups in India.

The Startup India Initiative is a government program launched by Prime Minister Narendra Modi in January to provide a range of incentives and support measures to boost entrepreneurship and startups in India. It aims to create a conducive ecosystem for startups to thrive and play a transformative role in the country's development.

Some key incentives include a Rs. 10,000 crore fund for innovation-driven enterprises, an Rs. 500 crore per year credit guarantee mechanism, a 3-year tax holiday on profits, capital gains tax exemption, 80% rebate on patent filing fees, and self-certification for compliance with labor and environmental laws.

Startups can now self-certify their compliance with nine labor and environmental laws, without being inspected periodically. Compliance will be checked only if there is a written complaint against the startup. This simplifies complex procedures and reduces the burden on startups.

Startups can avail tax exemption on capital gains if the proceeds are invested in specified funds or in shares of an eligible startup company. Additionally, they are eligible for a 3-year income tax holiday on profits, subject to certification from the Inter-Ministerial Board.

The amendment to Section 54GB of the Income Tax Act allows the expression 'new asset' to include computers or computer software for technology-driven startups. This aligns with the asset base of modern startups and provides them with tax benefits.

The initiative also includes a scheme for intellectual property rights protection, faster patent registration, facilitation centers for legal advice and compliance support, relaxed procurement norms, policies for women entrepreneurs, sector-specific incubators, and the establishment of bio clusters.

The government plans to provide funding support of up to Rs. 10 crores to set up new incubators. Additionally, investments made by incubators in startups above the fair market value will be exempt from taxes, similar to the exemption available to venture capital funds.

The Inter-Ministerial Board is responsible for assessing the innovative nature of startups and granting them certification, which is a prerequisite for availing various tax exemptions and benefits under the initiative.

The initiative aims to provide a faster exit arrangement for startups that fail, allowing them to wind up their business within 3 months. Suitable provisions for this will be made in the Bankruptcy and Insolvency Bill.

The Startup India Initiative aims to create a robust startup ecosystem in the country, fostering innovation, job creation, and economic growth. By providing incentives and a supportive environment, the government hopes that startups will play a transformative role in India's development.