Government Incentives for Startups

Government Incentives for Startups

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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, a 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 till date had to comply with various central and state laws pertaining to labor and 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 labor 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 percent rebate in patent registration fees compared to other companies to protect intellectual property. Startups are high risk ventures and about 90 percent of startups fail currently. Incase, a startup fails, a faster exit arrangement is also being worked out incase 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 have been provided as part of the action plan. According to Budget 2016, it has been proposed to insert a new Section 54EE to provide 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funds subject to the condition that the amount remains invested for three years failing which the exemption shall be withdrawn. The investment in the units of the specified fund shall be allowed up to Rs. 50 lakh. It is also proposed to amend section 54GB so as to provide relief to an individual willing to setup a company by selling a residential property to invest the shares of such company.  The amended section would provide that long term capital gains arising on account of transfer of a residential property shall not be charged to tax if such capital gains are invested 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 provided provisions that are in sync with the current trend of startups wherein technology is primarily used and computer software and hardware for the core asset base owing to the nature of the business activity, section 54GB is proposed to be amended so that 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. Investments by incubators above the fair market value would be exempted in line with the current exemption available to venture capital funds to invest in startups above the FMV. Funding support upto Rs. 10 crore would be provided to set up new incubators while individual states and the private sector would provide 40 percent and 20 percent respectively.

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