Startup India has been a very motivating event that has brought to the fore the power of India’s startup ecosystem. This initiative will help startups get a foothold in India. It will bring the aspiring entrepreneurs and investors on a common platform.

It is extremely heartening to note that the government has finally realised that start-ups can add tremendous value to our nation. This value-addition can be in the form of contribution to the GDP, providing direct and indirect employment, solving everyday problems cost-effectively and innovatively, and attracting global interest and finances.

 

Almost four start-ups are born every day, and now we expect this number to grow even higher with the latest policy intervention. Stories of professionals leaving well-paid jobs and starting-up have become so common that it does not raise eyebrows any more.

 

Though numerous startups have emerged in recent times, however, such event initiated by PM Modi has given a high recognition and status to ‘Startups’. Now, startups are very much accepted and appreciated by family and friends who did not have much idea about the concept.

 

PM Modi has announced an all-inclusive action plan to boost such ventures that would boost employment generation and wealth creation. But the question arises is if someone starts a business with a general model then is it not generating employment or does not contribute to GDP of the Country? All is not well with Modi’s Startup Plan.

 

With all appreciation to the Action Plan initiated by PM Modi, we just want to bring the attention to few flaws in the plan which needs attention before the budget.

 

In the Action Plan, definition of STARTUP has been defined as “Startup means an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding INR 25 crore in any preceding financial year, working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.”

 

• The limit of turnover has been fixed at a minimum limit of INR 25 crore which is too high from the perspective of a startup. The limit should be lowered to 3-4 crore. With the high limit, there will be scope for exploitation of loopholes.
• Startup, here has been recognised as who works with innovative idea driven by technology. Does Government here, means to say the one who does not use internet or other advance technology is not a startup or the one who incorporate with “not-so innovative idea” is not a startup? Why an entity with a general model contributing to GDP is not recognised as a “Startup”?

 

The Startup has to obtain certificate from the Inter-Ministerial Board, setup by DIPP to validate the innovative nature of the business.

• With the ‘startup certificate’, why discrimination is done among the startups? All those who are generating employment or contributing to GDP must be certified with “Startup” irrespective of business model and technology used.
• Also, while commuting this law can Government commit the corruption-free department? There is no assurance in regards to the red tape practice.

 

The tax exemption for 3 years subject to non-distribution of dividend by the Startup.

• Lack of clarity- exemption is available for 3 years starting from year of incorporation or from year when startup starts earning profit.
• In addition, PM Modi said this tax exemption shall be available to startups incorporating after 1^st April, 2016. With this news, all the startups that incorporated in last 6-9 months got disappointed. We expect that Government in the upcoming budget will include all startups in FY 15-16.
• This provision would also restrict companies to withdraw profits in the form of dividend. But we guess that Government has forgone that Action Plan include Partnership Firms and LLPs. As per the proposed provision, Partnership Firms and LLP can withdraw any amount from their business.

 

Compliance regime based on self-certification

• Appreciable move however, startups need to note that relaxation is available just in regard to entry of labour law inspectors into the premises for 3 years and not in regards to payments.
• Also, what will happen after 3 years? You might be prosecuted for those 3 years in which you were under the relaxation umbrella. So, do not build an illusion for 3 years.

 

Providing Funding Support

Government should focus on compliance-free zone and leaving the investment ground for angel investors, venture capitalists, and private equity funds who are the players of the game. Also, to encourage ‘less government, more governance’, government should interfere less in the normal course of the startups.

 

Tax Exemption on Capital Gains

The Action Plan provides exemption to persons who have capital gains during the year, if they have invested such capital gains in the Fund of Funds recognized by the Government. But what will be the tax liability at this stage? Again there is lack of clarity in the plans which need to be addressed properly before the upcoming budget.

 

Tax Exemption on Investments above Fair Market Value

As for now, for the startup, the difference in the fair market value arrived at by a chartered account and the value at which shares are allotted to an investor is treated as ‘income from other sources’. However, investments by SEBI-registered venture capitalists are exempted. In the initiative taken, Government intends to exempt the investments by incubators.

 

However, most early-stage startups raise money from angels and HNIs. To deal with the present scenario, the startups arrive at such fair market value that could be the minimum value at which shares should be allotted. By doing so, they try to bring the value as close as possible to the value at which shares are allotted, so that the differential is as minimal as possible. With this practice, startups make an opportunity to avoid the tax.

 

Thus, to avoid these practices, it is suggested that instead of giving exemption to a particular investor, the provision shall be extended to all the investors.

 

Overall Action Plan of Modi does not seem to be a flawless plan. Though this is just the proposed form, we expect a proper final version in the upcoming budget in which Finance Minister keep a look over all the pons and cons even from the startup side. Also, not to avoid the startups which are not using the updated technology as they are also a “STARTUP”.

Get started as a Startup now.

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