Likewise, the Startup Action Plan (SAP) of 2016 was introduced by the Prime Minister to focus mainly on three key issues:
- Hand holding and simplification
- Funding support and incentives
- Incubation and industry-academia partnership
Several further initiatives have been taken to address these issues. However, there is still required some consideration from the policy and regulatory perspective for a successful startup revolution in India.
The GOI has been continuously evolving the definition of an “Eligible Startup”, i.e., a Startup that is entitled to have the privileges of regulatory and tax incentives provided by the Government. Currently, in India an entity is considered as a “Startup” only if it fulfills the following conditions:
- Up to a period of ten years from the date of incorporation/ registration, it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
- Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded Rs 100 crores.
- The entity is working towards innovation, development, or improvement of products or processes or services, or is a scalable business model with a high potential of employment generation or wealth creation.
It is worth mentioning that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
According to recent reforms by GoI, under the Startup India initiative, an eligible company (Startup) can get itself recognized by applying before the Department for Promotion of Industry and Internal Trade (DPIIT), to access a host of tax benefits, easier compliances, IPR fast-tracking, etc.
The World Bank’s Ease of Doing Business Project is the key driver of regulatory reforms in the Indian entrepreneurial ecosystem. It ranks 190 economies on ten parameters from cradle to grave of a business cycle on a set methodology which indicates how easy it is to do business in the country.
These parameters are
- Starting a business
- Registering property
- Dealing with construction permits
- Getting electricity
- Getting credit
- Paying taxes
- Trading across borders
- Protecting minority investors
- Enforcing contracts
- Resolving insolvency
To translate the vision of GoI on entrepreneurship into reality, the next generation of reforms needs to be focused on reducing the compliance burden for entrepreneurs and ensuring the availability of funding (foreign and domestic) for them. Many compliance requirements have become irrelevant and unnecessary with changing times and technological development. In line with the same, a time-bound systematic exercise across Ministries and States needs to be coordinated by DPIIT.
This exercise must be directed at simplification and rationalization of compliances, decriminalization of minor civil offenses, and removal of redundant laws to ensure breathing space for startups to set their foot in the market and compete with market giants. The endeavor should be that the entrepreneur’s interface ecosystem should be a pleasant experience. Together with the political and administrative will, and an endeavor to move closer to international best practices, the GOI shall take dedicated steps in translating its goals and objectives for ease of doing business for entrepreneurs.
In this fast-paced, innovative, and robust business ecosystem, India is required to enhance its digital infrastructure to further strengthen its start-up ecosystem. Further, it is also essential that the entrepreneurs must focus on finding innovative solutions that are adaptable across the world, instead of focusing on local markets alone.
In order to prompt and encourage more scalable startups in India, GoI should come up with integrated programs to recognize and reward outstanding startups that are contributing to economic dynamism by spurring innovation and injecting competition by building innovative products/solutions, scalable enterprises, with high potential of employment generation or wealth creation, demonstrating measurable social impact.
Challenges being faced by Entrepreneurs
Decrement in penalties; relaxation of timelines and fewer compliance under Companies Act, 2013
In order to encourage more entrepreneurship and stimulate their functioning, GoI should ensure further relaxation(s) in compliances under the Companies Act, 2013 more focused on boosting and easing the functioning of startups. There should be a decrease in penalties and fees for non-compliance to avoid unnecessary hassles and deterrents for young companies. Also, entrepreneurs should be provided with lenient timelines to enable them to focus on their core activities rather than being burdened by statutory abidance.
Fewer regulations in other laws to ensure ease of doing business
Starting a business requires a number of permissions from government agencies. Although there is a perceptible change, it is still a challenge to register a company for gaining recognition as a Startup to claim a host of benefits provided by the Government. Regulations pertaining to labor laws, intellectual property rights, dispute resolution, etc. are rigorous in India. Hence, there need to be fewer and easy regulations that genuinely ensure ease of doing businesses for young companies.
Specific and strict timeliness in case of fast-track examination of a patent application
Rule 24C of The Patent Rules, 2003, provides a time frame for expedite examination and registration of patent application. However, there needs to be a specific timeline within which the Controller must clear the objection and pass the Order, either rejecting or accepting the application. Further, there needs to be strict adherence to timelines by the Controller.
Relaxation in FDI norms to increase funding by international investor
Though the foreign investment coming in from foreign investors has gone up in recent times, further liberalization under FDI norms and regulations will further meet the rising needs of entrepreneurs and help them in setting and running their business more smoothly and successfully. In January 2019, the Reserve Bank of India (RBI) issued External Commercial Borrowings (ECB) Policy – New ECB Framework. Under this Framework, every Start-up which is eligible to receive FDI can avail ECB irrespective of the fact that it is registered and recognized or not. This is a great initiative by the RBI with the aim to attract foreign funds from startups which can be used to leverage their financial health and growth. As per this new ECB Framework, the AD Category-I banks are permitted to allow Startups to raise ECB under automatic route up to $3 million or equivalent per financial year either in rupees or any convertible foreign currency or a combination of both for a minimum average maturity period of three years. It is required that there should be proper awareness and accessibility of the said policy to ensure more availability of foreign funds by the startups.
Extension of tax holidays and relaxation in Investments under Income Tax Act, 1961
The existing tax holding period of 3 consecutive years out of 10 years u/s 80IAC of Income Tax Act, 1961 needs to be extended. Further, the Income Tax Act provides that startups incorporated between April 1 2016 to 31 March 2022 are eligible for tax holidays exemption. It would be important that the GoI further extends this incentive/exemption to the coming years.
In addition to the above, there is a need to relax the minimum shareholding limit of 25% u/s 54GB of Income Tax Act, 1961. Asking for an investment of more than 25% in start-ups may demotivate individuals or HUF for investment. It takes a lot of effort for entrepreneurs to gain the confidence of individuals (especially a common man) for them to invest their hard-earned money into startups. Also, more tax benefits should be provided to startups to boost their operations and meet their working capital requirements.
Under the Start India Initiative, eligible companies can get themselves registered under DPIIT to get access to benefits such as tax benefits; easier compliance; IPR fast-tracking; self-certification, etc.
According to the website of GoI “startupindia.gov.in”, there are in total only 61,138 start-ups that are registered and recognized by DPIIT. Accordingly, even today majority of companies/startups are deprived of a host of benefits due to their lack of awareness and non-registration on DPIIT portal. Thus, it is necessary that GoI should take appropriate measures to ensure proper training and learning platforms for start-ups and encourage them to get registered and avail benefits to scale their business.
The entrepreneurial ecosystem in India is in progression mode. Consequently, further moderation, ease of compliance, easier fund accessibility (from foreign and domestic sources), recognition, and rewarding programs are required from GoI to ensure a superior startup ecosystem to help India reach its long-term goals. The RBI Committee on MSMEs deliberated on all the aspects relating to startups in India and found that, “The major reason for the migration of startups to other countries is because of the better enabling environment such as tax concessions, well-developed infrastructure, ease of doing business, exit policy, etc. Hence, financial incentives and excellent infrastructure facilities must be deployed to retain successful Indian startups and to lure the best talent across the world to start businesses in India.”
(Jatin Kapoor, Senior Associate – Corporate and Smriti Sahay Shukla, Associate – Direct Tax at S&A Law Offices)