Start-Up Registration and Tax Implication

According to the Notification G.S.R. 127(E) dated 19th February 2019 issued by Department of Industrial Policy and Promotion (DIPP) of Ministry of Commerce and Industry, entity can be termed as “startup entity” and can enjoy number of incentives and assistance, extended by the Government if the following conditions are satisfied: 

The entity shall be incorporated or registered in India:

• As a private limited company or registered as a partnership firm or a limited liability partnership;
• Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.; and
• Shall not be formed by splitting up or reconstruction of an existing And entity shall cease to be a startup:
• On completion of ten years from the date of incorporation/registration for startup;
• Turnover of the entity for any of the financial years since incorporation/ registration exceeds one hundred crore 

An entity fulfilling all the above conditions, need to apply to DIPP(The Department of Industrial Policy & Promotion) to be recognized as “startup” entity and avail all the benefits provided by the government of India. 

However, further the Notification while giving tax benefit, clarified as under: “Provided that the mere act of developing:

• products or services or processes which do not have potential for commercialization, or
• undifferentiated products or services or processes, or
• products or services or processes with no or limited incremental value for customers or workflow would not make a Startup eligible for tax benefits.” 

In view of the above Notification, prima facie, it is clear that mere development of product, process or service which lacks commercialization or which is not identifiable or which does not make value addition as such will not make business as eligible start-up.

Innovataion

As per the general meaning, innovation means the action or process of innovating.

The meaning of “innovation” as defined or explained in various dictionaries are as under: 

• It is a process of translating of an idea or invention into goods or services which creates value addition. [http://www.businessdictionary.com/definition/information.html]
• It is new idea, method, device or introduction of something new [https://www.merriam- com/dictionary/innovation]
• It is a new thing or a new method of doing Innovation is the introduction of new ideas, methods, or things https://www.collinsdictionary.com/dictionary/english/ innovation]/

  [http://www.dictionary.com/browse/innovation]

• “The process by which entrepreneurs put the new ideas into commercial use” [Taxmann’s Dictionary for Chartered Accountants/Company Secretaries/Cost Accountants/Corporate Professionals by Dhruba Dutta Chowdhury, Page 816]

Development

As per the general meaning ‘development’ means a process of developing or being developed or some time an event constituting a new stage in a changing situation.

 The meaning of “development” as defined or explained in various dictionaries are as under: 

• “The process in which someone or something grows or changes and becomes more advanced” https://dictionary.cambridge.org/dictionary/english/development
• “The act, process, or result of developing the development of new ideas” https://www.merriam- webster.com/dictionary/development
• Development is the gradual growth of something (like business or industry) or formation of It is process of making basic things gradually better and more advanced. [https://www.collinsdictionary. com/dictionary/english/development]
• CIT Radhe Developers [2012] 17 taxmann.com 156/204 Taxman 543 (Guj.)

Improvement

The meaning of “improvement” as defined or explained in various dictionaries are as under:

The meaning of “development” as defined or explained in various dictionaries are as under:

• “An occasion when something gets better or when you make it better: [https://dictionary.cambridge.org/dictionary/english/improvement ]
• https://www.merriam-webster.com/dictionary/improving
  • 1: the act or process of improving
  • 2a : the state of being improved; especially : enhanced value or excellence
  • 2b : an instance of such improvement : something that enhances value or excellence”

• https://www.macmillandictionary.com/dictionary/british/improvement
  • the state of being better than before, or the process of making something better than it was before
  • a change that you make to something in order to make it better”
• Nagarjuna Cotton Pressing Factory State of Andhra Pradesh [1999] 115 STC 600 (AP)
  • “’Improvement’ as per the Oxford dictionary, means “something that improves, especially an addition or alteration that adds to value”… Admittedly the activity of pressing cotton lint and converting the same into bales by using hessian cloths and iron hoops could not be considered as falling under the terms “improvement or repair” as there is no improvement or repair to the cotton supplied by the customers to the dealers for pressing the same and converting into “
  • 4-1b A scalable business model with a high potential of employment generation or wealth creation – The above business activity is now included in the definition of the eligible start-up.

Press Information Bureau (PIB) on 25-5-2017 had informed the change in definition of start-up, inter alia as under:

 “Startup India was launched by the Government of India on 16th January, 2016 to build a strong eco- system for nurturing innovation and Startups in the country to drive economic growth and generate large scale employment opportunities.

 In order to promote entrepreneurship in the country, the Government of India has amended the definition of a Startup. The following significant changes have been made to the definition of Startups

  (a) & (b) …….

• (c) Potential of Job and Wealth Creation: The scope of definition has been broadened to include scalability of business model with potential of employment generation or wealth ” (Emphasis supplied)
• However, what is scalable business model is not defined or

The process of recognition of an eligible entity as startup shall be as under: — 

• A Startup shall make an online application over the mobile app or portal set up by the
• The application shall be accompanied by—
  • a copy of Certificate of Incorporation or Registration, as the case may be, and
  • a write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth
• The DPIIT may, after calling for such documents or information and making such enquires, as it may deem fit, —
  • recognise the eligible entity as Startup; or
  • reject the application by providing reasons.
• Startup shall be allowed to self-certify compliance with labour laws (including laws pertaining to Gratuity, PF and ESI) and environment In case of labour laws no inspection for 5 years except in case of receipt of verifiable and credible complaint.
• Fast track processing of application and rebate in filing patents: IPR protection and its registration are crucial for startup but generally the process of getting IPR registered is a long drawn and expensive affair. Government is extending support to startup for IPR filing
  • Provision of panel of facilitator to assist the startup for filing to till disposal of IPR applications, at the cost of
  • Rebate @ 80% of the statutory fee for patent filing.
• Easy access to funds: A 10,000 crore rupees fund is set-up by government to provide funds to the startup as venture capital. The government is also giving guarantee to the lenders to encourage banks and other financial institutions for providing venture capital and has set-up a fund of 2,000 crores.
• Public procurement: Critical criteria of prior experience and turnover are being relaxed for Startup can apply for government tenders and they are exempted from the “prior experience/turnover” criteria applicable for normal companies answering to government tenders.
• Easy exit: A startup can close its business within 90 days under Insolvency & Bankruptcy Code
• Tax benefits for investors investing in venture fund – “Funds of Fund”: People investing their capital gains in the venture funds set up by the Government will get exemption from capital gains.
  • Tax Exemptions for Startup having certification from Inter-Ministerial Board (IMB):
    • A 100% deduction of the profits & gains from the income of startup for three consecutive years out of first seven years starting from year of its (section 80 IAC of the Income Tax Act. An application made to Board in Form 1 for obtaining certificate to avail deduction, This form will contain name of the startup , date of importantance ,address, PAN etc.This form will be accompanied by Assessee accounts and Income Tax Deductor of the startup for last 3 financial year.
    • Section 56 of the Income Tax Act, Exemption from levy of Income Tax on share premium received by eligible startup (section 56(2)(viib) of the Income Tax
    • Tax on long term capital gain arising on transfer of residential properties/plot, can be saved by investing in newly incorporated and

• Assistance in getting the statutory registration and approved as a startup
• Accounting, Taxation, and other financial matters including Income tax and GST
• Assist you in any kind of transaction whether related in merger & acquisitions, share sale or purchase and out tax planning
• Can provide assistance in Legal matters at any