START UP INDIA: A DETAILED INSIGHT

“I see startups, technology and innovation as exciting and effective instruments for India’s transformation.”

                                                                                       – Prime Minister ,Narendra Modi

What is it?

• Startup India is a flagship initiative of the Government of India, intended to build a strong eco-system for nurturing innovation and Startups in the country that will drive sustainable economic growth and generate large scale employment opportunities.

Aim:

• The Government through this initiative aims to empower Startups to grow through innovation and design.

Coverage:

• From digital/ technology sector to a wide array of sectors including agriculture,  manufacturing, social sector, healthcare, education, etc

• From existing tier 1 cities to tier 2 and tier 3 cities including semi-urban and rural areas.

Action Plan:

• Self certification and procedural simplification
  • The start-ups will adopt self-certification to reduce the regulatory liabilities.
  • The self-certification will apply to laws including payment of gratuity, labour contract, provident fund management, water and air pollution acts.
  • In case of the labour laws, no inspections will be conducted for a period of 3 years.
  • Startups may be inspected on receipt of credible and verifiable complaint of
  • violation, filed in writing and approved by at least one level senior to the inspecting officer.
  • In case of environment laws, Startups which fall under the ‘white category’ (as defined by the Central Pollution Control Board (CPCB)) would be able to self-certify compliance and only random checks would be carried out in such cases.

• Start-up India hub
• An all-India hub will be created as a single contact point for start-up foundations in India, which will help the entrepreneurs to exchange knowledge and access financial aid.
• The “Startup India Hub” will be a key stakeholder in this vibrant ecosystem and will:
  • Work in a hub and spoke model and collaborate with Central & State governments, Indian and foreign VCs, angel networks, banks, incubators, legal partners, consultants, universities and R&D institutions
  • Assist Startups through their lifecycle with specific focus on important aspects like obtaining financing, feasibility testing, business structuring advisory, enhancement of marketing skills etc
  • Organize mentorship programs in collaboration with government organizations, incubation centers, educational institutions and private organizations who aspire to foster innovation.

• Mobile App
  • The app is scheduled to be launched on April 1.
  • It is an online portal, which will serve as the single enabling platform for Startups for interacting with Government and regulatory institutions for all business needs and information exchange among various stakeholders like venture capitalists, incubators and so on
  • Towards these efforts, the Government shall introduce a Mobile App to provide on-the-go accessibility for purposes like registartion, tracking status of registration, application for schemes , filing for compliances and so on

• Patent protection
• A fast-track system for patent examination at lower costs is being conceptualised by the central government. The system will promote awareness and adoption of the Intellectual Property Rights (IPRs) by the start-up foundations.
• Various measures being taken in this regard include:
  • The valuation of any innovation goes up immensely, once it gets the protective cover of a patent. To this end, the patent application of Startups shall be fast-tracked for examination and disposal, so that they can realize the value of their IPRs at the earliest possible.
  • For effective implementation of the scheme ,a panel of “facilitators” shall be empanelled by the Controller General of Patents, Designs and Trademarks (CGPDTM), who shall also regulate their conduct and functions. Facilitators will be responsible for providing general advisory on IPR’s and also provide technical assistance in filing the patents  including the help in solving any disputes.
  • Under this scheme, the Central Government shall bear the entire fees of the facilitators for any number of patents, trademarks or designs that a Startup may file, and the Startups shall bear the cost of only the statutory fees payable.
  • Startups shall be provided an 80% rebate in filing of patents vis-a-vis other companies. This will help them pare costs in the crucial formative years.
  • The scheme is being launched initially on a pilot basis for 1 year; based on the experience it shall be reviewed for further processing.

• Fund of funds
  • The government will develop a fund with an initial corpus of Rs 2,500 crore and a total corpus of Rs 10,000 crore over four years, to support upcoming start-up enterprises.
  • The Life Insurance Corporation of India will play a major role in developing this corpus.
  • A committee of private professionals selected from the start-up industry will manage the fund.

• National Credit Guarantee Trust Company
  • A National Credit Guarantee Trust Company (NCGTC) is being conceptualised with a budget of Rs 500 crore per year for the next four years to support the flow of funds to start-ups.
  • This comfort of credit guarantee , experts believe, would encourage experimentation through disruptive business models and help attract venture debt from formal channels
• Exemption of Capital Gains Tax
  • At present, investments by venture capital funds are exempt from the Capital Gains Tax. The same policy is being implemented on primary-level investments in start-ups.
  • Due to their high risk nature, Startups are not able to attract investment in their initial stage.
  • It is therefore important that suitable incentives are provided to investors for investing in the Startup ecosystem. With this objective, exemption shall be given 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.
  • This will augment the funds available to various VCs/AIFs for investment in Startups.
  • In addition, existing capital gain tax exemption for investment in newly formed manufacturing MSMEs by individuals shall be extended to all Startups

• No Income Tax for three years
  • Start-ups would not pay Income Tax for three years.
  • The objective is to revolutionise the pace with which start-ups would grow in the future.
  • This fiscal exemption shall facilitate growth of business and meet the working capital requirements during the initial years of operations.
  • The exemption shall be available subject to non-distribution of dividend by the Startup.

• Tax exemption for investments of higher value
  • In case of an investment of higher value than the market price, it will be exempt from paying tax

• Building entrepreneurs
  • Innovation-related study plans for students in over 5 lakh schools. Besides, there will also be an annual incubator grand challenge to develop world class incubators.

• Atal Innovation Mission
  • The Atal Innovation Mission will be launched to boost innovation and encourage talented youths.

• Setting up incubators
  • A private-public partnership model is being considered for 35 new incubators and 31 innovation centres at national institutes.

• Research parks
  • The government plans to set up seven new research parks, including six in the Indian Institute of Technology campuses and one in the Indian Institute of Science campus, with an investment of Rs 100 crore each.

• Entrepreneurship in biotechnology
  • The government will further establish five new biotech clusters, 50 new bio incubators, 150 technology transfer offices and 20 bio-connect offices in the country.

• Innovation programmes in schools
  • The government intends to provide the required impetus and driving force through launching dedicated programmes for students in over 5 lakh schools.
  • This is with an objective to foster innovation, especially in the field of science and technology

• Uchhattar Avishkar Yojana:
  • A joint MHRD-DST scheme which has earmarked INR 250 crore per annum towards fostering “very high quality” research amongst IIT students.
  • This format has been devised to ensure that the research and funding gets utilized bearing in mind its relevance to the industry.
  • Each project may amount to INR 5 crore only.
  • This scheme will initially apply to IITs only.

• NIDHI:
  • A Grand Challenge program (“National Initiative for Developing and Harnessing Innovations)shall be instituted through Innovation and Entrepreneurship Development Centres (IEDCs) to support and award INR 10 lakhs to 20 student innovations from IEDCs.

• Easy rules
  • Norms of public procurement and rules of trading have been simplified for the start-ups.

• Faster exit
  • If a start-up fails, the government will also assist the entrepreneurs to find suitable solutions for their problems.
  • If they fail again, the government will provide an easy way out.
  • The Insolvency and Bankruptcy code 2016 has adequte provisions for the fast track and / or voluntary closure of businesses.
  • This process will respect the concept of limited liability.

DEFINITION OF A START UP:

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.”

Provided That :(Conditions Apply!!)

• such entity is not formed by splitting up, or reconstruction, of a business already in existence.
• An entity shall cease to be a Startup if its turnover for the previous financial years
• has exceeded INR 25 crore or it has completed 5 years from the date of incorporation/ registration.
• A Startup shall be eligible for tax benefits only after it has obtained certification

Definition of Startup (only for the purpose of Government schemes)

Why Start Up India?

• Six out of eight Indian Unicorns (companies which are valued more than $1million) had re-domiciled outside India.
• Ten of the top B2B start-ups had gone, 54 per cent of the top start-ups had gone in 2014 and 75 per cent in 2015.
• Due to uncertainty in our policies and taxation laws, companies prefer to register outside India.
• India’s forex regulations were not in tune with investor needs, mergers and acquisitions could become difficult and long-drawn-out and structuring was convoluted.
• India suffers from spectre of jobless growth. If India has to grow at double digit, and schemes like Make in India and Skill India haveto be successful, Start-Up India provides the required driving force.

ANALYSIS OF START UP INDIA PROGRAMME

Positive Points:

• Start-ups hold the potential of creating more jobs at a time when the manufacturing sector is facing a slump. The slump may last longer given global economic prospects and the slowdown in China, which has been one of the engines of global growth . In this context this is a laudable initiative.
• Real challenge for the Indian economy now is to fund several large projects — be it roads, highways or railways. That’s why it is a progressive step towards provide an enabling policy environment for start-up’s which are key drivers for employment uptick.
• The easing of certification and compliance procedure, aided by technological interventions will definitely boost investor confidence and improve the credit-off take in the economy.
• The government’s focus on industry-academia partnership is a very good initiative to upgrade research competence and enhance capacity building
• Therefore, the impetus to research is a good initiative. Conversely, the feedback from industry should be used as inputs for research. Such centres of excellence which combine education, research and industry experience can become hotspots for disruptive technologies and start-up ideas.
• Despite the reservations of skeptics, the tax exemption for first three years and easier rules for public procurement make it a viable proposition for the start-up’s to run their business, dominated by a few large corporates. Tax exemption would save the start-ups from harassment by tax officials
• A serious issue was the high deduction on receipts due to withholding of tax and service tax, causing serious cash-flow issues. Revenue actually said they understood this and would try to mitigate it in the Budget. It was heartening to see a positive, open outlook by revenue after so many years

Some reservations and possible challenges:

• The fund of funds proposed under the scheme has been criticised due to the fact that it is tax payer’s money which has been proposed to be put into this fund. This tendency of the government to turn a venture capitalist has been seen with skepticism
• It is far from clear why only companies which satisfy the government’s restrictive definition of a start-up – “driven by technology or intellectual property” – should have access to an enabling environment. What about other start-up’s which are not too much into automation?
• Firms set up in the past five years with an annual turnover below Rs. 25 crore, working ‘towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property’. The mere act of developing products or services that do not have potential for commercialisation or have no or limited incremental value for customers would not be a start-up.
• Slotting something like innovation into a template may not click, is what some experts opine.
• Moreover, a start-up shall be eligible for tax benefits only after it is certified by an inter-ministerial board.
• There is no self-certification as to whether the “innovation” is “significant” – allowing a possible discretion – anathema to a start-up ecosystem . Further, even to provide tax exemption, the approval required from the inter-ministerial board can enhance discretion and lead to procedural complexities.
• Skeptics have criticised the tax exemption to start up’s for first three years. Few start-ups, if any, can be expected to start returning profit in just three years of existence.
• Exemption from income tax, of course, will only be available to those vetted by an inter-ministerial panel. This runs counter to the government’s stated intention to remove exemptions in corporation tax and to close various loopholes in the system.
• A number of other exemptions and “handholding” measures have been questioned as they could possibly be an excuse to protect a certain class of industries from market competition.
• A number of concessions available to the small and medium enterprises in India, for instance, have done little more than keep them from growing up. Moreover, these exemptions stand in direct contrast to the government’s intention to phase out all exemptions and reduce corporate tax rates from 30% to 25% by 2019.
• Again, most of the promised investment in universities is limited to IIT and central government-funded institutions, ignoring 97 per cent of India, a glaring discrimination.

What more needs to be done?

• Forex regulations are a major reason for re-domiciling. We need a more open progressive regulation in this area. The hangover ofFERA (Foreign Exchange Regulation Act) is still felt .

• Although a relook at all regulations inhibiting investments and  reduction in unnecessary documentation, was promised , we are yet to see changes for start-ups.

• Company law is a big hindrance, putting a heavy compliance burden on small start-ups. The penalty provisions are onerous.

• CLARITY NEEDED ON:

• Tax laws
• valuation of start-ups for investment by angels
• Policies on digitisation and digital business
• Market places, including e-commerce
• Intellectual rights issues

• Taxes on alternative investment funds and venture capital need rationalisation.
• Mobile banking needs a boost.
• Payment systems need change. Supply chain issues continue to linger.
• Funding is needed for training in new technologies.
• In biotechnology, speedier clearances, are required.
• The definition of a start-up for the reasons mentioned above would need a relook early on, as it will inhibit growth in a number of start-ups.
• Benefits from any such scheme can be extended to all start-ups depending on criteria that are transparently laid down and objective.
• Tax breaks do help, but global experience shows that what is more critical is an enabling regulatory and business environment that will foster innovation and have a cascading impact on entrepreneurship. Therefore, experts feel , innovation should be best left to the market and government should only focus on policy environment
• Therefore, funding now on offer could perhaps be directed more towards entrepreneurs who find it tough to raise capital in segments such as food processing, rather than mobile-based applications or e-commerce firms, for whom raising money isn’t a major problem.

CONCLUSION:

• The government’s approach of targeting start-ups to power growth over the next decade is well judged. But the easing of rules and creation of a conducive policy environment should not be restricted just to start-ups. It should be extended to all businesses.
• India also needs start-ups throwing up globally path-breaking products. An enabling environment for this will comprise incubation centres which can plug into cutting-edge research happening in the country. If that is achieved , the Start-up India campaign would be meaningful
• The real test for Start-up India will be the re-domiciling of Indian start-ups .Partly to improve the ease of investing in start-ups, such investments have been exempted from long-term capital gains – which will have to be watched carefully for signs that it is being taken advantage of by, for example, real estate manipulators.

Keywords:  Start-up India, Taxation policy, Insolvency and Bankruptcy code, Jobless growth, Innovation, Investor Confidence

Approach to Civil Services Exam:

GS1

• Socio-economic impact of jobless growth on Indian society
• Locational Factors of Industries in India and also world

GS2

• Good Governance; developmental interventions of the government
• India’s Export Policy ( also refer Foreign trade policy 2015-19)

GS3

• Employment, job creation, manufacturing sector( please go through manufacturing sector chapter in the economic survey thoroughly)
• Innovation Mission and other related schemes
• Digital Divide

GS4

• Possible case study on digital divide, whether rural masses can access the mobile platforms for various schemes

Also read-

• Insolvency and Bankruptcy Code 2016

Practice Question:

1)Do you think the Start-up India programme is a game changer for the Indian Economy?Critically analyse.