Start-up India is a flagship initiative of the Modi government initiated to stimulate the culture of entrepreneurship and to nurture innovation in India. As part of this initiative, the 'Start-up India Action Plan', was unveiled in January 2016 to build a strong start-up ecosystem with the intention of achieving sustainable economic growth and for generating large scale employment opportunities.
An entity is eligible for registration as a start-up if it is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with the high potential of employment generation or wealth creation. An entity shall cease to be a start-up on completion of ten years from the date of its incorporation/registration or if its turnover for any previous year exceeds Rs 100 crore.
To incentivise the sector, the government facilitated a more conducive regulatory framework coupled with certain fiscal benefits such as self-certification compliance with respect to key labour and environment laws, reduction in patent and trademark filing fees, simpler entry and exit norms, income-tax benefits, etc. Such relaxations have eased the process of seeking start-up registration. The initiative led to the establishment of 19,280 recognised start-ups across the country and created an estimated 1,87,004 direct jobs and more than 5,60,000 indirect jobs.
The Indian start-up ecosystem is still evolving and has not yet achieved its full potential due to certain deterrents that require quick resolution to drive the growth of start-ups in India. We have outlined below some of the measures that, if implemented, could provide the much-needed impetus for the initiative:
1. Increase the income-tax exemption from three to five years.
2. Start-ups should be excluded from the recently introduced thin capitalisation provisions in the income-tax law to enable them to source foreign borrowings.
3. Exemption from the shareholding condition for carry-forward and set-off of losses to avoid start-ups losing their unabsorbed losses thereby reducing their tax burden.
4. Align the definition of 'eligible start-up' under the income-tax law with the revised definition issued by the Ministry of Commerce and Industry vide notification no GSR 127(E) dated February 19, 2019.
5. Extend the provisions of income-tax in dealing with carry-forward and set-off of accumulated losses and unabsorbed losses in case of amalgamation and demerger for technology-based companies, considering the increasing number of start-ups in the technology sector.
6. Rationalisation of long term capital gains tax norms applicable for investments made by domestic investors in start-ups by reducing the long term capital gains tax rate from 20 per cent to 10 per cent and reducing the long term holding period from 24 months to 12 months. This will incentivise domestic investors to invest in start-ups.
7. The revised angel tax provisions that grant an exemption to start-ups subject to fulfilment of certain conditions should also be extended to start-ups where the assessment is concluded and demand notices have already been issued under erstwhile provisions.
8. Incentivise start-ups for undertaking research and development either by extending the weighted deduction or by adopting best practices followed globally.
9. Start-ups should be granted exemption from Minimum Alternate Tax and Alternate Minimum Tax provisions under the income-tax law to enhance their growth in India.
10. Incentivise banks and financial institutions to extend funds to the start-ups.
11. Specific provisions relating to accelerated/additional depreciation on the acquisition of plant and machinery by start-ups can be introduced under the income-tax law.
12. Lastly, with the government contemplating measures to incentivise women to participate in the start-up initiative and benefit from the program, quick implementation of these measures would be vital for the overall success of the initiative.
Overall, start-up India is a noble initiative and its success entirely depends on the right and timely implementation of the contemplated measures. The initiative will go a long way in achieving the three fundamental underlying objectives: Creating a culture of entrepreneurship and innovation, facilitating sustainable economic growth and generating large scale employment opportunities.
(Shefali Goradia is Partner and Jimit Shah is Director, Deloitte India)
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