Startup India: An initiative of the NDA government to revolutionize the domestic entrepreneurial environment.

By:Manmeet Kaur Tura 2019-02-21

‘Startup India’ is a significant scheme of the NDA government to revolutionize the domestic entrepreneurial environment in order to create considerable employment prospects at the working middle-class level. 

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This impactful and long term scheme was initiated by the Department of Industrial Policy and Promotion (DIPP) under the Ministry of Finance in 2016. The objective was to focus on three main areas-

  1. Simplified processes for the establishment of entities.
  2. Offering tax and regulatory exemptions.
  3. Providing assistance in funding and incubation. 

In accordance with this scheme provided support to various entities by allocating funds to support the entrepreneurial startups. Additionally, various other steps have been taken like special procurement norms, setting up of Mudra banks to provide aid to the SME sector, etc. The government has also initiated tax sops for new businesses. The details of which are given below-

  • Startups can benefit from tax holidays in the beginning few years, subject to acquiring recognition (through a simplified process of registration)
  • Even in case of the change in majority shareholding, carrying forward of tax losses will not lapse (conditions applicable) 
  • Capital gains from the sale of residential property are treated as tax-exempt, only if the capital gained is invested in a startup venture. This is done to promote and support individuals and their startups.

The above policies have made a significant impact on the growth of startups in the country. But there are many more areas that need attention, and reforms need to be made for the benefit and welfare of the entrepreneurs and their startups. We have listed a few challenges that the startups face-

Currently, acquiring the status as a startup and consequent permission sanction for availing tax holiday is a little regressive and extensive a process.

a) There needs to be a more liberal policy for the acceptance or rejection of a startup as a recognized entity. Preliminary recognition is given to startups that are innovative or have the potential of generating huge employment prospects. These broad and generalized conditions can lead to different interpretations that may lead to biased or unjust approvals.

In order to avail tax holiday, a separate approval needs to be taken by a startup. Additionally, another approval is necessary for becoming eligible to issue new shares at a premium and stay away from the rigors of angel tax. The government can initiate processes to ease the process for the startups by combining these procedures along with the preliminary recognition procedure.

b) The other primary concern is that of the ‘angel tax’. The tax department was willing to tax amounts attained on the issuance of shares allegedly in the surplus of their fair value. This matter created perplexity when several startups got unpleasant tax orders for the above reason. The issue was raised widely leading to an instantaneous action from the Government. And it was explained that startups would not have to be concerned about angel tax (subject to those on premium quantum less than Rs 100 million, reasonable turnover thresholds, etc). This was a relief for the startups but still, there is much that needs to be amended in the longer run.

c) The startups are also facing a major issue in attracting and retaining suitable manpower.  Due to the lack of capital they usually choose to the issuance of Employee Stock Options (ESOPs). As per the prevalent tax regime, the tax is to be paid by employees on the implementation of ESOPs. This leaves an immense impact on the cash flow of these employees; hence there needs to be an upfront tax payment on the exercise of ESOPs.

d) There needs to a single body for governing and regulating startups. Currently, multiple bodies like DIPP, RBI, and CBDT deal with separate facets that affect startups. A single body shall ease the processes and provide clarity in the business processes.

Beyond the above challenges, the startups in India have grown at an exponential rate and contributed significantly to the country’s economy. With the introduction of new startups in the country, there is an inflow of new employment opportunities for all along with the infrastructure development and technological advancements.

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