BASICS OF START-UP REGISTRATION

 

o   What is a startup?

 

A startup is a company in the first stage of its operations, often being financed by its entrepreneurial founders during the initial starting period.

 

o   What is Startup India initiative?

 

Startup India is a flagship initiative of the Government of India, intended to build a strong ecosystem that is conducive for the growth of startup businesses, to drive sustainable economic growth and generate large scale employment opportunities. The Government through this initiative aims to empower startups to grow through innovation and design.

 

o   Who can be recognized as a startup under Department of Promotion of Industry and Internal Trade (DPIIT)?

 

Eligibility Criteria for Startup Recognition:

 

a.      The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership.

b.     Turnover should be less than INR 100 Crores in any of the previous financial years.

c.      An entity shall be considered as a startup up to 10 years from the date of its incorporation.

d.     The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth.

Note: An entity formed by splitting up or reconsutrction of an existing business shall not be considered a "Startup".

 

o   What are the benefits provided under startup scheme?

 

The benefits provided to recognized startups under the Startup India initiative are:

 

1. Self-Certification: Self-certify and comply under 3 Environmental & 6 Labour Laws.

 

2. Tax Exemption: Income Tax exemption for a period of 3 consecutive years and exemption on capital and investments above Fair Market Value.

 

3. Easy Winding of Company: In 90 days under Insolvency & Bankruptcy Code, 2016.

 

4. Startup Patent Application & IPR Protection: Fast track patent application with up to 80% rebate in filling patents.

 

5. Easier Public Procurement Norms: Exemption from requirement of earnest money deposit, prior turnover and experience requirements in government tenders.

 

6. SIDBI Fund of Funds: Funds for investment into startups through Alternate Investment Funds.

 

o   What are the tax benefits for recognized startups?

 

There are various tax benefits to the entities registered as startup which fulfil the conditions as mentioned in various sections of the Income Tax Act, 1961. We would go through the section wise analysis of the same as under:

Section 80-IAC:

 

1. 100% deduction of profits and gains derived from eligible business (eligible business means business as defined in Point 1(c). of Definition above), for 3 consecutive years, these deduction shall be allowed at the option of the assessee can be claimed for any 3 consecutive years out of 7 years from date of incorporation of eligible start up.

 

2. It should not be set up by splitting up, reconstruction of business already in existence.

 

3. Plant and Machinery used in the startup shall be new (Max. 20% of Value of Plant and Machinery can be old). However if the Plant and Machinery was used outside India by any person other than assessee and following conditions are fulfilled than it would be treated as New Machinery:

 

a. Such Machinery or plant was never before installation used by assessee in India.

 

b. Plant or machinery was imported to India.

 

c. No deduction on account of Depreciation in respect of plant of Machinery is allowed or allowable under Income Tax law of any person for a period prior to date of installation of plant and Machinery by the assessee.

 

4. For the Purpose of Deduction under section 80-IAC, partnership firm is not recognized, so even the startup Partnership firms recognized by DIPP cannot claim exemption under section 80-IAC.

 

5. In order to claim deduction under 80-IAC, company or LLP should fulfill the below mentioned conditions:

 

a. Incorporated after 1st April, 2016 but before 1st April, 2021.

 

b. Turnover does not exceed 25 crores in the year of which deduction is claimed.

 

c. Registered as start up with Inter Ministerial board of Certification (i.e. DPIIT).

 

6. Accounts are to be audited by a Chartered Accountant in order to claim the Deduction.

 

7. For the year of Deduction, Previous year and subsequent years it would be treated that it is the only source of Income of the asssessee.

 

8. Company or LLP fulfilling the above conditions shall make an application to Inter Ministerial Board in Form 1, and after calling for the documents and making the inquiry the Board may grant a certificate, which is required to claim Deduction.

 

Section 56 (2) (viib):

 

If a company issues shares, and the issue is at the price above face value, then in such case the difference between the issue price and fair market value of the shares shall be treated to be the income of the company. However, this provision is not applicable to Notified entities

 

In order to escape this provision following conditions need to be fulfilled:

 

1. A startup company shall be a company registered with DIPP.

 

2. Total of paid up share capital and Share Premium after issue or proposed issue shall not exceed Rs. 25 crores.

 

3. For the calculation of Rs. 25 crores, shares issued to non – resident or venture capital company or venture capital fund shall not be included. Further, shares issued to listed companies whose more than 10% shares of the total share capital are traded during the previous 12 calendar months, shall also not be considered for above limit of Rs. 25 crores.

 

4. It should not invest in any of the following assets (for the period of 7 years from the end of the latest F.Y. in which the shares are issued at premium):

 

a. Building or land, being a residential house (except when used for renting or stock -in-trade or in ordinary course of business)

 

b. Land or Building other than residential house (except occupied by start up, used for renting purpose, or as a stock-in-trade or in ordinary course of business)

 

c. Loans and advances (except when loans as advances extended in ordinary course of business, where money lending is substantial part of business).

 

d. Capital contribution to any other entity.

 

e. Shares and securities.

 

f. a motor vehicle, yacht, or any other mode of transport, the actual cost of which exceeds ten lakh rupees (except when held by startup for plying, hiring, leasing or as a stock in trade).

 

g. Jewellery (except when held as stock in trade)

 

h. Archaeological collection, drawings, painting, sculptures, any other work of art, bullion.

 

5. On fulfilling all the above mentioned conditions, company shall file a duly signed declaration in form 2 to DIPP.

 

6. In case the company invests in assets which are not permitted as stated above, exemption given shall be revoked.

 

7. However, if company fails to comply with any of the conditions on a later it shall be deemed that company had under reported the income to the extent of consideration over fair Market value and tax should be payable further penalty is leviable at the rate of 200% of the amount of tax payable on under reported Income.

     Disclaimer

It is intended to provide helpful information and legal guidance with respect to the subject matter. The entire contents have been prepared based on the relevant conditions existing at the time of preparation of article. The information cited on this article has been verified to the best of the author’s abilities and every effort has been made to keep the information error-free. Suggestions or feedback to improve the contents of the article are welcomed. The contents and information contained in the article is merely for educational and informational purposes and does not constitute a professional advice or a legal opinion. The contents of the article have been prepared based on the personal views of the author and may vary according to one’s interpretation of law. The author assumes no responsibility for the consequences of the use of such information. In no event the author shall be liable to anyone for the damage resulting from, arising out of or in connection with the use of such content or information.

KEY CHANGES IN CONSOLIDATED FDI POLICY

The Department for Promotion of Industry and Internal Trade (DPIIT) (formerly known as “Department of Industrial Policy & Promotion (DIPP)”) is the nodal Department for formulation of the policy of the Government on Foreign Direct Investment (FDI). It is also responsible for maintenance and management of data on inward FDI into India, based upon the remittances reported by the Reserve Bank of India.

The FDI policy is reviewed on an ongoing basis, with a view to making it more investor-friendly. To attract higher levels of FDI, Government has put in place a liberal policy on FDI, under which FDI up to 100%, is permitted, under the automatic route, in most sectors/activities. Significant changes have been made in the FDI policy regime in recent times, to ensure that India remains an increasingly attractive investment destination. The Department plays an active role in the liberalization and rationalization of the FDI policy. Towards this end, it has been constructively engaged in extensive stakeholder consultations on various aspects of the FDI policy.

The Consolidated FDI Policy Circular of 2020 was released by the DPIIT on October 29, 2020 and was made effective from October 15, 2020.

The Consolidated FDI Policy is a compilation of various decisions and policy pronouncements taken by the government with regard to FDI in different sectors. It is a policy framework on FDI, which is transparent, predictable and comprehensible. This framework can be updated on annual basis, to capture and keep pace with the regulatory changes, effected in the interregnum.

The present consolidation subsumes and supersedes all Press Notes / Press Releases / Clarifications / Circulars issued by the DPIIT, which were in force as on October 15, 2020 and reflects the FDI Policy as on October 15, 2020.

Key changes in Consolidated FDI Policy

The changes in consolidated FDI Policy as listed below are compiled based on the comparison between previously existing Consolidated FDI Policy, 2017 and newly introduced Consolidated FDI Policy, 2020 which may include the amendments made by Press Notes / Press Releases / Clarifications / Circulars issued by the DPIIT in the middle duration of these two policies.

·        Eligible Investors - An entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.

 

·        Foreign Portfolio Investors (FPI) may make investments in the manner and subject to the terms and conditions specified in Schedule II of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

 

·        A Foreign Venture Capital Investor (FVCI) may make investments in the manner and subject to the terms and conditions specified in Schedule VII of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

 

·        Establishment of branch office, liaison office or project office or any other place of business in India shall be governed by the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016. Further, acquisition or transfer of immovable property in India by citizens of certain countries shall be regulated as per the relevant provisions under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, as amended from time to time.

 

·        Foreign Investment in Investing Companies registered as Non-Banking Financial Companies (NBFC) with the RBI, being overall regulated, would be under 100% automatic route.

 

·        Foreign Investment in Core Investment Companies (CICs) and other investing companies, engaged in the activity of investing in the capital of other Indian company(ies)/LLPs, is permitted under Government approval route.

 

·        In Defence Sector, FDI up to 74% under automatic route shall be permitted for companies seeking new industrial licenses. (Previously, it was allowed up to 49% under automatic route)

 

·        Infusion of fresh foreign investment up to 49%, in a company not seeking industrial license or which already has Government approval for FDI in Defence, shall require mandatory submission of a declaration with the Ministry of Defence in case change in equity /shareholding pattern or transfer of stake by existing investor to new foreign investor for FDI up to 49%, within 30 days of such change. Proposal for raising FDI beyond 49% from such companies will require Government approval.

 

·        Foreign Investments in the Defence Sector shall be subject to scrutiny on grounds of National Security and Government reserves the right to review any foreign investment in the Defence Sector that affects or may affect national security.

 

·        In Broadcasting Content Services Sector, FDI up to 26% under Government Route shall be permitted for companies which are under Uploading/Streaming of News & Current Affairs through Digital Media.

 

·        It is clarified that real-estate broking service does not amount to real estate business and 100% foreign investment is allowed in the activity under automatic route.

 

·        E-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only.

 

·        E-commerce marketplace entity with FDI shall have to obtain and maintain a report of statutory auditor by 30th of September every year for the preceding financial year confirming compliance of the e-commerce guidelines.

 

·        In Single Brand Product Retail Trading, FDI up to 100% is allowed under Automatic Route. (Previously, it was allowed up to 49% under Automatic Route and beyond 49% under Government Route)

 

·        In Insurance Sector, FDI up to 100% is allowed under Automatic Route to Intermediaries or Insurance Intermediaries including insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrator, Surveyors and Loss Assessors and such other entities, as may be notified by the Insurance Regulatory and Development Authority of India from time to time. (Previously, FDI up to 49% was allowed under Automatic Route to Insurance Companies and Insurance Intermediaries whereas now 49% cap is only on Insurance companies)

 

·        The condition of Indian owned and controlled, shall not be applicable to Intermediaries and Insurance Intermediaries and composition of the Board of Directors and key management persons shall be as specified by the concerned regulators from time to time.

 

·        The foreign direct investment proposals shall be allowed under the automatic route subject to verification by the Authority and the foreign investment in intermediaries or insurance intermediaries shall be governed by the same terms as provided under rules 7 and 8 of the Indian Insurance Companies (Foreign Investment) Rules, 2015, as amended from time to time.

 

·        The insurance intermediary that has majority shareholding of foreign investors shall undertake the following:

 

i.                 be incorporated as a limited company under the provisions of the Companies Act, 2013;

 

ii.                at least one from among the Chairman of the Board of Directors or the Chief Executive Officer or Principal Officer or Managing Director of the insurance intermediary shall be a resident Indian citizen;

 

iii.               shall take prior permission of the Authority for repatriating dividend; Consolidated FDI Policy 2020 Department for Promotion of Industry and Internal Trade 63

 

iv.               shall bring in the latest technological, managerial and other skills;

 

v.                shall not make payments to the foreign group or promoter or subsidiary or interconnected or associate entities beyond what is necessary or permitted by the Authority;

 

vi.               shall make disclosures in the formats to be specified by the Authority of all payments made to its group or promoter or subsidiary or interconnected or associate entities;

 

vii.             composition of the Board of Directors and key management persons shall be as specified by the concerned regulators;

 

·        The reporting structure of FDI was changed with effect from September 01, 2018. The Reserve Bank has introduced an online application, FIRMS (Foreign Investment Reporting and Management System), which provides for the SMF. With the implementation of SMF, the reporting of FDI, which was presently a two-step procedure viz., ARF and FC-GPR was merged into a single revised FC-GPR. With effect from September 01, 2018, five forms viz., FC-GPR, FC-TRS, LLPI, LLP-II and CN were being made available for filing in SMF. The other three forms viz., ESOP, DI, and DRR were made available for filing with effect from October 23, 2018. With effect from September 01, 2018, all new filings for the 5 forms and other three forms viz., ESOP, DRR and DI with effect from October 23, 2018 have to be done in SMF only.

 

     Disclaimer

It is intended to provide helpful information and legal guidance with respect to the subject matter, determining the changes in the consolidated FDI Policy. The entire contents have been prepared based on the relevant policies or circulars existing at the time of preparation of article. The information cited on this article has been verified to the best of the author’s abilities and every effort has been made to keep the information error-free. Suggestions or feedback to improve the contents of the article are welcomed. The contents and information contained in the article is merely for educational and informational purposes and does not constitute a professional advice or a legal opinion. The contents of the article have been prepared based on the personal views of the author and may vary according to one’s interpretation of law. The author assumes no responsibility for the consequences of the use of such information. In no event the author shall be liable to anyone for the damage resulting from, arising out of or in connection with the use of such content or information.