March 1, 2016
On 16 January this year, Prime Minister Narendra Modi announced the “Start-up India Action Plan” (“Action Plan”). The Action Plan is the latest in Modi’s moves to revive the Indian economy and generate employment, and follows initiatives such as ‘Digital India’, which was designed to bring Internet services to rural areas, and the ‘Make in India’ campaign, which aspires to establish India as a global manufacturing hub.
Protracted incorporations and liquidations, bureaucratic procedures and problems in early-stage funding and exits under current Indian regulations have led to a restrictive climate for entrepreneurs. Modi introduced the Action Plan in an effort to tackle the increasing numbers of start-ups, including unicorns (companies with a valuation of $1 billion ), leaving India and re-domiciling in countries such as Singapore.
As part of the Action Plan, the government has introduced a separate regulatory framework for start-ups, which emphasizes promoting innovation and facilitating ease of regulatory compliance. The scheme promises deregulation and a more supportive ecosystem for start-ups. Some of the specific initiatives are summarized in this article.
Greater seed-funding available from the government
Following the Action Plan and to further promote India as a start-up hub, the government also announced a hike in seed-funding in the recently released Union Budget 2016.
For the 2016-2017 financial year, the government increased overall funding available to start-ups from Rs. 40 crore (S$8 million) to Rs. 200 crore (S$40 million). The Department of Science and Technology (“DST”), a major funding agency for new ventures related to science and technology is expected to provide seed capital to 50 - 80 new ventures with funding ranging from Rs. 50 lakh (S$100,000) to Rs. 1 crore (S$200,000) per company.
With greater access to seed money, start-ups can then approach venture capitalists or other funding agencies. In India, new ventures other than technology tend to have limited scope of raising funds. The government’s provision of seed-funding, as well as the measures under the Action Plan, is aimed at encouraging start-ups taking off in industries other than technology, including agriculture, manufacturing, the social sector, healthcare and education.
Key points of the Action Plan
The initiatives of the Action Plan are organised under the following categories:
Simplification and handholding;
Funding support and incentives; and
Industry-academia partnership and incubation.
The benefits under the Action Plan apply to an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding Rs. 25 crore (S$5 million) in any preceding financial year, and is working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property. The entity should not have been formed by the splitting up, or reconstruction of a business already in existence. In order to avail itself of the tax benefits under the Action Plan, the start-up must have obtained certification from the Inter-Ministerial Board, set up for such purpose by the Department of Industrial Policy and Promotion.
Some of the incentives available to start-ups under the Action Plan are set out below. Several of these incentives and schemes were made available from 1 April 2016 – these include the availability of tax benefits, the start-up portal and mobile app, as well as the Start-up India Hub.
Self certification-based compliance: Self-certification in respect of specified labour and environmental laws. In respect of labour laws, there will be no government inspection for three years, except upon receipt of credible and verifiable complaints of violations.
Fund of funds: A start-up fund with a corpus of Rs. 10,000 crore (S$2 billion) that will invest in venture funds registered with the Securities and Exchange Board of India (“SEBI”); the fund of funds is to be managed by a board of private professionals drawn from industry bodies, academia, and successful start-ups. Life Insurance Corporation (“LIC”) is to be a co-investor in the fund of funds.
Income tax exemption: Where an eligible start-up is established between 1 April 2016 and 31 March 2019, there will be an exemption from income tax for three out of five years, subject to non-distribution of dividends; this is to facilitate the growth of start-ups, and assist in meeting their working capital requirements during the initial years.
Capital gains tax: There will be no capital gains tax where the capital gains are invested in fund of funds recognised by the government. Capital gains exemptions that are available to individuals investing in newly formed micro, small and medium manufacturing enterprises, are to be extended to all start-ups.
Faster and easier exits: Fast- track voluntary closure of businesses for start-ups (with simple debt structures or those meeting specified criteria), within a period of 90 days.
Single point of contact: Start-up India hub as a single point of contact for the entire start-up ecosystem; to enable knowledge exchange (mentorship programs, assistance throughout life cycle) and access to partners, consultants and funding.
Mobile portal: Mobile app and web-based portal are set up for start-ups, with a simple form to be filled so that start-ups can be registered within one day (a huge improvement on the current time- frame of 29 days); there will also be a portal for filing and obtaining clearances, approvals and registrations, and for applying for various government schemes under the Action Plan. The portal and mobile app were launched on 1 April 2016. It is available here.
Better IP protection: Legal support for fast-tracking patent examination at lower costs, promotion of awareness and adoption of intellectual property rights (“IPR”), and assistance with protection and commercialisation of IPRs; 80% reduction in patent filing fees.
Exemption on investments above fair market value (“FMV”): An existing exemption available to venture capital funds, in relation to taxation of investments made above fair market value, has also been extended to incubators investing in start-ups.
Credit guarantee fund: To encourage initial funding by way of debt, the Government has envisaged a credit guarantee mechanism through a National Credit Guarantee Trust Company or Small Industries Development Bank of India.
Public procurement: To encourage the growth of start-ups in the manufacturing sector, the eligibility requirement of prior experience or turnover is to be waived for start-ups. However, start-ups would be required to demonstrate capability, and must have own manufacturing facility in India.
You may refer to the full text of the Action Plan dated 16th January 2016 here.
On 30 March 2016, the Department of Industrial Policy and Promotion (“DIPP”) also released answers to some frequently asked questions in relation to the mechanisms and incentives under the Action Plan. You may read them here.
What comes next
The Action Plan was announced soon after the approval of several amendments to the Indian Companies Act last year, which included relaxations in the regime governing related party transactions, limiting of access to strategic corporate resolutions as well as the elimination of certain procedural requirements. These changes are set to provide a more nurturing environment for start-ups in order to bring India in line with international standards.
In light of these legislative amendments aimed at a more attractive tax environment, reducing regulatory compliance hurdles and promoting the ease of doing business in India, investors can expect new investments in India, along with the acceleration of economic growth in the coming years.