Pwc India Tax News Alert 18 Jan 2016 Start-up Action Plan

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    from India Tax & Regulatory Services

     www.pwc.in

     Startup India – Action Plan 

     January 18, 2016

     In brief  

    Prime Minister Shri Narendra Modi unveiled an Action Plan for Startups on 16 January, 2016highlighting various initiatives and schemes being proposed by the Government of India to build astrong eco-system for nurturing innovation and empowering Startups in the country. The ActionPlan proposes a 19-point action list which will enable setting up of incubation centres, easier patentfiling, tax exemption on profits, setting up a Rs.10,000 crore corpus fund, ease of setting-up of business, a faster exit mechanism, among others.

     In detail

    The Department of IndustrialPolicy and Promotion (DIPP)conducted an event on 16January, 2016 which aimed atcelebrating the entrepreneurialspirit of India’s youth. Theevent was a day-long workshopattended by notable personsfrom the Startup community.The closing session wasaddressed by Shri NarendraModi, Prime Minister of India, who unveiled the Startup India Action Plan.

     Key Highlights

    The Action Plan is an initiativeof the Government of India to build a strong eco-system fornurturing innovation in order to

    accelerate economic growth andgenerate employmentopportunities.

    For this purpose, “Startup” has been defined to mean an entityincorporated or registered inIndia, with an annual turnovernot exceeding Rs.25 crore in anypreceding financial year, and working towards innovation, development of new products,or services driven by technology

    or intellectual property.

     Additionally, it has beenprovided that the entity:

      should not be formed bysplitting up, orreconstruction, of a businessalready in existence;

      shall cease to be a Startup ifits turnover exceeds Rs.25crore in any preceding

    financial year, or it hascompleted 5 years from thedate of incorporation/registration.

       will be eligible for tax benefits only after acertificate is obtained fromthe Inter-Ministerial Boardset up by the DIPP for thispurpose.

    The key proposals of the ActionPlan are:

    General Initiatives

    Compliances based on Self-Certification

      Compliance pertaining to6 labour and 3 environmentallaws will be allowed to beself-certified through theStartup mobile app.

      No inspections will becarried out under labour

    laws for a 3 year period.

      Startups classified as WhiteCategory as defined by theCentral Pollution ControlBoard will be allowed self-certification underenvironmental laws, withonly random checksproposed. 

    Startup India hub

     Government to set up aStartup India Hub which will be a single-point of contactfor Startups.

      Such hub will enableknowledge exchange bycollaborating with variousstakeholders such as theCentral and StateGovernments, legal partners,consultants, universities,R&D institutions and assistin the funding process.

    Establishment of Fund ofFunds with a corpus ofRs.10,000 crore

      Government to set up aFund with an initial corpusof Rs.2,500 crore and a totalcorpus of Rs.10,000 croreover a period of 4 years.

      Such Fund will not investinto Startups directly, butshall participate in the

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    capital of SEBI registered Venture Funds.

      Such Fund will be managed by

    a Board with privateprofessionals drawn fromindustry bodies, academia, andsuccessful Startups.

      The Venture Fund may obtainup to a maximum of 50% of thefund size from the Fund ofFunds, provided it has alreadyraised the balance 50% of thestated fund size.

    Credit Guarantee Fund forStartups

      Credit Guarantee Fund aims tocatalyse entrepreneurshipthrough credit to innovatorsacross all sections of society.

      The Credit Guaranteemechanism shall be rolled outthrough the National CreditGuarantee Trust Company/SIDBI with a budgetary corpusof Rs.500 crores per year forthe next 4 years.

    Startup fests

      Introduction of Startup fests to bolster the Startups ecosystemand provide a platform toshowcase ideas and work with alarger audience.

       As a part of the “Make in India”initiative, the Governmentproposes to hold one fest at thenational level and one fest atthe international level in an

    international city on an annual basis.

      Such fests would help inshowcasing innovation andprovide a platform forcollaboration therebyconnecting with investors,mentors, incubators,exhibitions, product launches,etc.

    Launch of Atal InnovationMission (“AIM”) 

     AIM proposes to promoteentrepreneurship through Self-

    Employment and TalentUtilization (“SETU”), whereininnovators would be supportedand mentored to becomesuccessful entrepreneurs. This

     would be achieved through:

      Establishment of sector specificincubators;

      Establishment of 500 tinkeringlabs;

      Pre-incubation training

      Strengthening of existingincubation facilities;

      Seed funding to high growthstartups.

     AIM also proposes to promoteinnovation through:

      Institution of innovationawards (3 per State/UT and 3at National level);

      Providing support to StateInnovation Councils forawareness creation andorganizing state level workshops/conferences;

      Launch of Grand InnovationChallenge Awards for findinglow cost solution to India’spressing problems.

    Set up of Incubators

      To leverage private sectorexpertise in the set-up ofincubators, it is proposed that35 new incubators be set up inexisting institutions.

      Funding support of 40%(subject to a maximum of Rs.10crore) is proposed to beprovided by the CentralGovernment for establishmentof new incubators in existinginstitutions; balance funding to be committed by the respectiveState Government and privatesector.

      35 new private sectorincubators will also be set up with a grant of 50% (subject to

    a maximum of Rs.10 crore)provided by the Government.

    Innovation centres

      In order to augment incubationand R&D efforts, 31 centres ofInnovation andentrepreneurship will be set-

    up/ scaled up for providingfacilities to over 1,200 Startups,at national institutes.

      These 31 centres will include 13Startup centres and 18technology business incubatorsto be set up/ scaled up at IIMs/NITs/ IITs.

    Research Parks

      7 new research parks areproposed to be set up with an

    initial investment of Rs.100crore each.

      These parks shall enablecompanies with a researchfocus to set up base andleverage the expertise ofacademic/ researchinstitutions.

    Promote entrepreneurship in biotechnology

      5 new bio clusters, 50 new bioincubators, 150 technologytransfer offices and 20 bioconnect offices will beestablished thoughBiotechnology Research Assistance Council (BIRAC).

      Biotech Equity Fund – would be set up in partnership withNational and Global EquityFunds to provide financialassistance to young BiotechStartups.

    Innovation focused programs forstudents

      Innovation core program shall be initiated to target school kids with an outreach to 10 lakhinnovations from 5 lakhschools. Further, 10,000innovations will be providedprototyping support and thetop 100 would be showcased atthe Annual Festival ofInnovations at the RashtrapatiBhavan.

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       A Grand Challenge Program – NIDHI (National Initiative forDeveloping and HarnessingInnovations) to be initiated tosupport and award Rs.10 lakhsto 20 student innovations fromInnovation andEntrepreneurship DevelopmentCentres.

      Uchhattar Avishkar Yojanascheme will have an earmarkedfund Rs.250 crore per annumtowards fostering “ very highquality ” research amongst IITstudents.

     Annual Incubator GrandChallenge

      In order to assist in building world class incubators, theGovernment proposes toinitially identify and establish10 incubators with financialassistance of Rs.10 crore each.

      Further, an annual “IncubatorGrand Challenge” will be heldto identify incubators who can become world class.

     Regulatory

    Mobile App and Portal

     A Mobile App and Portal would belaunched by 1 April, 2016 toprovide on-the-go accessibility for:

      Registration of Startupsthrough a simple form andobtaining certificate.

      Filing of compliances andobtaining information on various clearances/ approvals/

    registrations.

      Provision of a platform forcollaborating with otherstakeholders such as venturefunds, incubators, academia,mentors etc.

       Applying for various schemes ofthe Government under the StartupIndia initiative. 

    Faster Exit for Startups

      The Insolvency and BankruptcyBill 2015 (“IBB”), will allow fast

    track and / or voluntary closure of businesses.

      Startups satisfying the specifiedconditions of the IBB will beallowed to be wound up in 90 days

    on a fast track basis.

      Such a wind up will be carried out by anInsolvency  Professional who will be in charge of the companyand oversee the liquidationprocess.

    Legal support and fast-trackingpatent application

    Startup Intellectual PropertyProtection (SIPP) scheme will beintroduced on a pilot basis for aone year period to facilitate filingof Patents, Trademarks andDesigns. The scheme wouldinclude:

      Fast-tracking patentapplication.

      Setting up a panel of“Facilitators” who will advise ondifferent Intellectual PropertyRights (“IPR”) and also provideadvice on promoting and

    protection of IPRs in overseas jurisdictions.

      Such Facilitators will alsoprovide end-to-end advisoryfrom making applications tillthe stage of final disposal of theIPR application.

      The Government will bear thecost of such Facilitators and theStartups shall bear only the costof the applicable statutory fees.

       A rebate of 80% on patent filingfees vis-à-vis other companiesis proposed.

    Relaxed Norms of PublicProcurement for Startups

      Startups (in the manufacturingsector) shall be exempted fromthe criteria of “priorexperience/ turnover” intenders floated by anyGovernment entity or PSU

     without any relaxation inquality standards or technicalparameters.

      The Startups will have todemonstrate their capability toexecute the project as perrequirements and should havetheir own manufacturingfacility in India.

    Tax

    Capital gains tax exemptions

       A capital gains exemptionmechanism has been proposedfor investors (class of investorsto be specified) investing in theStartup ecosystem.

      Capital gains invested in “Fundof Funds” recognized by theGovernment shall be exempted.

      Further, existing capital gainsexemption for investment innewly formed manufacturingMicro, Small and MediumEnterprises (MSMEs) byindividuals shall be extended toall Startups.

      For Startups, investment incomputer or computer software(used in core business activity)to qualify as purchase of “new

    assets”. Income-tax exemption for 3 years

      Income-tax exemptionproposed for Startups for aperiod of 3 years.

      Exemption subject to non-distribution of dividend by theStartup.

    Tax exemption for investmentsmade above Fair Market Value

    (FMV)  Investments made by

    incubators in Startupsproposed to be insulated fromthe rigors of Section 56(2)(viib)of the Income-tax Act, 1961. Any consideration received byStartups for issuance of sharesover FMV to incubators, not to be taxed in the hands of theStartup.

      The term “incubator” is yet to

     be defined for the abovepurpose.

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    The takeaways

    Startup India campaign is beinglauded for attempting to bringStartups to the centre stage ofIndia's growth story.

    The Action Plan has certainlyaddressed key concerns, likesimplifying the process to obtaincertain regulatory registrationsand approvals by rolling out theproposed Mobile App and Portal,enabling faster exits from aregulatory perspective, providingfunding support and creditguarantee for Startups, andpermitting certain specified tax benefits.

     While the Action Plan is certainlya welcome and positive steptowards the philosophy ofpromoting Startup innovation inthe country, it will also be

    important to consider taxexemptions for angel investors,seed capital funds and stockoptions offered by Startups toemployees. Additionally, theGovernment should considerproviding indirect tax incentivesfor Startups. The details of thetax exemptions are likely to beannounced in the upcomingUnion Budget.

     Let’s talk 

    For a deeper discussion of howthis issue might affect your business, please contact:

    Tax & Regulatory Services –  Direct Tax

    Gautam Mehra, Mumbai  +91-22 6689 [email protected]

    Rahul Garg, Gurgaon +91-124 330 6515 [email protected]

     Abhishek Goenka, Bangalore +91 80 4079 6279

    abhishek.goenk [email protected] 

    Sriram Ramaswamy, Bangalore +91 80 4079 6004sriram.ramaswam [email protected]

    mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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    For private circulation only

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