Start-Up India Action Plan & Income Tax Act

“I see start-ups, technology and innovation as exciting and effective instruments for India’s transformation”, says our Prime Minister. The startup India initiative was announced by the Prime Minister in his Independence Day speech in August 2015. The initiative aims at the development of entrepreneurship and promoting innovation by creating an environment which will provide an impetus to the growth of start-ups. Despite the manufacturing sector facing a downside, what makes start-up India a welcome initiative is the fact that start-ups have the potential of creating employment opportunities.

The Government of India announced the Startup India Action Plan in January 2016. The Action Plan proposes a list of 19 action points that look at easing up various regulatory, legal, financial and other challenges faced by the startups. The Action Plan has positive initiatives which inter alia includescompliance regime based on self-certification, rolling-out of mobile app and portal, legal support and fast-tracking patent examination, faster exit for startups, providing funding support through a ‘fund of funds’, credit guarantee fund for startups, etc.

Welcome proposals have been introduced for the start-ups in order to encourage their growth in the initial phases of their business. It is proposed to amend the Companies Act to simplify the registration process and grant registration to startups in one day. Further, it is proposed to provide a 100% deduction of the profits to the “eligible start-up” who are in business involving innovation development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. The deduction can be claimed for any three consecutive assessment years out of the five years beginning from the year in which such startup is incorporated. The benefit of claiming 100% deduction is available if the start-up is incorporated on or after 1 April 2016 but before 31 March 2019, the total turnover of its business does not exceed twenty-five crores in any of the previous years starting from 1 April 2016 and ending on 31 March 2021 and it has obtained a certificate of eligible business from the Inter-Ministerial Board of Certification. All the three conditions have to be met in order to be called as “eligible start-up”.

In order to finance the start-ups, the “start-up India Action Plan” proposes to establish a Fund of Funds which intends to raise money. In order to encourage raising of money, the Finance Minister has proposed to provide exemption from capital gains tax if the proceeds arising from long term capital gains are invested in units of such Fund provided the amount remains invested for three years and the amount of investment in such specified Fund does not exceed Rs. 50 lacs. The Government is yet to notify the Fund in which investments can be made.

In order to encourage individuals and HUF to set up a start-up company, it is proposed to provide that long term capital gains arising on account of transfer of a residential house property will be exempt provided such capital gains are invested in the shares of such start-up company and the individual or HUF holds more than 50% of shares of the company and such company utilizes the amount invested in shares towards purchase of new assets before the due date of filing the return of income.

The existing section 54GB exempts capital gains arising from a transfer of a long term capital asset, being a residential property owned by the ‘eligible assessee’, if the assessee utilizes the net consideration for subscription in the equity shares of an ‘eligible company’. Further, the ‘eligible company’ must utilize the said amount towards purchase of ‘new asset’ within one year from date of subscription of equity shares. The term ‘new asset’ means new plant and machinery but does not include plant and machinery installed in any office premises or residential accommodation or vehicle or any plant or machinery whose actual cost is allowed as deduction.  The Finance Minister proposes to widen the scope of expression “new asset” under the existing section 54GB to include computers or computer software.

Albeit the incentives and exemptions proposed by the Budget 2016 for the start-ups, there still remain areas of concerns and challenges. A few of the concerns and challenges have been listed below:

• Start-up India initiative is restricted only to startups which are driven by technology or intellectual property and not to all startups / businesses in general.
• Current laws may not provide for any concession or relief with respect to start-ups for instance easy exit option for the start-ups.
• There is no defense mechanism proposed by the Government if the Indian startups are to be taken over by foreign multinationals.
• Lack of adequate and easy funding to the startups may pose a hurdle to their growth.

While there still remains many long term challenges, overall the initiative is a welcome move and there are many noteworthy ideas in the Action Plan. Having said this, one needs to wait how the Finance Bill is finally enacted after the Budget session. If the Action Plan is implemented properly, there can be a positive impact in the business environment.

The views expressed above are personal views of the authors.