Start-Up’s IP protection

                                                                           In January this year, the Government of India launched the Start-Up India policy (‘Policy’) - the objective of which was to provide certain benefit to start-up entities. The Policy aimed at relaxing and providing exemptions to start- ups from certain legal and regulatory requirements for achieving the ‘ease of doing business in India’.

Defining start-ups

Through a notification dated February 17, 2016 the Government defined what constituted a start-up. This definition was also subsequently incorporated in the Finance Bill, 2016. An entity would be considered as a start-up

• Up to five years from the date of its incorporation/registration
• If its turnover for any of the financial years has not exceeded Rupees 25 crore, and
• It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property

The definition carved some exceptions by stating that entities formed on splitting up or reconstruction of a business already in existence won’t be considered as start-ups.

It has further been clarified that an entity will be considered to be working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property if it aims to develop and commercialize a new product or service or process, or a significantly improved existing product or service or process, that will create or add value for customers or workflow. Mere act of developing of a products or service or processes which does not have commercial potential or has limited incremental value for customers or workflow would not be covered under this definition of start-up.

All start-up entities are required to obtain a certificate from the government to be recognized as start-ups and to avail the benefits as prescribed under the policy. An entity would cease to be a start-up after 5 years or if its turnover exceeds 25 crore.

Taking a leap: The propositions –

The Finance Bill 2016 has provided significant tax breaks for start-ups along with other changes aimed at giving an impetus to innovation and research.

Some of the benefits are as follows: –

• 100% deduction of the profits and gains derived by an eligible startup for 3 out of 5 years for startups setup during April, 2016 to March, 2019.
• Finance Bill proposes to amend section 35 of the Income Tax Act relating to expenditure on scientific research. The proposed amendment would reduce weighted deduction of any sum paid to a scientific research association which has the object of undertaking scientific research or to a university, college or other institution to be used for scientific research up to one hundred fifty per cent. It is further proposed to reduce the said weighted deduction to one hundred per cent from the financial year 2020- 2021 and subsequent years.
• 10% tax rebate for Indian pharmaceutical companies on earnings from global patent filings.
• 10% rate of tax on income from worldwide exploitation of patents developed and registered in India by a resident.
• 80% reduction in Patent fees for start-ups

It is therefore clear that the government of India is keen on providing certain tax benefits to start-ups. Though income tax benefits have been provided for the first 3 years of start-up, the Minimum alternative Tax (MAT) can apply to a start –up entity. The tax benefit would be provided to the start-ups fulfilling all the conditions mentioned above and the Finance bill through which the income tax act would be amended.

Reduction in weighted deduction for scientific research would also provide some impetus to innovation, research and development.

Indian Pharmaceutical companies will certainly benefit from 10% tax rebate on the earnings from global patent filings. This will also provide impetus to Indian Pharmaceutical companies to exploit patents in foreign jurisdictions. The glitch in this announcement is that ‘earnings’ from global patent filings haven’t been clarified so far. This would most likely include patent royalties. There is some debate over how this tax rebate should also include global patent prosecutions costs. Patent regimes across the world are diverse and the prosecution costs are significant. However, this cost isn’t likely to be considered.

Start-up’s in practice

Registration -

The Department of Industrial Policy and promotion has clarified[1] that start-ups require a number of documents to be submitted before obtaining the registration certificate.

One of the following documents is required to be uploaded along with the application for registration as a Startup on Startup India portal and mobile app for obtaining the registration –

• recommendation (with regard to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion, from any Incubator established in a post-graduate college in India;
• letter of support by any Incubator which is funded (in relation to the project) from Government of India or any State Government as part of any specified scheme to promote innovation;
• recommendation (with regard to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion, from any Incubator recognized by Government of India;
• letter of funding of not less than 20 percent in equity by any Incubation Fund/ Angel Fund/ Private Equity Fund/ Accelerator/ Angel Network duly registered with Securities and Exchange Board of India that endorses innovative nature of the business. Department of Industrial Policy and Promotion may include any such fund in a negative list for such reasons as it may deem fit;
• letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation;
• patent filed and published in the Journal by the India Patent Office in areas affiliated with the nature of business being promoted
• The last point mentions a filed patent published in the Patent office journal. This too would provide additional impetus to Start-ups to apply for patents. Adding Patent filing as one of the criteria for grant of registration would create awareness among the start-up community regarding intellectual property protection.

Scheme for facilitating Start-up’s IP protection -

In April 2016, the office of Patent controller launched a scheme for facilitating Start-up’s Intellection Property Protection (‘SIPP’). It was launched with the aim of protection of intellectual property and encourage innovation and creativity in Start-ups. As per the SIPP, facilitators will be empanelled by the Controller of Patents to provide general advice relating to intellectual property to Start-ups.. These facilitators would be Patent agents, advocates, trademark agents, etc. The facilitators would also provide aid in filing patents, drafting specifications, preparing and filing responses to examination reports, contesting opposition and in any other manner disposing off the IP application.

Conclusion -

It is clear that the Government of India is taking systematic and significant efforts to promote the growth of start-ups in India. With initiatives like ‘Make in India’ and ‘Start up India, stand up India’, the expectations are growing. Nevertheless, this is one side of the story. The other side is the fact that the government of India is taking systematic efforts to attract foreign investments as well. Foreign Trade policy has been shaped accordingly, and significant changes have been made to numerous laws that would facilitate the ease of doing business in India for foreign entities.

While India has enormous potential in commerce and Industry, there is still apperception that India behind in research and development. Most Indian start-ups are based on ideas that have already been implemented abroad. With the government opening doors to foreign Investments and facilitating more and more investments in India, Indian start-ups face challenges when huge conglomerates enter Indian market with existing well established business models. It is therefore evident that start-ups in India will have to come up with innovative business models, new ideas and a lot of awareness of IP laws if they are to thrive in India and outside of it.