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Govt tweaks startup definition, benefits to apply for up to 7 years

26 May, 2017

The government has broadened the definition of a startup, making it easier for early-stage business ventures to avail of incentives under the ‘startup India’ initiative.

Now a business not older than seven years will qualify for benefits under the startup India programme. So far, companies up to five years from the date of incorporation were eligible for benefits under the plan which was announced in January 2016.

However, in the case of startups in the biotechnology sector, the period shall be up to 10 years, the Ministry of Commerce and Industry said in a notification.

An entity shall cease to be a startup on completion of seven years from the date of its incorporation/registration or if its turnover for any previous year exceeds Rs 25 crore, according to the notification.

The process of recognition as a startup shall be through an online application made over the mobile app/portal set up by the Department of Industrial Policy and Promotion (DIPP). Entities will be required to submit an online application along with a certificate of incorporation/registration and other relevant details.

In order to obtain tax benefits under the startup India initiative, an entity should be working towards innovation, development or improvement of products or processes or services, or should be following a scalable business model with a high potential of employment generation or wealth creation, the government said.

Earlier, an entity was considered as a startup only if its activities were innovative and driven by technology or intellectual property.

Also, startups were required to obtain a certificate of eligibility from the Inter-Ministerial Board of Certification constituted by the DIPP.

According to the latest notification, startups would no longer require a letter of recommendation from an incubator or an industry association for either recognition or tax benefits.

However, if an entity is gaining recognition as a startup without uploading the relevant documents or on the basis of false information, the DIPP reserves the right to revoke the recognition certificate immediately, the notification said.

“Also, any entity formed by splitting up or reconstruction of a business already in existence shall not be considered a startup,” it said.

The scope of definition has been broadened to include scalability of business model with a potential of employment generation or wealth creation, the notification said.

“The changes are an effort to ensure ease of starting up new businesses to promote the startup ecosystem and build a nation of job creators instead of job seekers,” it said.

Recognition as a startup would make early-stage ventures eligible for various concessions, such as reduction in patent application fee and a tax holiday. It would also help speed up the patent process.

The move to include entities up to seven years under the definition is seen as a positive step. “The government’s move to extend the period from five to seven years is symbolic of the ideology that maximisation of benefits for startups is a key growth driver for this eco-system,” said Archana Khosla, founder partner of Vertices Partners.

“While technology- and IP-driven businesses have their own benefits in terms of mass penetration, the essence of scale as well as creating livelihoods by generating employment is a key marker towards macro development,” Khosla added.

“Most startups don’t make profits within the initial years of operations. So, this (acknowledging entities with up to seven years of operations as startups) is a welcome step from the government,” said Roma Priya, founder, Burgeon BizSupport LLP.

However, commenting on the startup definition being extended beyond innovation, she said, “It (a startup’s ability to create employment) depends on a lot of factors including whether the startup has enough funds or if it is going to raise the next round, in addition to market conditions.”

In early stages, startups’ financial statements are nothing but projections. “How would the government evaluate startups on the basis of projections?” asked Priya, who helps startups close venture funding deals.

Many in the startup ecosystem, too, are apprehensive about the inclusion of the ability to create jobs as a qualifying criterion.

Several startup founders previously told VCCircle that inclusion of ‘job creation’ capability in the definition of startups is likely to hurt early-stage ventures as startups would typically try to remain lean initially to reduce cash burn. To understand more about what startup founders think on the job creation part, click here.

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Govt tweaks startup definition, benefits to apply for up to 7 years

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