Government and RBI draw startup revolution roadmap

The government’s 2016-17 budget, released on 29 February, included a number of initiatives promised for startups, such as one-day company registration, 100% deduction of taxes (except minimum alternate tax) on profits for three consecutive years out of five for startups set up from April 2016 to March 2019, long-term capital gains tax exemption on investments up to ₹5 million (US$75,000) in notified units, and long-term capital gains exemption to an individual or Hindu undivided family on sale of residential property if proceeds are used to subscribe to more than 50% of the shares of an eligible startup and to acquire new assets before the filing of returns. The budget also proposed a concessionary tax model for patent exploitation and introduction of hybrid foreign direct investment (FDI) instruments to facilitate business.

Earlier, on 16 January, the government unveiled its Start-up India action plan, which envisages changes to the regulatory environment aimed at one primary objective: ease of doing business for startups. While these steps and more reflect a positive change towards doing business as a startup, it is important to understand the types of entities that would be eligible for the declared benefits. To qualify as a startup, an entity must have an annual turnover of less than ₹250 million; be within the first five years since its inception; be working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property; and not have been formed by splitting up or restructuring an existing business. To obtain tax benefits, a certificate of eligible business from an Inter-Ministerial Board of Certification will be required.

The Reserve Bank of India (RBI), in its sixth bi-monthly monetary policy statement for 2015-16, pledged its support to the startup action plan. Much to the cheer of the startup community, the RBI promised to take steps to ease doing business and contribute to an ecosystem that is conducive for the growth of startups. Even before the release of the action plan, the RBI had launched a dedicated email helpline to assist startups in their foreign exchange transactions by helping startups to understand and prepare for some of the basic groundwork through a single platform.

Luthra & Luthra Law Offices is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad. Dipti Lavya Swain is a partner and Harshit Anand is an associate at the firm. The views of the authors are personal. This article is intended for general information purposes only and is not a substitute for legal advice.