STARTUP
Introduction Startups are young companies founded to develop a unique product or service, bring it to market and make it irresistible and irreplaceable for customers. Rooted in innovation, a startup aims to remedy deficiencies of existing products or create entirely new categories of goods and services, disrupting entrenched ways of thinking and doing business for entire industries. That’s why many startups are known within their respective industries as “disruptors.”
The startup is the dream of an entrepreneur nourished with his ambition and creativity. This dream was further Enlighted by a campaign started by Indian Prime Minister, Narendra Modi. The government took the opportunity to regulate entrepreneurship and encourage the commercialization of plans by initiating the startup environment.
STATISTICAL DATA OF STARTUP Today around 1,10,000 startups are spread among top 10 countries out of which USA dominates with having more than 70,000 startups. If we see the figures below, India stands at second position in the world for having more than 13000 Startups.
UNICORN Startup when gets skyrocket success and funding, they turn into Unicorns. Unicorn are privately-held startup companies with value of $1 billion. There are more than1000 unicorns around the world, who collectively value at more than $3500 billion, India has pride to have 5% of unicorns and a home of 100 Unicorns. IT of Delhi and Mumbai have produced most numbers of startups in India. IIT Delhi alma mater of many Unicorns startup founders. Till 2020, IIT Delhi alumni raised $480 million of funding.
Sachan Bansal and Binny Bansal {Flip Kart}Deepinder Goyal and Pankaj Chaddha {ZOMATO} are some of the famous startup alumni of Delhi IIT.
HOW DOES A STARTUP WORK? On a high level, a startup works like any other company. A group of employees work together to create a product that customers will buy. What distinguishes a startup from other businesses, though, is the way a startup goes about doing that. Regular companies duplicate what’s been done before. A prospective restaurant owner may franchise an existing restaurant. That is, they work from an existing template of how a business should work. A startup aims to create an entirely new template, i.e, a new way of doing old things, which delivers a scale of potential customers. There’s another key factor that distinguishes startups from other companies: speed and growth. Startups aim to build on ideas very quickly. They often do this through a process called iteration in which they continuously improve products through feedback and usage data.
HOW ARE STARTUPS FUNDED? Startups generally raise money via several rounds of funding: • There’s a preliminary round known as bootstrapping, when the founders, their friends and family invest in the business. • After that comes seed funding from so-called “angel investors,” high-net-worth individuals who invest in early stage companies. • Next, there are Series A, B, C and D funding rounds, primarily led by venture capital firms, which invest tens to hundreds of millions of dollars into companies. • Finally, a startup may decide to become a public company and open itself up to outside money via an IPO, an acquisition by a special purpose acquisition company (SPAC) or a direct listing on a stock exchange. Anyone can invest in a public company, and the startup founders and early backers can sell their stakes to realize a big return on investment. It’s worth noting that the initial stages of startup funding are limited to those with especially large pockets, people called accredited investors
HOW DO STARTUPS SUCCEED? While many startups will ultimately fail, not all do. For a startup to succeed, many stars must align and crucial questions be answered. • Is the team obsessively passionate about their idea? It’s all in the execution. Even an outstanding concept can fail to engage its audience if the team isn’t ready to do everything to support it. • Do the founders have domain expertise? The founders should know everything about the space in which they operate. • Are they willing to put in the time? Early startup employees often have intense work schedules. A 2018 survey by MetLife and the U.S. Chamber of Commerce found that startup owners log 14-plus-hour workdays. If a team isn’t willing to devote most of their waking hours to an idea, it may struggle to thrive. • Why this idea and why now? Is this a new idea, and if so, why haven’t people tried it before? If it isn’t, what makes the startup’s team uniquely able to crack the code? • How big is the market? The size of a startup’s market defines the scale of its opportunity. Companies that obsess over niche technology may outcompete their rivals, but to what end? Too small of markets may lead to financials that aren’t large enough to survive. If a startup is able to answer all of these questions, it may stand a shot at becoming part of the 10% of early stage companies to survive.
GOVERNMENT POLICIES When we talk about the journey of growth of startup then the Government of India has contributed a lot towards this by introducing various schemes since inception of initiative till it become unicorn. To list a few, following are the initiatives started by Government of India for startups: - Drone Shakti Startup Indian seed fund Pradhan Mantri MUDRA Yojana (PMMY) Startup India initiative Software Technology Park scheme Startup India scheme Credit linked capital subsidy for technology upgradation and many more Atma Nirbha Bharat app Innovation challenge
These initiatives are intended to build a strong eco-system for nurturing innovation and Startups in the country that will drive sustainable economic growth and generate large scale employment opportunities. It aims to empower Startups to grow through innovation and design.
CERTIFICATION OF Dissuader the Startup India Action Plan, startups that meet the definition are eligible to apply for recognition under the program. The Startups have to provide support documents, at the time of application. The Conditions laid down by Department for Promotion of Industry and Internal Trade for start-up recognition 1. Startup should be registered as Private Company, Registered firm or LLP 2. Period of existence should not be more than 10 years 3. Turnover should be less than 100 crores in any of the previous years. Once the company crosses the mark, it no longer remains eligible to be called a start-up. 4. 80% of plant & machinery should be new and not used in India 5. It should not be formed by splitting up and reconstruction 6. The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth.
BENEFITS OF BEING REGISTERED UNDER DPIIT 1. Self-certification under six labor law and three environmental laws for 5 years from date of incorporation. 2.If share capital is up to 10 lacs and amount received on issue of shares by Startup is above fair market value than it will not treated as income under section 56 {2} {viib}. 3.Section 54 EE No long-term capital gains will be charged if startup has invested into long term specified assets within 6 month of date of transferor long-term asset. Maximum exemption limit is Rs. 50 lacs 4.Section 54 GB If any capital gains arise from sale of house property and same is invested in buying 50% of more of share capital of company qualified under MSME Act 2006. 5.Seed funding Easy availability of capital is essential for entrepreneurs at the early stages of growth of an enterprise. Funding from angel investors and venture capital firms becomes available to start-ups only after the proof of concept has been provided. Similarly, banks provide loans only to asset-backed applicants. It is essential to provide seed funding to start-ups with an innovative idea to conduct proof of concept trials. DPIIT has created Start-up India Seed Fund Scheme (SISFS) with an outlay of INR 945 Crore to provide financial assistance to start-ups for Proof of Concept, prototype development, product trials, market entry, and commercialization. 6. Simple process the government of India has launched a mobile app and a website for easy registration for start-ups. Anyone interested in setting up a start-up can fill up a simple form on the website and upload certain documents. The entire process is completely online.
7.Reduction in cost The government also provides lists of facilitators of patents and trademarks. They will provide high-quality Intellectual Property Right Services including fast examination of patents at lower fees. The government will bear all facilitator fees and the start-up will bear only the statutory fees. They will enjoy 80% reduction in the cost of filing patents. 8.Easy access to Funds A 10,000 crore rupees fund is set-up by government to provide funds to the start-ups as venture capital. The government is also giving guarantee to the lenders to encourage banks and other financial institutions for providing venture capital. 9.Apply for tenders Start-ups can apply for government tenders. They are exempted from the “prior experience/turnover” criteria applicable for normal companies answering to government tenders. 10.R & D facilities Seven new Research Parks will be set up to provide facilities to start-ups in the R&D sector 11.Choose your investor After this plan, the start-ups will have an option to choose between the VCs, giving them the liberty to choose their investors. 12.Easy exit
In case of exit – A start-up can close its business within 90 days from the date of application of winding up
13.Meet other entrepreneurs The government has proposed to hold 2 start-up fests annually both nationally and internationally to enable the various stakeholders of a start-up to meet. This will provide huge networking opportunities. Tax Benefits for Startup Tax Benefits to Startups under DIRECT TAXATION regime Tax Benefits to Startups under DIRECT TAXATION regime (INCOME TAX): Direct Taxation means the tax on the Income of the operations of the business. There are various benefits given to the startups under the Income Tax Act, also there are few pre condition for availing the benefits. Lets have a look at the benefits: • Tax Holiday Scheme to the Startups and Small Businesses {U/s 80 IAC of the Income Tax Act} • Angel Tax Benefits {U/s 56(2)(viib)} • Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups {U/s 54GB} • Set off of carry forward losses and capital gains allowed in case of a change in Shareholding pattern.
1. Tax Benefits under section 80 IAC Tax exemption under Section 80IAC of the Income Tax Act is one of the benefits from the various benefits provided to startups under Startup India Scheme. Amount of deduction: -Tax holidays for 3 consecutive financial years out of first 10 years i.e., 100% profits are exempt for 3 consecutive years. Eligibility Criteria for applying to IT exemption u/s 80IAC If startup is a private company or LLP It is incorporated after 1-4-16 but before 1-4-23 It is registered under DPIIT Startup has innovative and scalable ideas in terms of wealth generation and employment Startup has got certificate from Indian Ministerial board
So if any Startup fulfils the above conditions it gets a Tax Holiday for 3 years and hence fuels a little growth for itself.
2. Angel Tax Benefit under Section 56(2)(viib) of the Income Tax Act: Sec 56(2)(viib) taxes the income of the person who holds the shares of private limited company and he receives any consideration for such shares which exceeds the face value of shares. Due to this the Angel Investors had to face tax implication which made their exit a little expensive and the ultimate bearer of this tax implication were the Startups themselves, so the Government initiated to remove this hardship for venture capital undertakings (angel investors) providing the startups with angel tax benefit.
3. Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups {U/s 54GB} With the increasing number of Startups in India one problem that the Startups face is to fund their operations at least in the early age where the funding from the market is not easily available the early operation are usually funded by the startup founders by selling their properties and other assets but again since the gain on selling these assets and properties are taxed as Capital Gains which takes away a part of the funds that was about to be used for the early age operations of the startup.
To reduce this hardship a section 54GB was amended and introduced which says that an Individual and HUF if sells a property and have a Long Term capital gain out of such property, than such Long term Capital Gain shall not be taxable if the net consideration received from selling the property is utilized for subscription of the Equity shares of an Eligible Company and the Company utilizes such money for acquiring the assets for the company within one year from the date of such subscription.
4. Set off of carry forward losses and capital gains allowed in case of a change in Shareholding pattern One condition which comes with sec 79 for allowing the set-off of early stage losses is that such losses can be carried forward only when all the shareholders in financial year of losses continue to be shareholders in the year of set-off, which is little difficult in case of startups as according to the culture of the startups the shareholders and their ownership ratio changes very frequently, thus keeping them outside the purview of the benefit which is again a hardship.
So to remove this hardship, the law was amended and an exception to the normal clauses was introduced and its now easier for the startups to set-off and carry forward the early stage losses with the profits in further years.
TYPE OF ENTITY Income Tax Rate Applicable
Sole Proprietor Income Tax slab
Partnership / LLP 30% of profit
INDIAN Company 22% of profit
Computation of Income: - In early stage of startups, it is very difficult to account for sales and expenses and therefore to ease out this government of India introduced Presumptive Taxation Scheme where in irrespective of status of organization except companies or LLP, income will be presumed to be as: • Income of Professionals: - 50% of value of services provided • In case of any other business: - 8% of value of goods sold • This provision was introduced to ease out the burden of maintaining books of accounts for startups. • Once the income is computed, next step is to calculate the tax on income