Department of Industrial Policy and Promotion (DIPP), under the Union Ministry for Commerce and Industry, has come out with a new notification on definition of start-ups. Notably, this is the second time DIPP has made changes in the definition of Startup. Earlier in May 2017, DIPP has made minor changes wherein an entity would be recognized as a startup up to seven years instead of the previous five years rule.
According to the fresh DIPP notification, “An entity shall be considered as a start-up up to a period of seven years from the date of incorporation/registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under Sction 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India”.
In the case of start-ups in the biotechnology sector (including medical device), the period shall be up to ten years from the date of its incorporation/ registration. In March of last year, DIPP has moved a cabinet note and suggestion that the maximum age for classifying a biotechnology or a medical devices firm as a startup be raised to 8-10 years from the current five years.
The increase in the age of Biotechnology and Medical Devices companies to consider as startups is made on the very fact that the companies in these two sectors take long development process to mature.
The notification also said that the turnover of the entity for any of the financial years since incorporation/ registration should not exceed ₹25 crore.
The definition also said that the entity should be working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. However, an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘start-up’.
Notably, last month DIPP has cancelled certifications of companies which have been earlier recognized as ‘Start-ups’ but misusing the Start-up India initiative as these are actually subsidiaries of existing Indian or foreign companies.
“An entity shall ‘cease’ to be a start-up on completion of seven years from the date of its incorporation/ registration or if its turnover for any previous year exceeds ₹ 25 crore. In respect of start-ups in the biotechnology sector, an entity shall cease to be a start-up on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds ₹ 25 crore ,” it added.
Interestingly, according to above changes Flipkart, which was incorporated in 2007, now cease to be called as a startup — technically speaking, going by the new definition of startup by DIPP.
A start-up shall make an online application over the mobile app or portal set up by the Department of Industrial Policy and Promotion for recognition, it added.
The notification also said that a start-up being a private limited company or a limited liability partnership incorporated on or after 1st day of April 2016 but before 1st day of April 2021, can claim 100% tax exemption on profits for three out of seven years, as per the prescribed norms.
The notification also provided tax relief for issue of shares by start-ups over the fair market value, with certain conditions.
For availing the tax relief for issue of shares over the fair market value, the aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares should not exceed ₹ 10 crore.
Further, the investor/ proposed investor, who proposed to subscribe to the issue of shares , should either have an average returned income of ₹ 25 lakh or more for the preceding three financial years or net worth of ₹2 crore or more as on the last date of the preceding financial year.
The start-up had to obtain a report from a merchant banker specifying the fair market value of shares in accordance with rules, it said.
The above news was first reported in The Hindu