In what could be seen as fraudulent misuse of government of India's Start-up India initiative introduced in 2016, Department of Industrial Policy & Promotion (DIPP) has cancelled/revoked certifications of companies which have been earlier recognized as 'Start-ups' is actually subsidiaries of existing Indian or foreign companies.

On March 15, the Inter-Ministerial Group (IMG) on Startups held a meeting and revoked the certificates of recognition and certificates of eligibility given to two entities -- Riot Solutions and JVS Flow Control OPC -- as they failed to respond to queries on whether they were subsidiaries of existing companies, as indicated in minutes of meetings.

These two entities were sent queries by the IMG but have not yet responded. So, the IMG decided to revoke the certifications of recognition issued to them. Riot Solutions is based out of Ernakulam, Kerala while JVS Flow Control is based out of Gujarat, as per registrar of companies.

Besides these two, the IMG has also sought clarification from five more entities that it suspects might be subsidiaries of existing companies. It is currently waiting for the response and if the replies are not satisfactory, or if there is no reply, then the IMG will revoke certifications issued to these entities as well.

Notably, this should serve as a warning to others too, who, in order to avail tax benefits, have done this same wrong doing and have not came under the scrutiny yet.

The IMG had earlier observed that certain entities that had sought recognition as start-ups by DIPP were incorporated/registered as subsidiaries of existing Indian or foreign companies. However, as per the notification 501(E) under the reconstruction clause, it states that any entity formed by splitting up or reconstruction of a business already in existence shall not be considered a start-up. Thus, such subsidiaries are ineligible to be recognised as start-ups and will also not be eligible to be considered for tax benefits by the IMB. The certification of registration and certification of eligibility for such an entity that may have been issued earlier now stands cancelled.

“The whole idea behind promoting the start-up culture in the country, which is to encourage individuals to start their own enterprises and get gainfully employed, gets defeated if existing companies try to take advantage of the scheme. That is why the IMB is acting strictly here,” said a government official to a business daily.

Since the Startup India Action Plan was approved by the Centre in 2016, 6,096 entities have been recognised as start-ups by the DIPP and 74 have been approved for tax benefits by IMB, as per government figures up to first week of January 2018.

The above development was first reported in BusinessLine.

To recall, in February government has extended tax holiday/exemption by eligible startups till April 1 2021. Moreover, in last year's budget government had also reduced corporate Tax by 5% for SMEs, startups With turnover less than Rs 50 crore. It is because of these tax gains that companies are incorporating new companies as subsidiaries of existing ones and registering them as startups to gain tax benefits which actually nullifying the aim of PM Modi's ambitious Start-up India initiative.

Additionally, although the IMG is now scrutinizing these companies falsely posing as startups, DIPP must also improvise the procedural guidelines of recognition/ certification of companies as startups as how come these subsidiaries went on to get recognized as startups which they are not while at the same time the new ventures actually started by fresh entrepreneurs are finding it difficult to get recognition as startups.

Besides, there are other companies which are nor a startup nor a subsidiaries of existing ones but still getting full tax exemptions.

Top Image Via - Ankur Rajput @Linkedin

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