Re-defining Start-ups

The notification dated April 11, 2018, the Department of Industrial Policy and Promotion (DIPP) under the Ministry of Commerce and Industry, has superseded the notification dated May 23, 2017, and redefined “Start-ups”.

Key points to note include:

a. In case of a private limited company / partnership firm / LLP registered per applicable law, for a period of 7 years from its date of incorporation / registration, it shall be considered a start-up. (Note: startups in the biotechnology sector enjoy a gestation period of 10 years.)

b. Further, the turnover of the entity for any of the financial years since incorporation/ registration shall not exceed INR 25 crore.

c. Entities would need to be in the area of innovation, development or improvement of products or processes or services, or if it’s a scalable business model with a high potential of employment generation or wealth creation.

This notification also stipulates additional conditions for entities seeking approval per S.56(2)(viib) of the Income Tax Act, 1961, which deals with income from other sources for certain types of companies (i.e., income from issuance of shares to residents where consideration exceeds the face value of shares). For approval under this provision, in addition to the above eligibility criteria as above, only a private limited company shall be eligible if:

a) the aggregate amount of paid up share capital and share premium of the startup after the proposed issue of shares does not exceed INR 10 crore, and

b) the investor/ proposed investor, has: (i) the average returned income of INR 25,00,000 or more for the preceding three financial years; or (ii) the net worth of INR 2 crore or more as on the last date of the preceding financial year, and

(c) the startup has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11UA of the Income-tax Rules, 1962.

Whether this will undergo further changes is dependent on the ‘independent evaluation’ of the benefits of this notification, where such review will be carried out before March 31, 2019.