What’s new for Startups?

By now, many of you would have no doubt read the new definition of a “start-up”.

The major changes from the earlier definition, include: (a) the extension of the life of a startup from 5 to 7 years (from the date of incorporation / registration) while carving out a longer incubation period for entities in the biotechnology space, which would be 10 years; and (b) the provision for a “scalable business model with a high potential of employment generation or wealth creation”. Enlarging the time period to 7 years is probably to bring it in consonance with the tax laws for startups which envisage a three year tax holiday from among 7 years of their incorporation.

It may also be pertinent to note the following points.

(a) The inter-ministerial board will now be constituted only by the DIPP while the other two departments (namely the Dept. of Science and Technology, and the Dept. of Biotechnology) appear to have no role.

(b) The new rule empowers a bureaucrat to revoke the recognition to a startup without any prior notice or reason (earlier only a fine/penalty would have been levied).

(c) The definition of a startup clearly attaches excessive  importance to the form of the organization rather than the substantive nature  of its activities. A startup that is a sole proprietorship and  subsequently converts to a private company or an LLP is not eligible to be regarded as a startup. (As the proviso to the definition reads: Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘Startup’). There  is  no compelling rationale for this treatment. Instead a definitive time frame may be provided to a sole proprietorship to register itself as a startup company or as an LLP.

For a Government that wants to encourage entrepreneurship and private investment and is committed to maximum governance and minimum Government, these seem strikingly draconian provisions that merit a re-look.

The author would like to thank Abishek Venkataraman for his inputs.