Start–Up India Will The Government Walk The Talk?
The rapid advances in technology, unleashed over the last 50 years by Moore’s Law — which states that the processing power of computers has doubled approximately every two years — have created a digital revolution. Computing has become dramatically faster, cheaper and smaller, every few years since the 1950s, enabling us to carry an equivalent of a supercomputer in our pockets in the form of a smartphone.
This relentless exponential growth in technology has resulted in its penetration in every aspect of our lives, ranging from cell phones to cars, healthcare to financial services, and homes to social networks. Technology has become the new invisible force that is driving the structural transformation of businesses, industries and governments, globally.
Enabled by technology, startups like Snapdeal, Flipkart, Ola, Uber, Paytm and many more are reshaping the retail, transportation and mobile payment industries in India. This transformation tsunami is creating major disruptions in the existing paradigms, pushing businesses to rush to digitise in order to stay relevant.
This is also providing opportunities to millions of entrepreneurs, worldwide: to create technology-led solutions to solve problems in more cost effective and environmentally safer ways. India, with its large pool of tech-savvy talent in software and services, is very well positioned to take advantage of this shift.
In this age of an internet-connected world, a healthy startup ecosystem requires three inputs: an entrepreneurially driven culture, competitive sources of venture capital, and investor friendly policy framework. India’s tech-savvy millennials, unlike their parents and grandparents, are no longer satisfied with just a well-paying job and the promise of lifelong employment. They increasingly want to try more fulfilling entrepreneurial roles and are showing the willingness to take risks. The recent success of Snapdeal, Ola and others has created visible role models for the future generation of homegrown entrepreneurs.
More than one-third of our educated best are now reported to be joining startups after getting their management and engineering degrees from top institutes. They have shown willingness to forgo steady and stable jobs for risky and challenging entrepreneurial endeavours. This is a positive change that bodes well for India, where job security and risk averseness have been the norm.
Realising this, on the occasion of India’s 69th Independence Day that Prime Minister Narendra Modi announced the Startup India initiative from the ramparts of iconic Red Fort. Just five months later, on 16th January, the PM unveiled the historic Startup Action Plan. PM Modi’s talk was laced with humour: “If anyone asks what’s the difference, the government working on a Saturday that too after 6pm is the difference.” He also said: “When I heard Ritesh (Aggarwal of OYO) speak, I thought how a tea seller like me didn’t think of setting up a hotel chain.” In an effort to give a fillip to the start-up ecosystem in the country, the government announced its intention to exempt capital gains tax on investments in start-ups and a Rs.10,000 crore fund to provide funding support to innovation driven enterprises.
Announcing the start-up action plan at the concluding session of the Startup India event, prime minister Narendra Modi said Indian youth need to be encouraged to be job creators rather than job seekers.
Exemption of the 20 per cent capital gains tax has been a long pending demand of the overseas venture capital investors who have been claiming that government is forcing them to route their investments through Mauritius to get the capital gains tax. At present, most investments in Indian start-ups are routed through Mauritius as capital gains tax on investments from that country is waived due to a provision in Double Tax Avoidance Treaty. However, the waiver of capital gains tax will only come into effect after a formal proposal in the upcoming budget next month is approved by the Parliament.
Key Features of Start-up India, Stand-up India Action Plan
- Start-up profits to be tax-free for 3 years and also no labour inspections for 3 years of launch of the venture.
- Compliance regime based on self-certification for labour and environmental laws.
- Easy exit policy for start-ups with 90 days.
- Tax exemption to be provided on capital gains if money is invested in another start up.
- Government to create Rs. 10,000 crore corpus fund for development and growth of innovation driven enterprises. It will be Rs. 2500 crore a year for four years .
- Liberalised Fast-track mechanism for start-up patent applications under intellectual property rights protection with 80 per cent cost rebate.
- Encouraging startups to participate in public procurement by easing norms of minimum turnover/experience.
- Mobile apps, portal for register start-ups in a day from April 1, 2016.
- Establishing Credit guarantee fund and special scheme for women entrepreneurs.
- Sector specific incubators 500 tinkering labs, per-incubation and seed funds under the Atal Innovation mission Public-private partnership
- (PPP) model for 35 new incubators, 7 new research parks, 31 innovation centres at national institutes and 5 new Bio clusters will be set up to help Biotech Sector.
- Government to start Atal Innovation Mission to give an impetus to innovation and encouraging talent among young people by instituting national awards. Government to promote the provision of core innovation programmes in 5 lakh schools across the country.
In order to provide funding support to start-ups, the government will set up a fund with an initial corpus of Rs.2,500 crore and a total corpus of Rs.10,000 crore over a period of four years. “The fund will be in the nature of Fund of Funds (FoF), which means that it will not invest directly into startups, but shall participate in the capital of SEBI (Securities and Exchange Board of India) registered venture funds,” the action plan said.
The Life Insurance Corp. of India will be an investor in the FoF and it will be managed by a board with private professionals drawn from industry bodies, academia and successful startups. The FoF will support a mix of sectors such as manufacturing, agriculture, health, education among others.
Modi also announced profits from start-ups will be exempted from income tax for three years to address their working capital requirements. “The exemption shall be available subject to non-distribution of dividend by the startup,” the action plan said.
To encourage seed-capital investment, the government also exempted tax above fair market value for incubators in start-ups, which is currently only available to venture capital funds. “In the context of startups, where the idea is at a conceptualisation or development stage, it is often difficult to determine the FMV of such shares. In majority of the cases, FMV is also significantly lower than the value at which the capital investment is made,” it added.
The government also defined a start-up for the purpose of government schemes as one registered in India within the last five years and has annual turnover not exceeding Rs.25 crore.
With the intention of reducing regulatory burden on start-ups so that they can focus on their core business, they have been exempted from six labour laws and three environmental laws for a period of three years. Start-ups will also be provided free legal support in filing intellectual property rights (IPR) and their patent applications will be fast tracked at lower costs.
To create a single point of contact for the entire start-up ecosystem and enable knowledge exchange and access of funding a Startup India hub will be created.
Starting April, start-ups can register themselves as a company in a simple procedure using an app.
To provide equal platform to startups in government procurements, the criteria of prior experience or turnover will be exempted without any relaxation in quality standards or technical parameters. At present, central government, state government and public sector units have to mandatorily procure at least 20 per cent from the micro, small and medium enterprises in which now start ups can also participate.
The government will also create a policy framework for setting up of incubators across the country in public private partnership, build innovation centres at national institutes and set up seven new research parks.
If’s and but’s of the Action Plan
One of the great accomplishments of all of this hullaballoo has been to get the word “startup” accepted within the administration. Acknowledging that an educated, highly talented set of individuals could come together to start an entity based on innovation and driven by technology and intellectual property was a major achievement. But the action plan presented by the government has its own ifs and buts. For instance, Section A of the Action Plan details the definition of a startup which is quite acceptable. However, what is important is to see how language gets transferred into official government notifications and the law. Also, a mobile app will be made available from 1 April of this year for the purposes of registering, filing, tracking, applying for schemes, by startups. Interestingly, though the hope is that it will be within a day, the Action Plan document doesn’t specify how long it will take for a startup company to be registered!
The Action Plan aims at allowing a startup to wind-down its operations in 90 days after it appoints a liquidator/insolvency professional and pays off all creditors and sells the assets. This is a very welcome move as anyone who has attempted to shut a company down in India can relay the fact that it is an almost impossible task. The Insolvency and Bankruptcy Bill 2015 (IBB) that’s pending in Parliament will detail the provisions of the fast-track and voluntary closure of a business. Till the IBB is passed and the details known, celebrations over the Start up initiative will have to wait.
Since April 2015, central and state governments and PSUs have to mandatorily procure 20 per cent from micro, small and medium enterprises (MSMEs). This has been extended now to include startups. But only startups in the manufacturing sector are eligible! Why not all startups?
And in place of “prior experience/criterion” startups have to demonstrate “requisite capability to execute the project as per the requirements”. One cannot ascertain what does this mean. With fears of the CAG audit, one can see how this will be implemented in practice.
A Rs 10,000 Fund of Funds, setting up a Rs 500 crore annual venture debt scheme, encouraging the setting up of research parks, incubators and a country wide programme to spread the awareness of startups in schools and colleges showcase what the government does best, namely creating large national schemes with a grandiose hopeful vision. Clarity on how these will be implemented and more importantly managed and monitored and what kind of outcomes is planned will however have to await clarification!
The good news is that entrepreneurs are unstoppable and have, in spite of the best efforts of India’s overwhelming bureaucracy, demonstrated their abilities and established India as a global startup hotspot. The steps outlined in the Action Plan will only nudge them along faster. And that can’t be bad. India remains the country with enormous potential!
By Nilabh Krishna