What, Who and How of
Startup in India

Startup in
India
Page 2
16 December 2019
► Startup India is a flagship initiative of the Government of India, intended to
build a strong ecosystem that is conducive for the growth of startup
businesses, to drive sustainable economic growth and generate large scale
employment opportunities.
► The Government through this initiative aims to empower startups to grow
through innovation and design.
► For availing various benefits under the Startup India scheme, an entity would
be required to be recognized by Department of Industrial Policy and
Promotion (DIPP) as a startup by applying at
https://www.startupindia.gov.in/content/sih/en/startupgov/startup-recognition-
page.html.

Who can be a
Startup?
Page 3
16 December 2019
1. If it is incorporated as a private limited company or registered as a
partnership firm or a limited liability partnership in India
2. Up to ten years from the date of its incorporation/registration
3. If its turnover for any of the financial years since incorporation/registration has
not exceeded INR 100 Crores
4. If it is 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
Note: An entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘startup’.

Startup registered on the startup
India website vs DIPP recognized
startups
Page 4
16 December 2019
► A startup which has a profile on the startup India website is considered a
registered startup on the portal.
► These startups can apply for various acceleration, incubator/mentorship
programmes and other challenges on the website along with getting an
access to resources like Learning and Development Program, Government
Schemes, State Polices for startups, and pro-bono services.
► For DIPP-recognition, the startups have to apply
at https://www.startupindia.gov.in/content/sih/en/startupgov/startup-
recognition-page.html to avail benefits mentioned in the above slides

Cities ahead in the startup venture in India

Page 20 16 December 2019
Cities ahead in the startup
venture in India
Bengaluru Delhi/NCR Mumbai Chennai
Hyderabad
Kolkata
Pune Ahmedabad
Kochi

Startup India: Initiatives by Central
Government

Benefits under Startup
India Initiative
Page 8
16 December 2019
The benefits provided to recognized startups under the Startup India initiative
are:
1. Self-Certification: Self-certify and comply under 3 Environmental & 6 Labour
Laws
2. Tax Exemption: Income Tax exemption for a period of 3 consecutive years
and exemption on capital and investments above Fair Market Value
3. Easy Winding of Company: In 90 days under Insolvency & Bankruptcy
Code, 2016
4. Startup Patent Application & IPR Protection: Fast track patent application
with up to 80% rebate in filling patents

Benefits under Startup
India Initiative
Page 9
16 December 2019
5. Easier Public Procurement Norms: Exemption from requirement of earnest
money deposit, prior turnover and experience requirements in government
tenders
6. SIDBI Fund of Funds: Funds for investment into startups through Alternate
Investment Funds
7. Apply for tenders: Startups can apply for government tenders. They are
exempted from the “prior experience/turnover” criteria applicable for normal
companies answering to government tenders.
8. R&D facilities: Seven new Research Parks will be set up to provide facilities
to startups in the R&D sector

Benefits under Startup
India Initiative
Page 10
16 December 2019
9. No time-consuming compliances: Various compliances have been
simplified for startups to save time and money. Startups shall be allowed to
self-certify compliance (through the Startup mobile app) with 9 labour and 3
environment laws
10. Tax saving for investors: People investing their capital gains in the venture
funds setup by government will get exemption from capital gains. This will
help startups to attract more investors.
11. Choose your investor: After this plan, the startups will have an option to
choose between the VCs, giving them the liberty to choose their investors.
12. Meet other entrepreneurs: Government has proposed to hold 2 startup
fests annually both nationally and internationally to enable the various
stakeholders of a startup to meet. This will provide huge networking
opportunities.

Benefits granted by State
Governments:

Page 26 16 December 2019
Benefits under
Maharashtra
State Innovate
Startup Policy,
2018

Definition of a
Startup
Page 13
Incorporated as either a private limited company, a partnership firm or a limited
liability partnership in Maharashtra, as per the prevalent norms for registration
Operational for not more than seven years from the date of its
incorporation or registration, which is extended to 10 years for units in the
biotechnology and social sectors
Reporting an annual turnover of at most INR 25 Crores since its
incorporation or registration
The unit should either strive towards innovation, development or improvement
of products, processes or services; OR be a scalable business model with
strong potential for high employment generation or wealth creation
Notes
► The aforementioned criteria have been defined under the Startup India:Action Plan by the Government of India
► Units in the social sector include, but are not limited to, Education, Skill Development, Healthcare, Clean Energy,
Water Sanitation & Conservation, Waste Management,Agricultural, Food Security and Financial Inclusion
► Entities formed by the split-up or reconstruction of an existent business unit are ineligible under the Policy
Eligibility
Criteria
16 December 2019

Incentives
offered
Page 14
16 December 2019
Sr.
No.
Particulars Additional details
1 SGST reimbursement
► 100% reimbursement of Net SGST subject to the condition that
input credit for the same is not available to the customers
2
Stamp Duty and
Registration Fees
reimbursement
► 100% reimbursement for first 3 years
► 50% reimbursement for subsequent 3 years
► Aggregation of business places supplied by private places
through a common platform may also be permitted
3 Quality Testing assistance
► Assistance of 80% of quality testing costs incurred by startups
at BIS-accredited facilities
4 Patent filing assistance
► 80% rebate in filing costs
► Up to INR 2 Lakh for Indian patents and up to INR 10 Lakhs for
international patents
5 Other incentives
► Self certification for select compliances and norms, with
exemption from inspections for 7 years
► Relaxation from norms under Maharashtra Shops and
EstablishmentsAct
► Startups in the manufacturing sector are exempt from the “prior
experience and/or turnover” criteria, subject to specified
conditions

Additional non-fiscal benefits
and initiatives
Page 15
Access to Leapfrog
Maharashtra Portal
► The portal will serve
as a communication
hub and a single
window clearance
facilitator
► Serves as the
nucleus for the
State’s startup hub
for enabling effective
knowledge
exchange
► Clearances and
approvals can also
be obtained
efficiently
► The portal launch
date is awaited from
authorities
► Mumbai – Fintech
and AVGC
► Pune – Automotive
and Electronics
► Nashik –
Healthcare
► Aurangabad –
Agro-process
► Nagpur – Clean
Energy
Designation of
Innovation Clusters
Institution of Incubators
and Parks
16 December 2019
► The State will encourage
the development of
incubators through
Private, Public or
Private-Public
Partnership (PPP)
methods, in
collaboration with the
private sector and
educational and R&D
institutions
► A multi-facility Startup
Park has been proposed
in order to consolidate
incubators, accelerators,
investors, mentors and
other stakeholders in
one location

Additional non-fiscal benefits
and initiatives
Page 16
State-sponsored Funds
► Fund-of-funds with an
initial corpus of INR
100 Crore and a total
corpus of INR 500
Crore
► Infrastructure fund for
incubators,
accelerators and
other labs
► Encouragement of
CSR funds and an
Alternative
Investment Market
► The State will support
units in the social
sector through
crowdfunding
platforms
► Startup Week
► Grand Challenges
► B-Plan
Competitions
► Startup Symposia
► Get-togethers
State Sponsored
Events
Development of
Human Capital
16 December 2019
► Organization of
workshops and
programmes in
schools and
universities
► Designation of
community builders
and role models
► Setup of TEDCs
► Institution of
EdTech platforms

Page 35 16 December 2019
Gujarat
Scheme For
Assistance Of
Startups /
Innovation,
2015

Gujarat Scheme for Assistance of
Startups / Innovation, 2015
Page 18
Criteria for
Recognition as
Eligible Startup
Unit [a]
► Incorporated as a Private Limited Company, Partnership or Limited
Liability Partnership for not more than 10 years from the date of
registration/incorporation
► Maximum annual turnover of INR 100 Crore since incorporation
Criteria for
Recognition as
Eligible Startup
Unit [a]
► The Unit is working towards innovation, development or improvement of
products, processes or services [OR]
► A scalable business model with a high potential of employment generation
or wealth creation
► Units formed through a split up or reconstruction of an existing entity are
ineligible
Definition of
Innovative Project
► “Innovation is the process of introducing new or making changes with
updated technology, large and small, radical and incremental, to products,
processes, and services that results in the introduction of something new
and innovative products”
Policy Title &
Eligible Entities
16 December 2019
Introduction
► Gujarat Scheme forAssistance for Start ups/Innovation, 2015 – 2020
► Individuals with an innovate idea or universities, educational institutions,
incubation centres, R&D institutions, Public Sector Units (PSUs) and
private establishments that support and mentor innovators are eligible

Gujarat Scheme for Assistance of
Startups / Innovation, 2015
Page 19
16 December 2019
Sr.
No.
Particulars Incentive Amount
1 Sustenance allowance for innovator INR 10,000 per month for 1 year
2 Assistance for mentoring services Up to INR 5 Lakh
3
Assistance for procuring raw material and other
components pertinent to the innovative process
Up to INR 10 Lakh
A. Assistance for Innovation
Sr.
No.
Particulars IncentiveAmount
1 Net VAT/SGST Reimbursement
80% for 5 years up to 70% of eligible
fixed capital investment*
2
Marketing and PublicityAssistance for introduction of
product to the market
Up to INR 10 Lakh
B. Assistance once idea is conceptualized
*Computation of Net VAT/SGST will exclude the additional tax payment and reduction in Input tax credit, if any
Additional benefits include
Provision of mentor services
Permission for the innovator to utilise the facilities in the eligible institution
Select innovators will receive free access to institutions that include university libraries, government laboratories,
Centres of Excellence and PSUs

Challenge of Angel
Tax faced by a Startup

Angel Tax
In the recently launched Budget 2023-24, the government has proposed to extend the
provisions of ‘angel tax’ to transactions involving foreign investors. Angel taxes are taxes funds
raised by startups if they exceed the fair market value of the company. Finance minister
Nirmala Sitharaman said in the budget speech that non-residents will now come under the
purview of Section 56(2) VII B, also known as angel tax, which was introduced in 2012 as an
anti-abuse measure aimed at tax avoidance. Alternative investment funds registered with the
Securities and Exchange Board of India (Sebi) will continue to be exempted from the tax.
However, foreign investors who were earlier outside the tax’ s purview have now been brought
under the ambit of angel tax.

♦ History of Angel Tax In India
The tax was introduced in the 2012 Union Budget by
then finance minister Pranab Mukherjee to arrest and
stop laundering of funds. It has come to be called angel
tax since it largely impacts angel investors in start-ups.

♦ Law Governing Angel Tax In India Section 56(2)(viib) of Income Tax Act, 1961 is
the core section of Angel Taxation. Angel taxation is only a terminology given to
tax levy under the abovementioned section.
when a closely held company issues equity shares and any investor subscribes for
such shares and pays such consideration per share which is above the fair value
of such shares, then such excess i.e. (Consideration per share less Fair Value per
Share) is to be treated as income from other sources of such receiver company
and Consequently such company has to pay tax on such excess amount @ 30%
plus cess as applicable. When this section becomes applicable to a closely held
company and such company is a startup company, then tax paid on such excess
receipts (amount above Fair Value) is termed as Angel Tax and Similarly the
persons investing in its shares are termed as Angel Investors.

Angel Tax New Proposal
• It is related to the premium received. If an Indian unlisted company receives an excess premium on the sale of shares to a foreign investor, the premium is
considered “income from other sources”. And it will be subject to tax.
• Before this proposal in budget 2023-24, angel tax was imposed only on investments made by a resident investor.
Proposed change:
• • The amendment is required in the Finance Bill, 2023. It has proposed to amend Section 56(2) VII B of
the Income Tax Act.
• • It will include foreign investors in the ambit of tax. When a start-up raises funding from a foreign
investor, it will also be counted as income and be taxable after the amendment.
• • But, exceptions are also made. It mentions that foreign investors will not need to pay any angel tax
while investing in a government-recognised (Department for Promotion of Industry and Internal Trade
(DPIIT) registered) startup in India.

Possible impacts:
• It can impact the funding of startups, as the
proposal has come in the declining funding
trend in startups. India’s startups dropped by
33 per cent to $24 billion in 2022 as compared
to the previous year.
• Indian startups get a major source of funds
from foreign investors.
• The source and amount of funding also
impact their valuation.
• • It can generate fear among the startups as the
imposition of angel tax impacts the fair market valuation of
the company. The tax department calculates market value
based on the net assets of the company. But the estimated
growth prospects and future projections based on these
growth prospects determine the fair market valuation of
the startup.
• The proposal can damage confidence in the
startup ecosystem.
• • The proposal can also impact the FDI inflow that we get
from these foreign investments.
• • The investors may not want to deal with additional tax
liability in investment in a startup.
Though, to relieve such anticipation, the DPIIT
secretary has mentioned that ‘Angel Tax’
provisions in Finance Bill will not impact
startups. As exceptions are also there for
investing in a government-recognised
(Department for Promotion of Industry and
Internal Trade (DPIIT) registered) startup in
India. And it is an easy process to get
recognition from the department, as said by
the DPIIT secretary.

Who are Angel
Investors?
Angel investors are high-net-worth
individuals who invest their personal
income in business start-ups or small
and medium-scale companies.
Why they are
Gaining
Importance?
Angel investors finance small
startups. They provide funds at a
stage where such startups find it
difficult to obtain funds from
traditional sources of finance such as
banks, financial institutions, etc. In
this way, they encourage
entrepreneurship in the country.
Further, such investors provide
mentoring to entrepreneurs as well
as access to their own business
networks. Thus, they bring both
experience and capital to new
ventures.

What is Angel Tax and the Issue Related to them?
1. Angel Tax, formally known as Section 56 (2) (vii b) of the Income Tax Act, taxes funds raised by startups
if they exceed the fair market value of the company. It was introduced in 2012 by the UPA government in
order to detect money laundering practices and catch bogus startups.
2. In the past few years, many startups have raised concerns over angel tax calling it an extremely
unfriendly and unfair tax as it is not possible to calculate the fair market value of a startup. They have also
alleged that to calculate the fair market value, the Assessing Officer (AO) chooses the cash discounted flow
method, which is not very startup-friendly but suits the tax officers.
3. Last December, over 2,000 startups in the country received notices to clear the angel tax and some of
them were also notified to pay an expensive penalty for not paying the dreaded tax on time. Also the dept.
Asks for documents which usually are not required.

What are the New Rules?
1. As per earlier rules, the exemption from angel tax was for companies with turnover up to Rs 25 crores, but as per new rules, the exemption limit has been
extended to companies with turnover less than Rs 100 crores and those companies should be less than 10 years old.
2. Further, investments made by listed companies with a net worth of at least ?100 crore or a total turnover of at least ?250 crore will be fully exempt from
the tax; so will investments made by non-resident Indians.
3. An eligible start-up would be one that is registered with the government, has been incorporated for less than 10 years, and has a turnover that has not
exceeded ?100 crore over that period.
4. Also, the Finance Minister announced that a mechanism of e-verification will be put in place to resolve the issue of establishing the identity of the
investor and source of his funds. With this, funds raised by startups will not require any kind of scrutiny from the Income Tax Department.
5. Also announced that startups will not be required to present the fair market value of their shares issued to certain investors including Category-I
Alternative Investment Funds (AIF).

Significance of New Rules
1. The rules will definitely make life easier for start-ups, which are in desperate need for
capital to fund their growth and other business requirements.
2. The changes will encourage wealthy individuals to invest in startups that receive
capital at a premium on account of their innovative business model although the valuation
is not justified by the physical assets they hold.
3. Further, since the new rules are applicable retrospectively, many young companies
which received notices from the Income Tax Department in the past will be relieved by the
latest tweak in the rules.

Concerns
1. Companies need to be registered with the government as start-ups to make use of the latest exemption.
2. To be classified as a startup, a company has to prove certain conditions such as that it hasn’t invested in vehicles worth more than ?10 lakh, in land unrelated to the
business, or in jewellery.
3. These conditions, which are probably intended to prevent money-laundering, can lead to a lot of bureaucratic delays as well as rent-seeking.
4. In addition, the new rules for angel tax, although less severe than earlier, can cause the same old issue of arbitrary demands for tax for companies that don’t fall under the
defined start-ups category.
5. Taxes due are calculated based on what amount the sale price of a company’s unlisted shares is greater than its fair market value.
6. It is not possible to know the market value of shares that aren’t openly traded in the market. So tax authorities with questionable intentions can still find reasons to harass
startups with unreasonable demands for tax. The damage to investor confidence may stay unless the government does something about the arbitrary nature of this angel tax.
The changes, when seen in totality, are welcome, for startup companies. The changes will also assuage the government’s concerns to a small extent with respect to shell
companies evading taxes under this mechanism, while permitting exemptions for startup organisations.

♦ Point of Concern:. The main point of Concern is
Fair Value of Investments as per Rules Specified By
Income Tax and Fair Value Generally Accepted for
Valuation of Start up for Investment by Angel
Investors. In the current pace of start-ups and
investments and taking consideration into the
Rules prescribed by Income Tax Act the valuation
of start ups has to be greater than the value
derived by Income Tax Rules and the angel tax is
nothing but an Tax on difference between (Value
of share for Investing in start-ups and Fair Value as
per Rules given by Income Tax)

Fair Value As Per Income Tax Rules. (Rule 11U And 11UA)
• Rule 11Uof the income tax rules provides for the meaning of expressions used in determination
of fair market value while following methods prescribed under Rule 11UA of the income tax rules.
• Rule 11UA, on the other hand, provides for methods of determining fair market value of a
property, other than immovable property, including valuation of
• Jewellery,
• Archaeological collections, drawings, paintings, sculptures or any work of art,
• Shares and securities (both quoted and unquoted)

Fair Value Generally Accepted for Valuation of Start
up for Investment by Angel Investors.
• Valuation of start-ups is also a different world since industry
demands Discounted cash flow (DCF) method to be applied
instead of Net Assets Value (NAV) method. The valuation of a
start-up is usually based on a commercial negotiation between
the company and the investor, and it depends on the company's
projected earnings at that point in time.
• However, since start-ups operate in a highly uncertain
environment, many companies are not always able to perform
as per their financial projection. Equally, some companies
exceed the projection by a long mile if they are doing well.

♦ Illustrative Calculation of Angel Tax. Particulars Amount Fair Market
Value of Share as Per Angel Investors For Investment.
Particulars Amount
Fair Market Value of Share as Per
Angel Investors For Investment. Rs. 500/Share
Fair Value of Share Calculates as Per
Rules and Methodology given by
Income Tax Act 1961. Rs. 300/Share
Number of Share as mutually decided
by Angel Investor and Start-up
Company. 1000 Shares
Income Taxable In the Hands of Start-
up Company under the head Income
From Other Source.
Shares 1000(Rs. 500 - Rs. 300) =
2,00,000/-
Tax Payable by Start-up Company Rs. 2,00,000 * 30.90%=Rs. 61,800/-

♦ Exemption/Relief To Some Start-ups.
Major Relief has been granted to Start-ups by The Department for
Promotion of Industry and Internal Trade in super session of all earlier
notification by means of issuing New Notification dated 19 Feb 2019
• • Start-up Means:-The entity shall be considered as Startup for a period of 10 years
(earlier 7 years) subject to turnover not exceeding 100 crores (earlier 25 crores) and the
entity should work towards innovation, development or improvement of products or
services.
• • Exemption from Section 56(2)(viib):- Aggregate amount of paid up share capital and
share premium of the startup after the proposed issue of shares does not exceed Rs. 25
crores (Earlier 10 Crore). In calculating the above limit of 25 crores non-residents,
venture capital funds ('VCFs') and venture capital company, registered with SEBI are not
to be included. Accordingly shares can be issued to such excluded investors without any
limit and still the Startup will be eligible to claim exemption u/s 56(2)(viib) of the Act
provided the shares beyond the threshold limit are issued to the excluded investors.
• • 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.

LIMITATION OF THE STUDY
The study engrosses only details available through online
platform.
Due to time constraint the in depth study could not be
conducted.
The project has prepared on current policy only and tax slabs,
exemption. relief may change as per amendment.

The step is likely to impact startups as they raise bulk of the capital from foreign investors. In 2022, private equity and
venture capital funding into India totalled $54 billion, while it was close to $77 billion in 2021, a record year for Indian
firms.
Angel tax has been the sword of Damocles hanging over the heads of various Indian startups. This had been misapplied to
them because all startups end up raising money from investors at a premium and often tax demand would come after
one or one-and-a-half years. No investor would touch these startups because any money they put into the startup would
actually go towards clearing the older tax liability," Pai said. He added that this would be taxed for startups under
“income from other sources" and corporate tax rates would apply.
The tax would also apply to domestic investors who are not Sebi-registered AIFs. “If money came in from hypothetically a
State Bank of India or LIC into a startup, that would also be liable to tax because they’re not Sebi-registered AIFs," Pai
added.
To avoid the purview of angel tax, startups can file a “Form 2 Exemption". However, according to the law, this exemption
would prevent the startup from undertaking many activities such as setting up a subsidiary, making any advances of
salary, rental deposits, and vendor advances. Startups also would be barred from making treasury investments or
participating in stock merger and acquisition deals as claiming the exemption would hamper the startup in many ways,
according to Pai.
Finding of the Study and Conclusion