Dec 05,2022 | 14 min read

Compliance and Regulatory of Startups

Startups are businesses that want to revolutionize the industry and change the world. They are found by entrepreneurs to create unique and irreplaceable products and services. The aim is to innovate and develop ideas quickly.

 

Eligibility Criteria for Start-up Recognition in India:

 

Any entity which fulfills certain conditions can get recognized as a startup by Department for Promotion of Industry and Internal Trade (DPIIT) and get many benefits and compliance exemptions under the Startup India Initiative.

Entity Type: The startup must be Incorporated as a Private Limited Company, a Registered Partnership Firm or a Limited Liability Partnership.

Entity Age: Period of existence and operations should not exceed 10 years from the Date of Incorporation.

Annual Turnover: Since the company's inception, the annual turnover should not have exceeded Rs. 100 crore in any financial year.

Original Entity: The Entity should not have been created by splitting up or reconstructing an existing business.

Innovative & Scalable: A startup should work on the development or improvement of a product, process, or service, and/or have a scalable business model with a high potential for wealth and employment creation.

 

Compliance exemptions and other benefits under Startup India Initiative

 

Compliances under Labour and Environmental Laws

To lessen the regulatory burden on startups, thus allowing them to focus on their core business, Startups are allowed to self-certify compliance with six labour laws and three environmental laws through a simple online procedure.

In the case of labour laws, there will be no inspections for a period of five years. Startups may only be inspected if a credible and verifiable complaint of violation is filed in writing and approved by at least one level senior to the inspecting officer.

In the case of environmental laws, startups in the 'white category' (as defined by the Central Pollution Control Board (CPCB)) would be able to self-certify compliance, with only random checks can be carried out.

Labour Laws:

1)      The Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996

2)      The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979

3)      The Payment of Gratuity Act, 1972

4)      The Contract Labour (Regulation and  Abolition) Act, 1970

5)      The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952   

6)      The Employees’ State Insurance Act, 1948

Environment Laws: 

1.       The Water (Prevention & Control of Pollution) Act, 1974

2.       The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003

3.       The Air (Prevention & Control of Pollution) Act, 1981

Patent & IPR Compliances

Startups rely on innovation to survive. Because patents protect new innovative ideas that give the company a competitive advantage, patenting the product or process can significantly increase its value as well as the value of company. However, filing a patent is an expensive and time-consuming process that many startups cannot afford.

Fast-tracking of Startup Patent Applications: Startup patent applications will be expedited for examination so that their value can be realised sooner.

Panel of facilitators to assist with the filing of intellectual property applications: The Controller General of Patents, Designs, and Trademarks (CGPDTM) will appoint a panel of "facilitators," who will also regulate their conduct and functions. Facilitators will be in charge of providing general intellectual property advice as well as information on protecting and promoting intellectual property in other countries.

Government to bear facilitation costs: The Central Government will pay the entire facilitation fee for any number of patents, trademarks, or designs that a Startup may file, and the Startups will pay only the statutory fees payable.

Rebate on filing of application: Startups will receive 80% rebate on patent application and 50% rebate on trademark filings when compared to other companies. This will assist them in cutting costs during the crucial initial years.

Tax holiday for 3 Years

Under section 80IAC of Income Tax Act, Startups can be exempt from paying income tax for three consecutive financial years in their first ten years since incorporation.

Section 56 Exemption

Section 56(2)(viib) of the Income Tax Act provides that if a closely held company issues unquoted shares at a premium, the excess of the premium over the fair market value of the shares is taxable as income from other sources in the hands of the company. However, if an eligible start-up meets the requirements outlined in Notification No. GSR 127 (E) [F.NO.5 (4)/2018-SI], dated 19-2-2019, the provisions of this section will not apply.

 

Easy Winding Up Of Company

According to the Insolvency and Bankruptcy Code of 2016, startups with simple debt structures or those meeting certain income criteria can be wound up within 90 days of filing an insolvency application.

An insolvency professional will be appointed for the Startup and the promoters and management will no longer be involved. The insolvency professional shall thereafter be in charge of the company including liquidation of its assets and paying its creditors within six months of such appointment.

Following the appointment of the insolvency professional, the liquidator is responsible for the prompt closure of the business, the sale of assets, and the repayment of creditors in accordance with the IBC's distribution waterfall. This procedure will adhere to the principle of limited liability.

 

Easier Public Procurement Regulations

DPIIT Approved Startups can register as sellers on Government e Marketplace (GeM) and sell their products and services to government entities directly. 

Exemption from Prior Experience/Turnover: To encourage startups, the government shall exempt startups in the manufacturing sector from the "prior experience and turnover" criteria, while maintaining the stated quality standards and technical parameters. Startups must also demonstrate the necessary capability to carry out the project as specified, and they must have their own manufacturing facility in India.

EMD Exemption: DPIIT-recognized startups are exempt from submitting an Earnest Money Deposit (EMD) or bid security when bidding on government tenders.

 

Conclusion

India now has the world's third largest startup ecosystem after the US and China. According to the StartupIndia website and Economic Survey 2021-22, India has over 84,000 startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT), with over 14,000 startups recognised during the financial year 2021-22. The rapid growth of startups will undoubtedly bring new innovations, job opportunities for youth, and play an important role in the growth of India's economy.

References:

https://www.startupindia.gov.in/content/sih/en/startup-scheme.html#1488109787526

https://taxguru.in/corporate-law/legal-compliances-start-ups-india.html

https://m.economictimes.com/tech/startups/economic-survey-2022-at-least-14000-new-startups-recognised-in-india/articleshow/89243366.cms

 

 


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