Lok Sabha Question No. 1725 (UNSTARRED), answered on 2023-12-13
Subject: Startup Ecosystem
Ministry: COMMERCE AND INDUSTRY
Asked by: Maddila  Gurumoorthy

## GOVERNMENT OF INDIA MINISTRY OF COMMERCE & INDUSTRY DEPARTMENT FOR PROMOTION OF INDUSTRY AND INTERNAL TRADE

## LOK SABHA

UNSTARRED QUESTION NO. 1725.

TO BE ANSWERED ON WEDNESDAY, THE 13 TH  DECEMBER, 2023.

## STARTUP ECOSYSTEM

## 1725.  SHRI MADDILA GURUMOORTHY:

Will the Minister of COMMERCE AND INDUSTRY be pleased to state:

वाणिज्य एवं उद्योग मंत्री

- (a) whether the Government is aware of the rapid growth of startup ecosystem in India;
- (b) if so, the details thereof;
- (c) whether any steps are being taken by the Government towards simplifying the regulatory environment for startups; and
- (d) if so, the details thereof and if not, the reasons therefor?

## ANSWER

## वाणिज्य एवं उद्योग मंत्रालय में राज्य मंत्री ( श्री सोम प्रकाश ) THE MINISTER OF STATE IN THE MINISTRY OF COMMERCE & INDUSTRY (SHRI SOM PARKASH)

- (a) & (b): The  Government  with  an  intent  to  build  a  strong  ecosystem  for nurturing innovation, startups and encouraging investments in the startup ecosystem of the  country  launched  the  Startup  India  initiative  on 16th  January  2016. Sustained Government efforts have resulted in an increase in the number of recognised startups from over 300 in 2016 to 1,14,902 as on 31st October 2023. The recognised startups have reported to have created over 12.2 lakh direct jobs.
- (c) & (d): The  Government  is  spearheading  multiple  initiatives  under  ease  of  doing business  and  reducing  compliance  burden  which  are  aimed  at  creating  a conducive business environment. These initiatives aim to extend benefit to all entities/sectors/industries of the economy, including startups.

The key focus areas of the initiatives are:

- i.  Simplification  of  procedures  related  to  applications,  renewals,  inspections, filing records, etc.,
- ii.  Rationalization by repealing, amending or subsuming redundant  laws, laws
- iii.  Digitization  by  creating  online  interfaces  eliminating  manual  forms and records, and
- iv. Decriminalization of minor technical or procedural defaults.

Specifically  for  the  startup  ecosystem,  the  Government  has  taken  various measures  to  enhance  ease  of  doing  business,  raising  capital, and reducing compliance burden to simplify the regulatory environment. In this regard, a list of the 57 key regulatory reforms undertaken for the startup ecosystem is placed as Annexure-I .

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## ANNEXURE-I

## ANNEXURE REFERRED TO IN REPLY TO PARTS (c) & (d) OF THE LOK SABHA UNSTARRED QUESTION NO. 1725 FOR ANSWER ON 13.12.2023.

## 57 key regulatory reforms undertaken for the startup ecosystem are as under:

## Reserve Bank of India

1.  Startup  enterprises  permitted  to  access  loans  under  External  Commercial Borrowing Framework up to USD 3 million. (Oct, 2016)
2.  A  Securities  and  Exchange  Board  of  India  (SEBI)  registered  Foreign  Venture Capital  Investor  (FVCI)  may  contribute  up  to  100%of  the  capital  of  an  Indian company engaged in any activity  mentioned  in  Schedule  6  of  Notification  No. FEMA 20/2000, including startups irrespective of the sector in which it is engaged, under the automatic route. (Aug, 2017)
3.  An Indian startup having an overseas subsidiary, may open a foreign currency account with a bank outside India for the purpose of crediting to it foreign exchange earnings out of exports/ sales made by the said entity and/ or the receivables, arising out of exports/ sales, of its overseas subsidiary. (June, 2016)
4.  SOFTEX form filed by software exporters moved online. (Feb, 2019)
5.  Under FDI Policy, tenure of Startup has been aligned with DPIIT Notification dated 19th  February,2019  for  the  purpose  of  definition  of  convertible  notes.  (March 2022)
6.  RBI has rationalised the reporting process in Single Master Form (SMF) on FIRMS Portal for Foreign Investment in India. (January 2023)

## Securities and Exchange Board of India (SEBI)

7.  Lock in period for investments made by an Angel Fund reduced to 1 year from 3 years  as  amended  by  the  SEBI  (Alternative  Investment  Funds)  (Amendment) Regulations,2016, w.e.f. 04-01-2017.
8.  Angel Funds are allowed to invest in overseas venture capital undertakings up to 25% of their investible corpus in line with other AIFs as provided by the SEBI (Alternative  Investment  Funds)  (Amendment)  Regulations,  2016,  w.e.f.  04-012017.
9.  The upper limit for number of angel investors in a scheme is increased from forty nine  to  two  hundred  as  amended  by  SEBI  (Alternative  Investment  Funds) (Amendment) Regulations, 2016, w.e.f. 04-01-2017
10.  The  requirements  of  minimum  investment  amount  by  an  Angel  Fund  in  any venture  capital  undertaking  is  reduced  from  fifty  lakhs  to  twenty  five  lakhs  as amended  by  SEBI  (Alternative  Investment  Funds)  (Amendment)  Regulations, 2016, w.e.f. 04-01-2017
11.  'Operating Guidelines for Alternative Investment Funds in International Financial Services Centres' issued by SEBI. (Nov, 2018)
12.  Under  AIF  Regulations,  definition  of  Startup  has  been  aligned  with  DPIIT Notification  dated  19 th   February,2019  for  the  purpose  of  investment  by  Angel Funds in Startups (5 th  May,2021)
13.  The SEBI (Alternative Investment Fund) (Second Amendment) Regulations 2021 removes the list of restricted activities or sectors from the definition of  Venture Capital Undertaking i.e., Category 1 AIFs can now invest in NBFCs.  (5 th  May 2021)

## Ministry of Corporate Affairs

14.  The financial statement, with respect to private company (if such private company is a start-up) may not include the cash flow statement. (June, 2017)
15.  A private company, which is considered as a start-up for a period of five years from the date of its incorporation, is also allowed to accept deposits from members without any restriction on the amount. (Sep, 2017)
16.  Startup defined for the purpose of Companies Act, 2013: As per the definition, a start-up company means a private company incorporated under the Companies Act, 2013 and recognised as a 'start-up' in accordance with the notification issued by the Department for Promotion of Industry and Internal Trade. (June, 2017)
17.  Exemption from procedural compliance (e.g., such as issue of an offer circular or creation of a deposit repayment reserve) for raising deposits from shareholders. (June, 2017)
18.  In relation to a private company (if such private company is a startup), the annual return shall be signed by the Company Secretary, or where there is no Company Secretary, by the Director of the company. (June, 2017)
19.  A private company (if such private company is a startup) is required to conduct at least one meeting of the Board of Directors  in each half of a calendar year and the gap between the two meetings is not less than ninety days. (June, 2017)
20.  Name Reservation for Company incorporation: Rule 8, Companies (Incorporation) Rules, 2014 substituted with Companies (Incorporation) 5th Amendment Rules, 2019,  which  provides  for  new  regulations  on  resemblance  with  an  existing company name, new categories of undesirable names of a company and list of words which can be used only after obtaining approval. (May, 2019)
21.  Amendment  in  Companies  (Share  Capital  and  Debentures)  Rules,  2014:  The Ministry of Corporate Affairs issued a notification on 16th August, 2019 increasing the period in which ESOPs could be granted to promoters and directors (holding more than 10% equity) of Startups, from 5 years to 10 years from the date of incorporation and thereby aligned the provisions of the Companies (Share Capital

and Debentures) Rules with the provisions referred to in the DPIIT notification dated 19th Feb, 2019.

The notification also enhanced the limit on shares with Differential Voting Rights in  the  Company from 26% of the total post-issue paid  up equity  capital  of  the Company to 74% of the total voting power. Further, the condition for the company to have consistent track record of distributable profits for the last three years for issue of DVR shares has been removed. (August 2019)

22.  Corporate  Social  Responsibility  Funds:  In  reference  to  section  135  of  the Companies Act 2013, Schedule VII has been amended to include  Contribution to incubators funded by Central Government or State Government or any agency or Public  Sector  Undertaking  of  Central  Government  or  State  Government,  and contributions to public funded Universities, Indian Institute of Technology (IITs), National Laboratories and Autonomous Bodies (established under the auspices of Indian  Council  of  Agricultural  Research  (ICAR),  Indian  Council  of  Medical Research (ICMR), Council of Scientific and Industrial Research (CSIR), Department  of  Atomic  Energy  (DAE),  Defence  Research  and  Development Organisation (DRDO), Department of Science and Technology (DST), Ministry of Electronics  and  Information  Technology)  engaged  in  conducting  research  in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs). (October 2019).
23.  As part of Government of India's Ease of Doing Business (EODB) initiatives, the Ministry of Corporate Affairs has launched a new integrated Web Form christened 'SPICe+' replacing the existing SPICe form. SPICe+ would offer 10 services by 3 Central Govt Ministries & Departments (Ministry of Corporate Affairs, Ministry of Labour  &  Department  of  Revenue  in  the  Ministry  of  Finance)  and  One  State Government (Maharashtra), thereby saving as many procedures, time and cost for  Starting  a  Business  in  India  and  would  be  applicable  for  all  new  company incorporations w.e.f.23rd February 2020. SPICe+ has two parts: Part A-for Name reservation for new companies and Part B offering a bouquet of services viz. (i) Incorporation (ii) DIN allotment (iii) Mandatory issue of PAN (iv) Mandatory issue of TAN (v) Mandatory issue of EPFO registration (vi) Mandatory issue of ESIC registration (vii) Mandatory issue of Profession Tax registration (Maharashtra) (viii) Mandatory Opening of Bank Account for the Company and (ix) Allotment of GSTIN (if so applied for) (February 2020)
24.  Amendment  in  Companies  (Share  Capital  and  Debentures)  Rules,  2014:  The Ministry of Corporate Affairs issued a notification on 05th June, 2020 increasing the period in which Sweat Equity shares, from 5 years to 10 years from the date of  incorporation  and  thereby  aligned  the  provisions  of  the  Companies  (Share Capital  and  Debentures)  Rules  with  the  provisions  referred  to  in  the  DPIIT notification dated 19th Feb, 2019. (June 2020)
25.  Amendment in Companies (Acceptance of Deposits) Rules, 2014: The Ministry of Corporate Affairs issued a notification on 07th September, 2020 increasing the period of issuance of convertible note, from 5 years to 10 years from the date of issue  and  thereby  aligned  the  provisions  of  the  Companies  (Acceptance  of Deposits) Rules, 2014 with the provisions referred to in the DPIIT notification dated 19th Feb, 2019. (September 2020)
26.  Amendment in Companies (Acceptance of Deposits) Rules, 2014: The Ministry of Corporate  Affairs  issued  a  notification  on  07th  September,  2020  whereby  the maximum limit in respect of deposits to be accepted from members by a private company shall not apply to a start-up company for 10 years from the date of its incorporation, instead of 5 years. (September 2020)
27.  Incorporation  of  One  Person  Companies  (OPCs)  by  allowing  OPCs  to  grow without any restrictions on paid up capital and turnover, allowing their conversion into any other type of company at any time, reducing the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days and also allow NonResident Indians (NRIs) to incorporate OPCs in India. (February 2021)
28.  Amendment in Insolvency and Bankruptcy Code, 2016: The Ministry of Corporate Affairs issued a notification on 30th August, 2022 harmonizing the definition of startup with the DPIIT notification dated 19 th  February 2019. (August 2022)

## Ministry of Finance Department of Revenue

29.  In the case of a domestic company, where its total turnover or the gross receipt in the previous year does not exceed two hundred and fifty crore rupees, income tax shall be charged at the rate of 25 percent of the total income. (Feb, 2018)
30.  Definition of eligible business as stated in Section 80-IAC aligned with Startups definition. (April, 2018)
31.  Introduction of Section 54EE in the Income Tax Act, 1961: Exemption from tax on long-term capital gain if such long-term capital gain is invested in a fund notified by Central Government. The maximum amount that can be invested is Rs 50 lakh. (May, 2016)
32.  Amendment in Section 54GB of Income Tax Act: Exemption from tax on capital gains arising out of sale of  residential house or a residential plot of land if the amount of net consideration is invested in prescribed stake of equity shares of eligible Startup for utilizing the same for purchase of specified asset. (Feb, 2016)
33.  Minimum  Alternate  Tax  credit  allowed  to  be  carried  forward  up  to  fifteenth assessment years instead of ten assessment years. (2017)
34.  Exemption under section 80-IAC of Income Tax Act: Exemption to eligible Startup for any 3 consecutive assessment years out of 7 years (earlier 5 years) beginning from the year in which such eligible Startup is incorporated. (April, 2018)
35.  Exemption from tax under the provisions of section 56(2)(viib) to Startups for issue of shares above fair market value on the basis of a self-declaration to the Central Board of Direct Taxes. The aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue should not exceed Rs. 25 Crore (Feb, 2019)
36.  Taxation of convertible notes - Period for which a bond, debenture, debenturestock or deposit certificate was held prior to conversion shall be considered for determining the period of holding of such shares or debentures acquired upon conversion. (March, 2016)
37.  Amendment in Section 54GB of Income Tax Act w.e.f 1 st  April 2020: (August 2019)
- i. The condition of minimum holding of 50% of share capital or voting rights in the start-up relaxed to 25%
- ii. Extension of period under which benefit under section 54GB from for sale of residential property can be availed up to 31st March, 2021
- iii. Condition  restricting  transfer  of  new  asset  being  computer  or  computer software is to relaxed from 5 years to 3 years w.e.f. 1-4-2020
38.  Amendment in Section 79 of Income Tax Act (August 2019): Eligible Startups to carry forward their losses on satisfaction of any one of the two conditions:
- i. Continuity of 51% shareholding/voting power or
- ii. Continuity of 100% of original shareholders carrying voting power
39.  Pass through of losses allowed to Investment Funds i.e., Category I and II AIF similar to pass through of income. These amendments will take effect from the 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years (August 2019)
40.  The investment made by Venture Capital Fund of Category-I AIF in a startup was exempted from the applicability of the provisions of section 56(2)(viib) of the IT Act. This exemption has been extended to all sub-categories of Category-I AIF and Category-II AIF via introduction of 'specified funds' in the said section (August 2019)
41.  The Finance Act 2020 provides for amendment in section 80-IAC of the Incometax Act relating to special provision in respect of specified business. The provisions of section 80-IAC, inter alia, provide for a deduction of an amount equal to hundred percent. of the profits and gains derived from an eligible business by an eligible start-up  for  three  consecutive  assessment  years  out  of  ten  years  vis-à-vis  the earlier norm of seven years at the option of the assessee and the total turnover of its business does not exceed hundred crore rupees in the previous year relevant to the assessment year for which deduction under this section is claimed. This amendment will take effect from 1st April,  2021  and  will,  accordingly,  apply  in

relation to the assessment year 2021-2022 and subsequent assessment years. (Feb 2020).

42.  The Finance Act 2020 provides for amendment in section 80-IAC of the Incometax Act relating to special provision in respect of specified business. The provisions of section 80-IAC, inter alia, provide for a deduction of an amount equal to hundred percent. of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of ten years at the option of the assessee and the total turnover of its business does not exceed hundred crore rupees vis-à-vis the earlier norm of twenty-five crore rupees in the previous year relevant to the assessment year for which deduction under this section is claimed. This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years. (Feb 2020)
43.  The Finance Act 2020 provides for amendment in sections 156, 191 and 192 of the Income Tax Act laying to enable employees receiving specified security or sweat  equity  share  as  perquisite  under  section  17(2)(vi)  of  an  eligible  startup referred to in section 80-IAC, to deduct or pay, as the case may be, tax on such income within fourteen days after the expiry of forty-eight months from the end of the  relevant  assessment  year;  or  from  the  date  of  the  sale  of  such  specified security or sweat equity share by the assessee; or from the date of the assessee ceasing to be the employee of the person, whichever is earlier, on the basis of rates in force of the financial year in which the said specified security or sweat equity share is allotted or transferred. This amendment will take effect from 1st April, 2020. As per the earlier norms, the said perquisite including ESOPs were taxed in the hands of the employee at the time of exercise of the option. (Feb 2020)
44.  The Finance Bill 2021 provides for extension of the eligibility period to claim tax holiday for the startups by one more year. (Feb 2021)
45.  The Finance Bill 2021 provides for extension of claiming Capital gains exemption for investment in startups by one year i.e., till 31 March, 2022. (Feb 2021)
46.  The Finance Bill 2022 provides for extension of the eligibility period to claim tax holiday for the startups by one more year. (Feb 2022)
47.  The Finance Bill 2022 capped the surcharge on the long term capital gain at 15% for  unlisted  companies  from  existing  37%.  The  effective  rate  of  tax  has  been reduced from 28.5% to 23.9%. (Feb 2022)
48.  The Finance Bill 2023 provides for extension of the eligibility period to claim tax holiday for the startups by one more year. (Feb 2023)
49.  The Finance Bill 2023 enables startups to set off and carry forward losses for a period  of  10  years  vis-a-vis  7  years  under  section  79  of  the  Income  Tax  Act 1961. (Feb 2023)
50.  The Finance Bill 2023 capped the surcharge on the long term capital gain at 25% for unlisted companies from existing 37% under the new tax regime. The effective rate of tax has been reduced from 42.74% to 39.0%. (Feb 2023)

## Department of Economics Affairs

51.  The Ministry of Finance now allows non-government provident funds, superannuation, and gratuity funds to invest up to 5 percent of their investible surplus  in  Category  I  and  II  Alternate  Investment  Funds  (AIFs)  registered  with SEBI. (March 2021).

## Insurance Regulatory and Development Authority

52.  The  Insurance  Regulatory  and  Development  Authority  of  India  (IRDAI)  has allowed insurance companies to invest in Fund-of-Funds (FoF) that invest within the country subject to certain conditions. (April 2021).

## Department of Expenditure

53.  Harmonization  of  Startup  Definition  under  the  Manual  for  Procurement  of Consultancy and other Services with the DPIIT notification dated 19 th  February 2019.

## Ministry of Labour and Employment

54.  The  Ministry  of  Labour  and  Employment  now  allows  EPFO  to  invest  up  to  5 percent of their investible surplus in Category I and II Alternate Investment Funds (AIFs) registered with SEBI. (April 2021)

## Ministry of Electronics and Information Technology

55.  Removal of clause from Electronic Development Fund (EDF) operating guidelines stating that if a fund draws from Fund of Funds for Startups, then they cannot draw from EDF and vice versa. (Nov, 2018)

## Ministry of Commerce and Industry, Department for Promotion of Industry and Internal Trade

56.  Amendment  in  the  definition  of  a  Startup:  An  entity  shall  be  considered  as  a Startup up to a period of ten years from the date of incorporation/ registration and turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees. (Feb, 2019)
57.  Ministry  of  Commerce  and  Industry,  Department for Promotion of  Industry and Internal Trade vide Gazette Notification No. G.S.R. 646(E). dated 21st September 2021  amended  the  Patent  Rules.  The  Patent  Rules  have  now  extended  the benefits related to 80% reduced fee for patent filing & prosecution to educational institutions as well. (Sept 2021)

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