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Also read: Startup Due Diligence explained

However, businesses that receive a Startup Recognition Certificate from the Department for Promotion of Industry and Internal Trade (DPIIT) are entitled to various benefits, the biggest of which are tax exemption and incentives.

Shri Narendra Modi, the Prime Minister of India, unveiled some ambitious plans to improve the startup ecosystem in his nation. The PM mentioned the Startup India initiative while promoting the startup philosophy. The initiative is designed to meet the needs of struggling business owners and motivate them to operate in a more practical way. Notably, new startup tax advantages and exemptions were covered in a separate section of the Budget 2016. The government wants to stimulate the economy by supporting technological advancements and consumer-focused enterprises.

What is a Start-up?

The Startup India action plan defines a "startup" as an individual entity that must be registered with the Government of India (no earlier than 5 years) and has an annual turnover of less than 25 crores in any financial year. It will operate in the field of development and create products for the benefit of society using innovation and technology.

Eligibility Requirements for Indian Startups

For Indian startups, there are a few requirements for qualifying that will guarantee the best possible level of cooperation with the Indian government. The startup must meet the following criteria in order to be eligible:

• Funded by a business incubator which is funded by the GOI and works on any Government project

• Recommended and Certified with the help of a proper format provided by SIPP (Startups Intellectual Property Protection)

• Funded by investors that are registered with SEBI. some prominent investors are Angel network, Private equity fund, Incubation fund

• Funded by GOI for promotion on any innovative technology

• Patent granted via Indian Patent and Trademark from the respective regional office

• A spitted or reconstructed business shall not be considered as a startup company

Tax exemption and incentives

Only startups who qualify for the Startup India program are granted tax exemptions:

Income tax exemption for a period of 3 consecutive years - The Startups that are formed after April 2016 are entitled for a tax rebate of up to 100% on the profits they produce for a period of three consecutive years in a block of & years under section 80 IAC of the Income Tax Act after receiving approval for tax exemption. It should be emphasized that such an entity must not have exceeded the 25 crores in turnover in any one financial year.

Also Read: Procedure, Document Checklist And Costs For Incorporation Of A Private Limited Company

Tax exemption on capital gains - Startups are exempt from taxation under Section 54EE of the Income Tax Act. This exemption relates to the tax on long-term capital gain and is applicable if any LTCG is realized and if all or a portion of that LTCG is invested in a fund that has been approved by the Central Government within six months of the asset's transfer date. If these two requirements are not met, the authority may revoke the exemption. The maximum investment amount in such an asset is Rs. 50 lakhs, and that amount must stay invested for a continuous period of 3 years.

Tax exemption on investments above fair market value - The government has exempted eligible start-ups from paying the tax on investments that exceed fair market value. Such investments may be made by a variety of parties, including angel investors, venture capitalists, friends and family, incubators, and others who invest money over fair market value.

Tax exemption to individual/HUF on investment of long-term capital gain in equity shares of eligible startups U/S 54GB - According to Section 54GB of the Income Tax Act, the government permits an exemption from taxation on long-term capital gains resulting from the sale of any residential property, provided that the gains are invested in MSME businesses as defined by the Micro, Small and Medium Enterprises Act of 2006 as well as qualifying startups. As a result, if an individual or HUF sells a residential property and uses the capital gains to purchase 50% or more of the equity shares of eligible startups, long-term capital gains tax will not apply as long as the shares are not sold or transferred within five years of the date of acquisition or purchase.

Also Read: Private Limited company

Set off carry forward losses and capital gains allowed in case of a change in shareholding pattern - Losses can be set off and carried forward only in relation to qualified startups where the shareholders have held those shares from the final day of the year in which the loss occurred to the final day of the year in which the loss is to be carried forward.

Conclusion

The government hopes to create a better ecosystem for new businesses and entrepreneurship with these tax exemptions for Startup India. The three-year tax exemption has sparked some interest, so Indian businesspeople should not really worry about the future and should feel free to take market risks. The government will offer all forms of assistance and support to startups that meet the aforementioned eligibility requirements.

Also Read: Procedure, Document Checklist And Costs For Incorporation Of A Private Limited Company

1. Identification of business organisation structure: When starting a business, one should create a separate legal entity under which they will operate. It is the most important item on the legal checklist for start-ups in India.  Private Limited Companies, Limited Liability Partnerships, One Person Companies, Sole Proprietorship Firms, and Partnership Firms are the six main legal entities recognised in India. A start-up can opt for any according to the business structure it wants to establish.

2. Registration: The two most crucial considerations for registering a start-up are as follows:  The start-up must be incorporated before registering with the "Start-up India Program," which is the second step. A start-up's incorporation includes obtaining a Directory Identity Number and a Digital Signature Certificate. By enrolling online, you can receive this recognition from the Department for Promotion and Industry and Internal Trade (DPIIT). The platform aims to encourage innovation in the nation by giving businesses access to a range of financial incentives and advantages like tax exemptions.

3. Obtaining Licences: It's crucial to understand that these licences are necessary for businesses to function lawfully and that they must be obtained. Every business organisation has different compliances to make. A business may be subject to legal penalties, fines, or other consequences if it fails to secure the licences necessary to operate in its industry. For example, a restaurant business will want a Certificate of Environmental Clearance, a Food Security Licence, and a Prevention of Food Adulteration Act Certificate, while an e-commerce start-up will require service tax and VAT registration.

4. Company Law Compliances: Meetings with board members, filling out crucial documents, auditing data, and producing reports are all things that a registered company must adhere to. They can be listed as:

• Annual-General Meeting

• Board Meetings

• Appointment of Auditor

• Director’s Report

• Maintenance of statutory registers

• Circulation of Financial Statement

5. Taxation Compliances: The two types of taxes are taxes, both direct (Income Tax) and indirect (GST, Excise duty, Customs duty, etc.) In India, taxes are imposed according to nature and company operations. Here are several tax benefits provided to start-ups for their efficient growth while they are still in their nascent stage.

• Three-year tax holiday in a block of seven years

• Exemption from tax on long-term capital gains

• Tax exemptions on investments above the fair market value

• Tax exemptions to individual/HUF on LTCG from equity shareholding

• GST based compliance

6. IPR Compliances: Start-ups place a high value on originality, creativity, and uniqueness as the foundation of their success. They establish a company with the intention of introducing the world to a brand-new good, service, or method. Protecting the intellectual property rights necessary for growing their firm is vital for entrepreneurs. 

Also Read: How Can You Form A Company In USA From India?

Start-ups have a number of options for safeguarding these assets, including non-disclosure agreements, copyrights, trademarks, and patents.

7. Labour Law Compliances: Start-ups must abide by the labour laws that come with opening a real firm. Rules like the Minimum Wage, Maternity Leave, or Protection Against Sexual Harassment in the Workplace, these laws are designed to shield employees from the possible exploitation of their employers. Additionally, they serve as a tool for holding both parties responsible for their conduct.

8. Event-based compliances: Some are related to particular occasions or industries, such as compliance with FEMA for start-ups with FDI or Customs law for businesses who import or export. When a start-up deals with potentially hazardous goods or processes, environmental law clearance is required, whereas when it interacts with real estate, RERA approval and other compliance with property laws are required. Mergers and acquisitions or large transactions that would significantly harm competition in India would require clearance under the Competition Law.

9. Contractual Obligations: Every business has agreements in place with various parties who play a role in how the firm operates, such as clients, workers, or vendors, through contracts.

Also Read: Startup Due Diligence explained

Any organisation must adhere to its regulatory requirements; the first step to ensure smooth operation is to comprehend and follow the applicable laws. To start a firm, every beginning entrepreneur must be familiar with all applicable regulations. One of the best ways to ensure that the business is always safe and avoids legal issues and implications is to hire an expert legal counsel who can advise, supervise, and maintain legal records.

Also read How to Register Your Startup in India: 5 Simple Steps for Registration? 

These start-ups are expected to follow certain legal requirements. Various legal, regulatory, and annual compliance deadlines, laid down by the Acts which govern start-ups, must be complied to. Non-compliance may lead to start-ups facing penalties, closer inspections and may even lead to disciplinary actions against its directors. Additional fees may be imposed if there is a delay in any submissions; these costs keep going up as long as they are delayed. To avoid these complications all compliances must be adhered to.

Annual Compliances required by a start-up:

One of the foremost legal requirements for startups are Annual Compliances that each startup is required to comply with.

• Annual General Meeting: Every start-up is required to have a general meeting once a year. The annual compliance deadline for the same should be no later than September 30th, six months after the conclusion of the fiscal year. The approval of financial statements, the announcement of income, the registration or nomination of auditors, the appointment and compensation of directors, and the appointment and compensation of officers all take place during this annual general meeting.
• Director’s Report: Having a director’s report is another crucial annual compliance. The Director's Report ought to be publicly disclosed each year. The report should be signed by the company's chairperson who has been given permission by the board. The directors are required to submit an annual written statement to the corporation in the format required for the directors' report.
• Annual Filing of Returns and Financial Statements: E-form MGT-7 is the electronic form allocated by the Ministry of Corporate Affairs (MCA) for companies and start-ups to file their annual returns and financial statements to the Registrar of Companies (“ROC”). All businesses are given access to this computerised form to submit the specifics of their annual return. The annual compliance deadline for every corporation to submit its annual return is within 60 days of the annual general meeting. For new start-ups, these returns should be filed with the new Company registration.
• Income Tax Filing: Income tax is to be filed by all individuals, start-ups and other companies annually. Even if a start-up company does not produce any money during the fiscal year, filing an income tax return is required. It is mandatory to make financial statements, prepare income tax returns, and file income tax returns.
• GST Return Filing: Even if they no sales are made during the month or year, all companies, start-ups and individuals selling goods and services in India are required to register for GST and file GST returns. GST registration is are a necessary annual compliance for start-ups selling goods and services in India.  
• Statutory Audit Compliances: At the conclusion of the fiscal year, every firm is expected to prepare its accounts and have them audited by a Chartered Accountant. In order to determine if an organisation is giving a clear and accurate picture of its financial condition, the statutory audit looks at data such as account balances, bookkeeping records, and banking transactions. Therefore, start-ups must also appoint an in-house auditor to ensure that there are no discrepancies in records.

You may also read Tax Exemptions: Know About Incentives For Start-Ups. 

Legal Requirements for a Start-up:

• The First Board Meeting- The first meeting of the board of directors is a regulatory compliance that is mandatory for newly incorporated companies and should take place within 30 days of the incorporation of your company. After that, there should be a total of four Board meetings throughout the year. At least two board meetings should be held annually for new small businesses. A board meeting is a requirement that should not be skipped.
• Internal Company Compliance: Monthly and Annual audits of financial statement must be carried out diligently since they are an essential part of the regulatory compliance. The holding of the annual general meeting, conducting a business analysis, discussing findings with the top staff, etc. It is necessary to update and review firm policies and practises, as well as to keep track of legislative changes and compliance requirements.
• Maintenance of Required Registrations and Records: Maintaining registration and recordkeeping is a legal requirement for start-ups. The documents must be kept current and accessible to company personnel. A register of directors, a register of company members, a register of shares, a register of chairs, and so on should all be included in the registration. Additionally, the business is required by law to maintain the records. The following documents must be preserved and updated on a regular basis: Transactions statements, Minutes Book of Board Meetings/AGM or other meetings; Books of Accounts; Financial Statements; ROC File etc. Records include decisions made by the board of directors, board meeting minutes, the results of the annual general meeting, and the company's articles of incorporation. It is necessary to keep all of this data.
• Obtaining Licenses and their Renewals: In India, seeking licenses within 40 days of incorporation is a legal requirement for start-ups. All start-ups must have the following licences: Trade License, Import and Export Code, Shop and Establishment Act License, etc. These licences, depending on their nature, must be renewed annually, before the licence expires, or as instructed by the licence authority.
• Other Statutory Compliances: Compliance to various acts such as the Employee Provident Fund Scheme, 1952; The Sexual Harassment of Women at Workplace (Prevention, Prohibition, and Redressal) Act, 2013; The Industrial Disputes Act, 1947 The Employee’s State Insurance Act, 1948; Minimum Wages Act 1948; Trade Union Act. 1926 are essential legal requirements for start-ups.

You may also read Pro Bono Legal Service - Know About Free Legal Services. 

It is pertinent for startups to know the various legal requirements applicable to them. Annual compliance deadlines should not be missed, as failure to abide by the compliance regulations, may lead to punitive liability, that may include monetary or other impositions.

Also read How to Register Your Startup in India: 5 Simple Steps for Registration. 

Tax benefits for start-ups:

Following Tax benefits have been given to startups:

• Income tax exemption for a period of 3 consecutive years: 

Start-ups that were founded between April 1, 2016, and March 31, 2022, meet the requirements to be approved for a three-year tax exemption under Section 80 of the Income Tax Act. After receiving approval for tax exemption, a start-up may take advantage of this start-up tax deduction for three consecutive fiscal years during the first 10 years following incorporation. If their annual turnover does not exceed Rs. 25 crores in any financial year, these entrepreneurs will be qualified for a three-year, 100% tax exemption on profit during a block of seven years. This tax exemption is aimed to lead the firm better-off to cover their initial working capital needs.

• Tax Exemption under Section 56 of the Income Tax Act (Angel Tax)

If a start-up has received DPIIT recognition and its total paid-up share capital and share premium after issuing or proposing to issue shares is less than INR 25 crores, it is eligible for an exemption from the angel tax. Angel tax is imposed on the funds raised by unlisted companies through the issuance of shares from an Indian investor, if the share price of the issued shares exceeds the company's fair market value. The excess realisation is regarded as income and subject to the appropriate taxes. Only investments made by a resident investor are subject to the angel tax. The tax imposed on investments in qualified start-ups that exceed fair market value has been waived by the government. This tax holiday is valid on investments made by resident angel investors, family or funds which are not registered as venture capital funds.

Read also Pro Bono Legal Service - Know About Free Legal Services. 

• Tax exemption on capital gains

Start-ups are exempted from paying taxes under Section 54EE of the Income Tax Act. The tax on long-term capital gains is connected to this exemption. If a long-term capital gain, or a portion thereof, is invested in a fund that has been approved by the Central Government within six months of the asset transfer date, start-ups are excluded from paying tax on that gain. Amounts up to Rs. 50 lakhs can be invested in the long-term defined asset. For a period of three years, this sum must stay invested in the designated fund. This start-up taxation exemption will be terminated in the year that the money is withdrawn if it is withdrawn prior to 3 years.

• Tax exemption to individual/HUF on investment of long-term capital gain in equity shares of eligible start-ups

The government permits a tax exemption under Section 54GB of the Income Tax Act with regard to the tax on long-term capital gains from the sale of any residential property, provided that such gains are invested in any MSME enterprise, as well as eligible start-ups. Therefore, tax on long-term capital will be exempted in any situation where an individual or HUF sells a residential property and invests the capital gains to purchase 50% or more of the equity shares of the eligible start-ups, provided that such shares are not sold or transferred within 5 years of the date of their acquisition. Therefore, tax on long-term capital will be exempted if an individual or HUF sells a residential property and invests the capital gains to purchase 50% or more of the equity shares of the eligible start-ups, if such shares are not sold or transferred within 5 years of the date of their acquisition. The start-ups are expected to use the funds invested to buy assets; however, they must not transfer such assets within five years of the asset's purchase date.

• Set off of carry forward losses and capital gains allowed in case of a change in Shareholding pattern

Start-ups whose shareholders have held their shares from the last day of the year in which the loss was incurred to the last day of the previous year in which such loss is to be carried forward are eligible for the set off and carry forward of losses. If all of the shareholders of the firm who had voting shares on the last day of the year in which the loss was incurred continue to own shares on the last day of the previous year in which such loss is to be carried forward, then losses incurred by eligible start-ups may be carried forward.

You may like to read What are the legal compliances required for a Start-up?

You may like to read What are the legal compliances required for a Start-up?

Startup Registration in India

Five steps for Startup Registration are:

Step 1: Incorporation of the Startup

This is the first step in which the startup is required to incorporate itself as a private limited company or a partnership firm or a limited liability partnership. A startup founder, may incorporate his startup by approaching the Registrar of Companies, if he wants incorporate a private limited company or a LLP or by approaching the Registrar of firms, if he wants to incorporate a partnership firm.

Step 2: Registration with Start-up India

Under this stage, a startup is required to mandatorily register itself as a start-up on the start-up India website.

Step 3: DPIIT Recognition

After the creation of a profile on the Start-up India website, the start-up is required to obtain a certificate of recognition from the Department for Promotion of Industry and Internal Trade (DPIIT).

Step 4: Recognition Application:

On the Recognition Application form (provided on the Start-up India website), a start-up is required to fill in the details such as the entity details, full address (office), authorized representative details, directors/partner details, information required, start-up activities and self-certification.

Read also Pro Bono Legal Service - Know About Free Legal Services. 

Step 5: Submit Documents for Business Registration

The following documents are required for registering a startup in India.

1. Certificate of Incorporation / Registration Certificate and PAN
2. Email ID and Mobile number
3. Company Details (Industry, Sector, Category, Regd. Office Address, etc)
4. Directors/Partners Details (Name, Photo, Gender, Mobile No. Email ID, Full Address)
5. Details of Authorised Representative (Name, Designation, Mobile No. Email ID)
6. A Brief about business and products/services and notes on innovations
7. Revenue model and Uniqueness of the Product
8. Website
9. Pitch Deck
10. Video
11. Declaration by a Startup for exemption under Section 56(2) (viib) of the Income Tax Act, 1961 on Letterhead.

Upon completion of the above steps, the startup is registered and is allotted a unique recognition number.

Miscellaneous Questions:

1.  Is Funding required at the time of registration of business?

No, funding is not required at the time of registration of business. Many startups start as bootstrapped businesses i;e they self fund themselves. Investors also invest in registered startups and hence, one should not look for funding before startup incorporation.

      2     Is it essential to obtain copyrights and IPR Registration?

Government incentivises those startups that obtain copyright and IPR registration. Moreover, it is pertinent for startups to have their intellectual property protected, right from the incorporation stage. Even investors who come for startup funding prefer those startups who have already procured copyright and IPR registrations.

Also, read What are the legal compliances required for a Start-up?