Role of Chartered Accountants in Startup India

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.

Several programs have been undertaken since the launch of the initiative on 16th January, 2016 by Hon’ble Prime Minister, to contribute to his vision of transforming India into a country of job creators instead of job seekers. These programs have catalyzed the Startup culture, with Startups getting recognized through the Startup India initiative and many entrepreneurs availing the benefits of starting their own business in India.

The 19-Point Startup India Action Plan envisages several incubation centres, easier patent filing, tax exemptions, ease of setting-up of business, a INR 10,000 Crore corpus fund, and a faster exit mechanism, among others.

The Action Plan is divided across the following areas:

(A) Simplification and Handholding

• Action Plan: 1 - Compliance Regime based on Self-Certification
• Action Plan: 2 - Startup India Hub
• Action Plan: 3 - Rolling-out of Mobile App and Portal
• Action Plan: 4 - Legal Support and Fast-tracking Patent Examination at Lower Costs
• Action Plan: 5 - Relaxed Norms of Public Procurement for Startups
• Action Plan: 6 - Faster Exit for Startups

(B) Funding Support and Incentives

• Action Plan: 7 - Providing Funding Support through a Corpus of INR 10,000 crore
• Action Plan: 8 - Credit Guarantee Fund for Startups
• Action Plan: 9 - Tax Exemption on Capital Gains
• Action Plan: 10 - Tax Exemption to Startups for 3 years
• Action Plan: 11 - Tax Exemption on Investments above Fair Market Value  

(C) Industry-Academia Partnership and Incubation

• Action Plan: 12 - Organizing Startup Fests for Showcasing Innovation and Providing a Collaboration Platform  
• Action Plan: 13 - Launch of Atal Innovation Mission (AIM) with Self-Employment & Talent Utilization (SETU) Program
• Action Plan: 14 - Harnessing Private Sector Expertise for Incubator Setup
• Action Plan: 15 - Building Innovation Centres at National Institutes
• Action Plan: 16 - Setting up of 7 New Research Parks Modeled on the Research Park Setup at IIT Madras
• Action Plan: 17 - Promoting Startups in the Biotechnology Sector
• Action Plan: 18 - Launching of Innovation Focused Programs for Students
• Action Plan: 19 - Annual Incubator Grand Challenge

Eligibility for Startup India:

As per the Startup India Action plan, the followings conditions must be fulfilled in order to be eligible as Startup:

1. Being incorporated or registered in India for less than seven years and for biotechnology Startups up to 10 years from its date of incorporation.
2. Annual turnover not exceeding INR 25 crores in any of the preceding financial years.
3. Aims to work towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
4. It is not formed by splitting up or reconstruction of a business already in existence.
5. It must obtain certification from the Inter-Ministerial Board (IMB) setup for such a purpose.
6. It can be incorporated as a private limited company, registered partnership firm or a limited liability partnership.

These start-ups must apply to the Department of Industrial Policy and Promotion (DIPP) to be recognised, which at its discretion may accept or reject the application. Out of the total applications received so far, 14,036 have been recognised as Startups by DIPP and 91 Startups have been approved for availing tax benefits by IMB, as of 3rd week of November, 2018. All the benefits and exemptions are available to the Startups only if they come under the criteria of an ‘Eligible Startup’ as mentioned above.

The role of professional Chartered Accountants in the start-up scheme launched by our Prime Minister is essential, vast and comprehensive. The CAs plays very vital role in execution of Business Model and Revenue Model of any Startups. As the partners in nation building, it is undoubtedly not only an opportunity in a professional domain but it is also a responsibility for interest in large. As we see that the growing complexity has made the business atmosphere comparatively difficult in terms of identification of potential grey areas in which most of the start-ups might find themselves in. Due to Statutory and Legal Complexity in India, every business requires a good professional advisor in order to fulfill all statute and Legal requirements applicable to start-ups in their respective fields.

So now it is essential to measure and understand how can chartered accountants justify and help entrepreneurs in making sure that the venture results into a profitable and successful adventure. The government is really working hard to build an atmosphere for encouraging start-ups and with a view to facilitate Startups various tax exemptions and benefits are provided which is briefly discussed as under.

1. The Finance Act, 2016 had made provision for Startups to get income tax exemption for 3 years in a block of 5 years, if they are incorporated between 1st April 2016 and 31st March 2019. In the Union Budget 2017-18, the Government has increased this period of profit-linked deductions available to the eligible Startups to 7 years with reference to Section 80-IAC of The Income Tax Act, 1961. To avail these benefits one must get a Certificate of Eligibility from the Inter-Ministerial Board of DIPP. This will help the Startups to meet their working capital requirements during their initial years of operation.
2. A new section 54EE has been inserted in The Income Tax Act, 1961 for the eligible Startups to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by Central Government within a period of six months from the date of transfer of the asset. The maximum amount that can be invested in the long-term specified asset is INR 50 lakhs. Such amount shall be remain invested in the specified fund for a period of 3 years. If withdrawn before 3 years, then exemption will be revoked in the year in which money is withdrawn.
3. Section 54GB of The Income-Tax Act, 1961 has been amended to provide 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 equity shares of eligible Startup for utilizing the same for purchase of specified asset.
4. The government has exempted the tax being levied on investments above the fair market value in eligible Startups. Such investments include investments made by resident angel investors, family or funds which are not registered as venture capital funds. Also, the investments made by incubators above fair market value are exempt.
5. The carry forward of losses in respect of eligible start-ups is allowed if all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of previous year in which such loss is to be carry forward. The restriction of  holding of 51 per cent of voting rights to be remaining unchanged under Section 79 of The Income-Tax Act, 1961 has been relaxed in case of eligible Startups.
6. MCA has notified the relevant sections pertaining to Fast Track process. Startups (other than partnership firm) shall now be able to wind up their business within a period of 90 days.

The above exemptions and benefits would encourage seed-capital investment in Startups, facilitate their growth and meet the working capital requirements during the initial years of operation. By virtue of these kind of benefits, Start-ups can easily focus on their Business Model and Revenue Model without worrying about the tax outflows and need of Working Capital. Further, they would also promote investments into Start-ups by mobilizing the capital gains arising from sale of capital assets.

The boom in the Startup ecosystem has caught the attention of chartered accountants (CAs), some of whom are seeking an equity stake for the non-audit services they offer. As per regulation, auditors are not allowed to pick up stakes in the company they audit as the question of Independence comes into the picture. Hence, many CAs are into Regulatory and compliance services, Startup advisory services and providing complete non-business support to a Startup from the structure, business plan, corporate law, ESOPs documentation, agreements, fundraising to angel round.

It is a win-win situation for both the Startup and the CAs. While the Startup gets all the services, including ideation on technical grounds, incubation and mentoring, the investing CA can see the upside of an investment if the Startup makes it big. With a CA, a Startup gets holistic advice on all corporate law, accounting, tax and all legal matters. A CA is a generalist and can manage all non-business services for a Startup, which can then focus on the business and operations. The Chartered Accountants can provide Advisory and Professional services in the field of Direct & Indirect Tax like PAN, TAN & GST Registration, Entity Formation and Capital Structuring and accordingly compliance with the respective regulatory authorities and Laws in relation to Shop & Establishment Registration, Provident fund (PF), Employees' State Insurance (ESIC), Profession Tax (PT), ROC Compliances, RBI & FEMA Compliances and any other applicable Laws.

In addition to above, the Institute of Chartered Accountants of India [ICAI] through Committee for Members in Industry & Business (CMI&B) in its endeavor to promote Startups by CAs has launched its first 15 seater incubation centre at ICAI Bhawan, BKC, Mumbai where whole ecosystem for start-up has been developed.

Hence, In this dynamic and challenging business environment, Chartered Accountants are looked upon as Complete Business Solution Providers. They are thoroughly trained practically in all avenues of Finance, Accounting, Audit and Advisory services for all types of entities including Startups.

The author can also be reached at ca.pratik.bhavsar@gmail.com