Change in definition of Startups

During last 25 years, India has made its mark globally by providing quality services at optimum cost,. Now time has come when the country needs to further establish itself as a hub for innovation, research and development. While the many startup sprung up over last 5-10 years, the Central Government took steps to nurture Startups by launching Startup India on January 16, 2016, to recognize and provide incentives for these startup to grow further. 

Comparison of earlier and amended definition

On May 23, 2017, the Central Government change the definition of Startups (only for the purpose of Government Schemes). The salient differences in the earlier and amended definition are as follows:

Earlier Definition

Amended definition

An entity shall be considered as a Startup: a) Up to five years from the date of its incorporation/registration, b) If its turnover for any of the financial years has not exceeded Rupees 25 crore, and c) It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property; Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘startup’; Provided further that in order to obtain tax benefits a startup so identified under the above definition shall be required to obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification consisting of: a) Joint Secretary, Department of Industrial Policy and Promotion, b) Representative of Department of Science and Technology, and c) Representative of Department of Biotechnology.

An entity shall be considered as a Startup: a) if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India; and b) up to seven years from the date of its incorporation/ registration; however, in the case of Startups in the biotechnology sector, the period shall be up to ten years from the date of its incorporation/ registration; and c) if its turnover for any of the financial years since incorporation/ registration has not exceeded Rupees 25 crores; and  d) 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. Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘Startup’.

* entity being a private limited company or registered partnership or limited liability partnership was also covered in earlier definition as a part of explanation.

Prominent changes in definition

The prominent changes in the definition are as follows:

1. Increase in age of Startups: The age of startups is increased to 7 years (10 years in case of biotechnology sector) as against earlier age of 5 years, considering the long gestation period for Startups. 
2. On certificate required: In in order to obtain tax benefits a Startup no longer requires to obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification consisting of: a) Joint Secretary, Department of Industrial Policy and Promotion, b) Representative of Department of Science and Technology, andvc) Representative of Department of Biotechnology.           
3. High potential of employment generation or wealth creation: Apart from age and turnover conditions, earlier Startup was eligible under Government schemes if it was working towards innovation, development or improvement of products or processes or service. This criteria has been further expanded to include Startups having scalable business model with high potential of employment generation or wealth creation.

It is expected that the new definition would provide Government Schemes benefits for extended period for projects with longer gestation period. Further the amendment with respect to scalable business model with high potential of employment generation or wealth creation may also lead to many businesses focusing remodeling the ways many businesses with rural setup are run.