As per common understanding, a startup company is an entrepreneurial venture which is typically a newly emerged, fast-growing business that aims to meet a marketplace need by developing a viable business model around an innovative product, service, process or a platform.

From the startup definitions used in government policies too, it is evident that only a newly incorporated company and not any company (Subsidiary/Affiliate) associated with any existing company will be considered and treated as startup.

However, it has been recently noticed that certain subsidiaries of Indian or foreign companies are registered with the Department of Industrial Policy and Promotion (DIPP) as startups to unlawfully avail the tax benefits. 

The Inter Ministerial Group on startups (IMG) cancelled the certification of recognition/eligibility dispensed to those subsidiaries as such companies failed to respond to the queries send by IMG to provide clarification on their status as subsidiaries of the existing companies.

The basic notion behind the recognition of the startups and to promote startups fraternity is to encourage individuals to instigate their own enterprise/business venture.

However, certain entities are trying to take the undue advantage of startups promotion and recognition related schemes which is strictly prohibited.

As per the notification 501 (E) (Reconstruction clause), certain subsidiaries are not qualified to be registered as startups provided they are established out of splitting up or reconstruction of existing business.

From the notification it is evident that any subsidiary (associated with or established out of existing business) is not authorized to register as startup with DIPP and avail the tax benefits. Any certificate of recognition/eligibility issued earlier in this regard will stand cancelled/terminated.

Income tax exemption to the startups (companies/LLPs) will be permitted for the duration (3 years in block of 7 years) provided they are incorporated amid (April 1, 2016 and March 31, 2019) and qualified the eligibility parameters specified in this regard.

According to the official figures, from the inception of startups recognition schemes by DIPP – 6,096 startups are registered with DIPP and 74 startups are conferred with tax benefits by IMG.

Startups are also entitled to obtain certain other benefits (i.e Exemptions from compliance with specific legal and regulatory requirements, Assistance in IPR filings and Ease of norms of government procurement applicable to small enterprises).

The measures taken by IMG/DIPP are likely to prevent certain companies misusing the advantage of the startup schemes and gain undue advantage of the startup ecosystem.

It is high time for existing companies (via their subsidiaries) not to attempt to grasp away the special benefits conferred on the startups or else there is a great possibility of cancellation of the startup oriented schemes hindering the development prospect of startup ecosystem by nullifying the government objective to transform the nation into hub of startups and innovation companies.

Research inputs by Paruchuri Baswanth Mohan