No Tunnel, Only light: Indian Government Plan for Startups Ecosystem Transformation

Startups play a critical role in the development of a country. Growing market, favorable funding, and technology have made the startup ecosystem take off. Who had imagined that our favorite food, cab or grocery can be at doorsteps with a mere touch of a button? The significant industry body NASSCOM has also realized that the growth of the software product industry in recent years has signaled a transformation in India and across the globe. With increasing numbers of active online users becoming consumers of e-commerce solutions and the related marketplaces, today, Indian startups are unfolding global digital solutions to capitalize on this rapid growth. Hyper-growth, capital availability, and acquisitions are the leading drivers of the growing startup ecosystem in India.

It all starts with an idea and coming up with a startup idea is a regular thing for someone aiming for an independent work life. But implementing the plan is a real big challenge which gradually gives rise to a chain of problems. When it comes to establish a startup in India, most Indians are reluctant. The reason is that the road to build a startup in India is filled with hurdles and challenges. Common factors which are essential for a startup success encompass right talent, marketing strategy, funding of startup and most important is the supportive government ecosystem with better policies and myriad laws and regulations. Without them, it’s immensely difficult to start a business. As a matter of fact, Government is the single biggest enabler for the entrepreneurial ecosystem. Government plays a vital role in the ease of doing business and helping companies start. World Bank Group in their latest 2016 report “Doing Business” has placed India at 130th position in “ease of doing business” column behind countries like Nepal and Vietnam.

Undoubtedly, Startups are significant, playing very crucial role in the development of a country but they demand necessary infrastructure, attractive tax benefits and supporting policies from government. The Indian government has now started understanding the necessities of modern startups, realizing the importance of entrepreneurship in the economic development of India. First generation entrepreneurs across the country applauded the government’s effort to recognize their business ventures under the banner of “Startup India” when Indian Prime Minister – Narendra Modi announced the government’s initiative on 15 August 2015 and Finance Minister – Arun Jaitley launched it on 16 January 2016.

“I see startups, technology and innovation as exciting and effective instruments for India’s transformation.” – Narendra Modi, Prime Minister of India

Startup India is a flagship initiative of the Government of India, intended to build a healthy ecosystem for nurturing innovation and startups in the country that will drive sustainable economic growth and generate large scale employment opportunities. The Government through this initiative intends to empower startups to grow through innovation and design. This initiative will provide startups an ecosystem without the trapping of the system. To meet the objectives of the initiative, Prime Minister Narendra Modi’s Startup Action Plan has a 19 point agenda incorporating incentives such as self-certification for complying with labor and environment regulations, a panel of facilitators to help file patents & intellectual property applications, tax exemptions from seed funding, capital gains and three year holiday on income tax as well as 10,000 crore financing support for four years. Let’s unfold the key action plan objectives in detail.

Startup India initiative addresses all aspects of the startup ecosystem, from digital, technology sector to a wide array of sectors including agriculture, manufacturing, social sector, healthcare, education, etc. With this Action Plan, the Government hopes to accelerate spreading of the Startup movement. Each and every objective mentioned in the Action plan is decided keeping in mind the current existing problems startups face in India.

Compliance Regime based on Self-Certification: To reduce the regulatory burden on Startups thereby allowing them to focus on their core business and keep compliance cost low.

Current regulatory formalities requiring compliance with various labor and environment laws are time-consuming and difficult in nature. Often, new and small firms are unaware of nuances of the issues and can be subjected to intrusive action by regulatory agencies. To make compliance for Startups, friendly and flexible simplifications will be done in the regulatory regime.

Startup India Hub: To create a single point of contact for the entire Startup ecosystem and enable knowledge exchange and access to funding.

In today’s environment, we have more Startups and entrepreneurs than ever before and the movement is on the cusp of a revolution. However, many Startups do not reach their full potential due to limited guidance and access. The Government of India will take various measures to improve the ease of doing business and also to build an exciting and enabling environment for these Startups, with the launch of the “Startup India” movement. Startup India hub will collaborate with Central & State governments, Indian and foreign VCs, angel networks, banks, legal partners, consultants, universities, and R&D institutions. Startups will be assisted through their lifecycle with focus a on obtaining financing, feasibility testing, enhancement of marketing skills, technology commercialization, and management evaluation, etc.

Legal Support and Fast-tracking Patent Examination at Lower Costs: To promote awareness and adoption of IPRs by Startups. Providing access to high-quality Intellectual Property services and resources, including fast-track examination of patent applications and rebate in fees.

Startups with limited resources and manpower can sustain in this highly competitive world only through continuous growth and development oriented innovations; for this, it is equally crucial that they protect their IPRs. The scheme for Startup Intellectual Property Protection (SIPP) will facilitate the filing of Patents, Trademarks, and Designs by innovative Startups. This scheme is being launched initially on a pilot basis for one year; based on the experience gained, further steps will be taken.

Providing Funding Support through a Fund of Funds with a Corpus of INR 10,000 crore: To provide funding support for development and growth of innovation-driven enterprises.

One of the key challenges faced by startups in India has been access to finance. Often startups, due to lack of collaterals or existing cash flows, fail to justify the loans. Besides, the high-risk nature of startups where in a significant percentage fails to take-off, hampers their investment attractiveness. To provide funding support to Startups, Government will set up a fund with an initial corpus of INR 2,500 crore and a total corpus of INR 10,000 crore over a period of four years (i.e. INR 2,500 crore per year). The Fund will be like Fund of Funds, which means that it will not invest directly into Startups, but shall participate in the capital of SEBI registered Venture Funds.

Tax Exemption on Capital Gains: To promote investments into Startups by mobilizing the capital gains arising from the sale of capital assets.

Due to their high-risk nature, Startups are not able to attract investment in their initial stage. It is, therefore, important that proper incentives are provided to investors for investing in the Startup ecosystem. With this objective, the exemption will be given to persons who have capital gains during the year, if they have invested such capital gains in the Fund of Funds recognized by the Government.

Tax Exemption to Startups for three years: To promote the growth of Startups and address working capital requirements.

During the initial years, budding entrepreneurs struggle to evaluate the feasibility of their business idea. Significant capital investment is made to embrace ever-changing technology, fight rising competition and navigate through the unique challenges, arising from their venture. Also, there are limited alternative sources of finance available to the small and growing entrepreneurs, leading to constrained cash funds. To stimulate the development of startups in India and provide them a competitive platform, it is imperative that the profits of startup initiatives are exempted from income-tax for three years.

These were the few among many phenomenal objectives in the Startup India action plan. These government initiatives will undoubtedly galvanize the startup ecosystem and provide national and international visibility to the startup ecosystem in India. The change it will bring in the Indian startup ecosystem will make a noticeable impact on healthcare, education, employment, agriculture, etc. On the macroscopic level, the resulting ecosystem will contribute to the Indian economy by enhancing citizen’s life, building innovative solutions and generating scope for opportunities for stakeholders.

Indian startups backed by government’s support will be instrumental in transforming India. Soon, India will become the primary technology hotbeds allowing fascinating possibilities for emerging businesses to thrive and establish in the world with their innovative ideas and solutions.