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DIPP redefines ‘startup’ and outlines conditions for the approval under Section 56(2) (viib) of Income-tax Act

DIPP updates

DIPP outlines the criteria of being a ‘startup’ in India.  First, the entity should be incorporated as private limited company or partnership firm or Limited Liability Partnership (‘LLP’) upto 7 years in India. In biotechnology sector the period for incorporation or registration should be 10 years. Second, the turnover for any financial year since incorporation/ registration should have not exceeded Rs. 25 crore. Third, DIPP mandates that entity should work 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.

DIPP further highlights that, “entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.

In order to get recognized as startup, an entity is required to submit an online application over the DIPP mobile app or portal. The online application should be accompanied by Certificate of Incorporation or Registration and a write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation. After reviewing the document DIPP shall decide to either recognise the eligible entity as Startup or reject the application by providing reasons.

DIPP further directs that start up that are incorporated as Private Limited Company or LLP on or after April 1, 2016 but before April 1, 2021 can submit an application in Form 1 along with the document specified to the Board to grant certificate under Section 80 –IAC of the Income Tax Act, 1961.

DIPP further outlines the following conditions to grant approval under Section 56(2) (viib) of the Income-tax Act, 1961 as :-

  1. the aggregate amount of paid up share capital and share premium of the startup after the proposed issue of shares does not exceed ten crore rupees,
  2. the investor/ proposed investor, who proposed to subscribe to the issue of shares of the startup (hereinafter in this notification referred to as “investor”) has, —

(a) the average returned income of twenty five lakh rupees or more for the preceding three financial years;

or

(b) the net worth of two crore rupees or more as on the last date of the preceding financial year, and

(iii) the startup has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11UA of the Income-tax Rules, 1962.

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