The ambitious launch of the Start Up India Scheme (SUIS) by the Prime Minister in January, 2016 can be a ‘game-changer’ policy for the present NDA government. It is indeed a dazzling fact that India has produced several successful start-ups in the last 2-3 years (especially in the internet domain) with names such a Myntra, Flipkart, Housing.com, Snapdeal, etc. leading a stellar line up.
For a country having the 2nd largest population in the world and having one of the youngest working class as well; India has faced an ever-increasing challenge to create enough employment generation opportunities/sectors. While IT & ITES fuelled the demand for engineers & professionals in the last two decades; our nations ever increasing work force is looking to new industries/sectors such as hospitality, F&B, retail trade, organized logistics, and many more to employ the ever increasing work force.
The Prime Minister has attempted to focus on the popular trend & acceptability of start-ups amongst the youth; as a potential area to complement the recently launched ‘Skill Development’ & the ‘Make in India’ programs. While the optimism for SUIS is due to the hypearound the launch, the reality remains that 90% of the start-ups are destined to fail. The reasons for most failures include lack of human resources, unavailability of finances, stringent laws & policies, challenges of implementation, etc. Interestingly SUIS proposes to address some of these issues through –
The other aspect of the SUIS regime is the ambitious plan to provide funding to start-ups and to incubation centers (including those existing, those developed by the private sector and those that will develop under the PPP model). With an outlay of ` 10,000 crores over the next 4-5 years, the SUIS can indeed bring out a much needed relief for many start-ups that are parched for funds required to survive as well as scale-up. The SUIS policy however does not specify the manner in which these funds will be utilized and does not set any benchmark targets that have to achieved by the disbursing entities/institutions. While the Government plans to set up 31 incubation centers across various IIT, IIM and NITs across India, it is unclear how the access to funds and the incubator infrastructure would be available to those who are resident in rural areas or cities where no such centers exist.
Presently the SUIS scheme suggests that for being eligible as a start-up, the entity must be a private company or a registered partnership or a LLP thereby excluding benefit to sole-proprietorship concerns AND also have been set-up in the past 5 years and currently should have a turnover not exceeding Rs. 25 crores AND aim to develop & commercialize and new product or service or significantly improve and existing product or service AND excludes any business to develop non-commercial products/services or those businesses that are merely incremental to the customer AND have a recommendation from an incubator or supported by an incubator in the manner as prescribed by the DIPP, Government of India.
While the initiative is both novel and laudable, from a legal perspective it is important to review the SUIS initiative critically since a flurry of start-ups in India are being set-up each day and many are also facing imminent closure. Traditionally, start-ups usually face hurdles from the conceptualization stage itself. Recently when a client approached us with the idea of starting a chain of food trucks & canteens in Gurgaon and Delhi targeting the office going public, the client was unaware of the plethora of laws that regulate the food & beverage industry in Delhi and Gurgaon and also the fact that the regulations/permissions required to operate in 2 different states were different. So for the same food truck to sell food in Gurgaon during lunchtime and in Delhi during the evening time, the client was unaware that 2 separate licenses for selling food were required along with separate permits for parking the truck in specific locations. Most often such logistical and practical problems lead to entrepreneurs looking for a quick-fix or convenient ideas received from friends/family/business colleagues without realistically seeking proper legal advice. The lack of clarity from the government departments & unavailability of one-stop incubation or advisory centers, further adds to this growing concern.
Such common problems are leading start-ups to focus on sectors where there are limited regulations applicable and where entrepreneurs are least likely to face a run-in with the authorities. While the Internet offers such a ready medium to budding startup entrepreneurs, SUIS seems to have missed IT & Internet enabled businesses. Instead the subsidized IPR registration regime reflects that SUIS is targeting start-up innovators likely to develop unique & novel technologies (R&D) rather than those in trading or basic services.
In my view, the SUIS conditions appear to be reasonable but the manner of implementation of the same would be a challenge since most start-ups are unaware of the incubator locations or unable to draw up a proper business plan that would entitle them to SUIS benefits. The proposed tax exemptions and benefits in the SUIS scheme however are a welcome step and the benefit of tax exemption under section 56(2) (viib) which is extended to start-ups is a welcome measure since a majority investments in such entities is at a rate much higher to the ‘fair market value’ of the shares in the start-ups. The above coupled with a benefit of tax exemption for up to 3 years from Income tax would indeed help start-ups considerably.
Overall, SUIS does provide a sincere hope for start-ups and upcoming entrepreneurs in India but my view is that the government will have to drive the initiative extensively to make it a success. Educating the public about the policy and simplifying the process for funding and selection; would be key to successful implementation. One trick that the government seems to have missed is in not providing incentives for the private sector to participate in SUIS. If the Government was to allow the private sector to commit funds towards development of incubation centers as part of permitted CSR spending, mandate private colleges and universities to compulsorily set up incubation centers from their own cash reserves and set targets for funding by banks and institutions (especially SIDBI); the Startup India Scheme can be a game changer policy. Not only will the young and aspiring entrepreneurs have an option away from private funds & venture capitalists, but also the largely untapped potential in rural and semi-urban areas can benefit from the booming startup revolution.
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