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Merchant Bankers to Compute the FMV for Startups

The government has amended its last notification on startups to redefine the definition of startup, and the process of recognition, requiring the companies to register with the Department of Industrial Policy and Promotion (DIPP) and take permission from an inter-ministerial board before issuing shares and getting investors on board.

The DIPP, the nodal body for Startup India, through a gazette notification has said that an entity shall now be considered a startup up to seven years from the date of its incorporation/registration, or till its annual turnover exceeds Rs 25 Cr. The government has also clarified that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.

According to a new gazette notification, the amended definition of a startup is as follows:

An entity shall be considered as a Startup:

  1. Upto a period of seven years from the date of incorporation/registration, 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. In the case of Startups in the biotechnology sector, the period shall be up-to ten years from the date of its incorporation/ registration.
  2. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded Rs. 25cror

Entity 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 an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.

Process of Recognition

The process of recognition of an eligible entity requires a startup to apply online to the mobile app or portal set up by the Department of Industrial Policy and Promotion.The application should be accompanied by a copy of Certificate of Incorporation or Registration, as the case may be. In addition, the Startup has to submit 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.

In order to be eligible for tax benefits the Startup should be a private limited company or a limited liability partnership incorporated on or after April 1, 2016 but before April 1, 2021. Also the Startup will have to obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification.

The board would consist of

  • Additional Secretary, Department of Industrial Policy and Promotion, Convener
  • Representative of Ministry of Corporate Affairs, Member
  • Representative of Ministry of Electronics and Information Technology, Member
  • Representative of Department of Biotechnology, Member
  • Representative of Department of Science & Technology, Member
  • Representative of Central Board of Direct Taxes, Member
  • Representative of Reserve Bank of India, Member
  • Representative of Securities and Exchange Board of India, Member

Tax on issuing of shares

A Startup being a private limited company is eligible to apply for approval for the purposes of clause (viib) of sub-section (2) of section 56 of the Income-tax Act, if

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,

the investor/ proposed investor has

  • the average returned income of twenty five lakh rupees or more for the preceding three financial years
  • 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.

The board will consider the Startup’s application and grant approval for the purposes of clause (viib) of sub-section (2) of section 56 of the Act, specifying the relevant details, including details of investor, amount of premium on which shares are to be issued, and the latest date by which the shares are to be issued; or decline to grant the said approval after providing reasons.

Revocation

In case it is found that any certificate or approval have been obtained on the basis of false information, the Board reserves the right to revoke such certificate or approval.

Where the certificate or approval has been revoked, such certificate or approval shall be deemed never to have been issued or granted by the Board.

 

 

 

 

 

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