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To put an end to attempts by subsidiaries of Indian or foreign companies to be categorised as start-ups for availing tax-benefits, the Department of Industrial Policy & Promotion (DIPP) has revoked some certifications and sent out warnings to others.
The Inter-Ministerial Group on Startups, which met on March 15, revoked the certificates of recognition and certificates of eligibility given to two entities — Riot Solutions and JVS Flow Control OPC — as they failed to respond to queries on whether they were subsidiaries of existing companies, as indicated in minutes of meetings.
“These entities were sent queries by the IMG a few months back but have not yet responded. So, the IMG decided to revoke the certifications of recognition issued to them. It should serve as a warning to others,” a government official told BusinessLine .
Business reconstruction
The IMG had earlier observed that certain entities that had sought recognition as start-ups by DIPP were incorporated/registered as subsidiaries of Indian or foreign companies.
Such subsidiaries are ineligible to be recognised as start-ups under the reconstruction clause as per the notification 501(E), which states that any entity formed by splitting up or reconstruction of a business already in existence shall not be considered a start-up.
“In view of this, such an entity will not be recognised as a start-up by the DIPP and will also not be eligible to be considered for tax benefits by the IMB. The certification of registration and certification of eligibility for such an entity that may have been issued earlier stands cancelled,” the board observed.
“The whole idea behind promoting the start-up culture in the country, which is to encourage individuals to start their own enterprises and get gainfully employed, gets defeated if existing companies try to take advantage of the scheme. That is why the IMB is acting strictly here,” the official said.
I-T exemptions
In its latest meeting, the IMB also sought clarification from five more entities that it suspects might be company subsidiaries. “We will wait for the response from the five. If the replies are not satisfactory, or if there is no reply, then we will revoke certifications issued to these entities too,” the official said.
As per existing rules, start-ups (companies and LLPs) can get income-tax exemption for three years in a block of seven years, if they are incorporated between April 1, 2016 and March 31, 2019 and meet the innovation criteria.
Start-ups that do not meet the innovation criteria don’t get an income-tax holiday but are eligible for other benefits, such as exemption from various compliances, help to file IPR applications and some relaxation in norms of government procurement reserved for small enterprises.
Since the Startup India Action Plan was approved by the Centre in 2016, 6,096 entities have been recognised as start-ups by the DIPP and 74 have been approved for tax benefits by IMB, as per government figures up to first week of January 2018.
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