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Start-up community in India
Content India - fastest growing startup-base worldwide; third in technology driven product startups just behind US and UK
India has ~4200 start-ups - Growth rate of 40 percent
Investments made in startups during 2015 - Over 5 billion US dollars - INR 34,000 crores - growth rate of 125
percent over 2014 (2.2 billion US dollars in 2014)
More than 390 startups received investments in 2015 as compared to 179 start-ups in 2014
156 - Number of PE/ VC firms - growth rate of over 100 percent since 2014
8 out of every 10 top VC/ PE firms in India are foreign and global investment in the Indian startup ecosystem
Employment to ~85,000 people by the startup ecosystem in India
Source: Nascomm Survey Report on Start-ups 2015 Edition
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Start-up community in India
Incubators - 110 in 2015 - Growth of 40 percent from 80 in 2014 with nearly 50 percent are setup outside NCR,
Bangalore, Hyderabad and Mumbai
65 percent of startups located in NCR, Mumbai and Bangalore
72 percent of the founders - less than 35 years old making India home to the youngest entrepreneurs in the world
50 percent rise in share of female entrepreneurs in 2015 over 2014 driven by 4.5x growth in funding to women
driven startups
Majority of the new startups are B2C, primarily present in 3 segments namely e-commerce, consumer services
and aggregators
~300 million internet users with 213 million mobile internet users and 140 million smartphone users
Source: Nascomm Survey Report on Start-ups 2015 Edition
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Why Start-up India Action Plan?
Two new startups everyday. India’s startup sector is fastest growing aided with energetic young entrepreneurs,
plentiful money and eager mentors
Since 2007, when starting up started becoming fashionable, India has created 7 unicorns (companies with
valuation of at least USD 1 billion). But is it good enough for a country which is rated as one of the best places in
the world to start up in? No.
Compared to India’s 7 unicorns, China has 24. And for American Amazon, there is a Chinese Alibaba. If the US
has produced a Google, there is a Baidu in China. In comparison to American and Chinese startups, India looks
like a minnow.
Indian Government believes in the start-up vision and is willing to walk the extra mile to help this sector grow even
beyond its avowed annual growth rate of 40 percent
Threat of flight of capital - It would look to arrest the flight of Indian startups to startup friendly countries like
Singapore, Ireland, USA
To restart private investment into the economy, on the face of risk aversion, stalled or slow investments from
corporate India
To eliminate the earlier obstacles - Government apathy, corruption and complex approval processes
"Start up India is a dream India must dream. Not because it can, but it can’t afford not to"
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Objectives of the Action Plan
Flagship initiative of the Government of India, intended to build a strong eco-system 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 aims to empower Startups to grow through innovation and design
Government policies and initiatives aimed towards improving and supporting the overall start-up ecosystem
19 point action list - divided into 3 areas:
Simplification and handholding
Funding support and incentives
Industry-academia partnership and incubation
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What is Start-up?
“Startup” has been defined to mean an entity incorporated or registered in India, with an annual turnover not
exceeding INR 250 million in any preceding financial year, and working towards innovation, development
of new products, or services driven by technology or intellectual property
Additionally, it has been provided that the entity:
Should not be formed by splitting up, or reconstruction, of a business already in existence
Shall cease to be a Startup if its turnover exceeds Rs 25 crore in any preceding financial year, or it has
completed 5 years from the date of incorporation/ registration
Will be eligible for tax benefits only after a certificate is obtained from the Inter-Ministerial Board set
up by the Department of Industrial Policy and Promotion (DIPP) for this purpose
‘Entity’ shall mean a private limited company, registered partnership firm or a limited liability partnership
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Key takeaways on definition of Start-up
It sets ups or institutes an inter-ministerial body led by DIPP which ‘validates’ the innovative nature of an
enterprise, thereby qualifying it as a start-up - an involvement of Government in this ecosystem that is hardly
desirable
Also requires a start-up to obtain recommendation from an incubator in order to be eligible - the need for validation
and recommendation goes against the very steps the Action Plan takes to reduce government involvement
The question is will the Government be able to keep the bureaucracy in check? The record, till date, is far from
satisfactory
Additional layer of bureaucracy could slow down the staring up process and needs to go
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Compliance regime based on self-certification
Objective - To reduce the regulatory burden on Startups thereby allowing them to focus on their core
business and keep compliance cost low
Compliance pertaining to 6 labour and 3 environmental laws* will be allowed to be self-certified through the Startup
mobile app
No inspections will be carried out under labour laws for a 3 year period
Startups classified as "white category" as defined by the Central Pollution Control Board will be allowed self-
certification under environmental laws, with only random checks proposed
Inspections could be done on receipt of credible and verifiable complaint of violation, filed in writing and approved
by at least one level senior to the inspecting officer
* Labour laws - The Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996, The Inter-State Migrant Workmen (Regulation of
Employment & Conditions of Service) Act, 1979, The Payment of Gratuity Act, 1972, The Contract Labour (Regulation and Abolition) Act, 1970, The Employees’ Provident Funds and
Miscellaneous Provisions Act, 1952, The Employees’ State Insurance Act, 1948
Environment Laws - The Water (Prevention & Control of Pollution) Act, 1974, The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003, The Air (Prevention &
Control of Pollution) Act, 1981
It is a step towards building trust with business. Waiver from labour inspections for 3 years is a significant benefit
accruing under this policy. However, the Action Plan exempts start-ups from inspection under a fixed number of labour
laws – six to be specific. There are about 45 laws at the central level and 4 times this number at the State level. The
Centre needs to work with the States to ensure a smooth rollout of the benefits under the Action Plan and avoid
discord between the policies at the two levels.
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Start up India Hub
Objective - To create a single point of contact for the entire Startup ecosystem and enable knowledge
exchange and access to funding
Government to set up a Startup India Hub which will be a single-point of contact for Startups
Such hub will enable knowledge exchange by collaborating with various stakeholders such as the Central and
State Governments, legal partners, consultants, universities, R&D institutions and assist in the funding process,
organise mentorship programmes, business structuring advisory etc
To collaborate with all stakeholders at one forum could be a challenge!
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Rs 10,000 crore ‘fund-of-funds’
Objective - To provide funding support for development and growth of innovation driven enterprises
Government to set up a Fund with an initial corpus of Rs 2,500 crore and a total corpus of Rs 10,000 crore over a
period of 4 years
Such Fund will not invest into Startups directly, but shall participate in the capital of SEBI registered venture funds
Such Fund will be managed by a Board with private professionals drawn from industry bodies, academia, and
successful Startups
Life Insurance Corporation (LIC) shall be the co-investor in the Funds of Funds
Venture Fund may obtain up to a maximum of 50 percent of the fund size from the Fund of Funds, provided it has
already raised the balance 50 percent of the stated fund size
Fund to ensure support to broad mix of sectors
Significant financial commitment by the Government of India under the Action Plan. India needs access to domestic
capital. Any investment by an angel investor in an Fund shall be supplemented by this FoF. This shall further
supplement the India Aspiration Fund launched with Rs 2000 crore corpus in 2014. Start-ups that are solving local
problems shall be the biggest beneficiaries. It’s implementation shall mean no more looking towards developed
markets for ideas that are normally funded by foreign funds.
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Credit Guarantee Fund for Startups
Objective - To catalyse entrepreneurship by providing credit to innovators across all sections of society
Credit Guarantee Fund aims to catalyse entrepreneurship through credit to innovators across all sections of
society
The credit guarantee mechanism shall be rolled out through the National Credit Guarantee Trust Company/ Small
Industries Development Bank of India (SIDBI) with a budgetary corpus of Rs.500 crores per year for the next 4
years
Debt funding to start-ups is perceived as high risk area and to encourage banks and other lenders to provide venture
debts to start-ups, this action point is being envisaged. Today, Start-ups need working capital facility from the banking
channels even after they have been funded by Venture Capital Funds. This facilitation should encourage banks and
lenders to provide venture debt to start-ups.
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Other General initiatives
Launch of Atal
Innovation Mission
(“AIM”)
Harnessing private
sector expertise for
incubator setup
Building innovation
centres at national
institutes
Setting up of new
Research Parks
The objective is to serve
as a platform for promotion
of leading innovation hubs,
start-up businesses and
other self-employment
activities particularly in
technology driven areas
To leverage private sector
expertise in the set-up of
incubators, it is proposed
that 35 new incubators be
set up in existing
institutions.
Funding support of 40
percent (subject to a
maximum of Rs 10 crore)
is proposed to be provided
by the Central
Government for
establishment of new
incubators in existing
institutions
In order to augment
incubation and R&D
efforts, 31 centres of
innovation and
entrepreneurship will be
set-up/ scaled up for
providing facilities to over
1,200 Startups, at national
institutes.
These 31 centres will
include 13 Startup centres
and 18 technology
business incubators to be
set up/ scaled up at IIMs/
NITs/ IITs.
7 new research parks are
proposed to be set up with
an initial investment of Rs
100 crore each.
These parks shall enable
companies with a research
focus to set up base and
leverage the expertise of
academic/ research
institutions.
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Other General initiatives
Promote
entrepreneurship in
Biotechnology sector
Innovation focused
programs for students
Annual Incubator Grand
Challenge
Organising Startup fests
5 new bio clusters, 50 new
bio incubators, 150
technology transfer offices
and 20 bio connect offices
will be established though
Biotechnology Research
Assistance Council
(BIRAC).
Biotech Equity Fund –
would be set up in
partnership with National
and Global Equity Funds
to provide financial
assistance to young
Biotech Startups.
Innovation core program
shall be initiated to target
school kids with an
outreach to 10 lakh
innovations from 5 lakh
schools.
A Grand Challenge
Program - NIDHI (National
Initiative for Developing
and Harnessing
Innovations) to be initiated
to support and award Rs
10 lakhs to 20 student
innovations from
Innovation and
Entrepreneurship
Development Centres.
In order to assist in
building world class
incubators, the
Government proposes to
initially identify and
establish 10 incubators
with financial assistance of
Rs 10 crore each.
Further, an annual
“Incubator Grand
Challenge” will be held to
identify incubators who
can become world class.
As a part of the “Make in
India” initiative, the
Government proposes to
hold one fest at the
national level and one fest
at the international level in
an international city on an
annual basis
Such fests would help in
showcasing innovation
and provide a platform for
collaboration thereby
connecting with investors,
mentors, incubators,
exhibitions, product
launches, etc
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Rolling out of the mobile app and portal
Objective - To serve as the single platform for Startups for interacting with Government and Regulatory
institutions for all business needs and information exchange among various stakeholders
A Mobile App and Portal would be launched by 1 April, 2016 on all leading mobile/ smart devices’ platform to
provide on-the-go accessibility for -
Registration of Startups through a simple form and obtaining certificate
Filing of compliances and obtaining information on various clearances/ approvals/ registrations
Provision of a platform for collaborating with other stakeholders such as venture funds, incubators,
academia, mentors etc
Applying for various schemes of the Government under the Startup India initiative
Promoting start-ups by improving the ease of doing business is clearly at the forefront of the Action Plan. The online
interface is a step in the right direction. This also advances the ‘Digital India’ campaign of the Government.
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Faster exits for start-ups
Objective - To make it easier for Startups to wind up operations
The Insolvency and Bankruptcy Bill 2015 will allow fast track and/ or voluntary closure of businesses
Startups satisfying the specified conditions would be allowed to be wound up in 90 days on a fast track basis
Such a wind up will be carried out by an Insolvency Professional who will be in charge of the company and
oversee the liquidation process
On the appointment of the insolvency professional, the liquidator shall be responsible for the swift closure of the
business, sale of assets, and repayment to creditors in accordance with the distribution waterfall set out in the
Insolvency and Bankruptcy Bill 2015
The Government had introduced the “Insolvency and Bankruptcy Code, 2015” that provides for resolution of insolvency
in a speedier and time-bound manner. The Bill aims at promoting investments, freeing up banks’ resources for other
productive uses, boosting credit markets and improving ease of doing business in India. An effective legal framework
for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage
entrepreneurship, according to the statement of objects and reasons of the Bill tabled in Lok Sabha.
Considering the logjam seen in the Parliament in recent sessions, it is anybody’s guess as to when this legislation
might see the light of day.
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Legal support and fast-tracking patent application
Objective - To promote awareness and adoption of IPRs by Startups and facilitate them in protecting and
commercializing the IPRs by providing access to high quality Intellectual Property services and resources,
including fast-track examination of patent applications and rebate in fees
Startup Intellectual Property Protection (SIPP) scheme will be introduced on a pilot basis for a one year period to
facilitate filing of Patents, Trademarks and Designs. The scheme would include:
Fast-tracking patent application
Setting up a panel of “Facilitators” who will advise on different IPR and also provide advice on promoting and
protection of IPRs in overseas jurisdictions
Such Facilitators will also provide end-to-end advisory from making applications till the stage of final disposal
of the IPR application
The Government will bear the cost of such Facilitators and the Startups shall bear only the cost of the
applicable statutory fees
A rebate of 80 percent on patent filing fees vis-à-vis other companies is proposed
This is one of the ‘sweetheart’ deals for start-up entrepreneurs under the Action Plan and is aimed at promoting
awareness and adoption of IPRs by start-ups and facilitate them in protecting and commercialising those rights. This
could also help in obtaining higher valuation by getting a protective cover on the patents.
“There is a need to blend intellectual property (IP) with youth property (YP). We will also give 80 per cent rebate in
patent registration fees for start-ups vis-à-vis other companies,” PM Modi said.
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Relaxed Norms of Public Procurement for Startups
Objective - To provide an equal platform to Startups (in the manufacturing sector) vis-à-vis the
experienced entrepreneurs/ companies in public procurement
Startups (in the manufacturing sector) shall be exempted from the criteria of “prior experience/ turnover” in tenders
floated by any Government entity or PSU without any relaxation in quality standards or technical parameters
The Startups will have to demonstrate their capability to execute the project as per requirements and should have
their own manufacturing facility in India
Typically, whenever a tender is floated by a Government entity or by a PSU, very often the eligibility condition specifies
either “prior experience” or “prior turnover”. Such a stipulation prohibits/ impedes Startups from participating in such
tenders. At present, effective April 1, 2015 Central Government, State Government and PSUs have to mandatorily
procure at least 20 percent from the Micro Small and Medium Enterprise (MSME). Currently only a handful of
manufacturing start-ups shall be able to benefit this scheme. Most of angel/ VC funded start-ups are in innovative
areas of service delivery, data analytics, software solutions, software products and platform. Such enterprises too need
this relaxation so that they can serve public sector without the need to partner a big software giant.
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Tax exemption for 3 years in a 5 year window
Objective - To promote the growth of Startups and address working capital requirements
Income-tax exemption proposed for Startups for a period of 3 years
Exemption subject to non-distribution of dividend by the start-up
This shall give a huge relief on working capital blocked in TDS for the start-ups. In reality, start-ups are loss-making in
the initial 3-7 years as they are chasing growth. A clarification is needed that the clients/ customers of start-ups would
not be required to deduct tax at source on payments to be made to such start-ups. This would mean a saving of cash
flow that today gets blocked as TDS for 12-18 months.
Also, by exempting profits from tax, the start-ups may perhaps not be eligible to carry forward any tax losses made
during the first 3 years - thus, tax losses arising in the said period may not be available for set-off against profits made
in the future. Some clarity is required on this aspect as well.
Union Budget 2016:
− Deduction available to start-ups engaged in ‘eligible business’ which is incorporated on or after April 1, 2016 but
before April 1, 2019 and whose turnover does not exceed INR 250 million in any of the previous years beginning on
or after April 1, 2016 and ending on April 1, 2021
− Condition on not distributing dividends done away with
− Tax holiday restricted only to companies, not to LLP or firms
− No exemption from Minimum Alternative tax (MAT) provisions [effective tax payout - 20.388% or 21.341%]
While the tax incentive was identified as one of the significant proposals of the Start-up Plan, the fact that it is available
only to Start-ups incorporated as companies on or after April 1, 2016, is a dampener to non-corporate eligible Start-ups
as well as eligible Start-up companies already in existence.
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Tax exemption for investments made above FMV
Objective - To encourage seed-capital investment in Startups
Investments made by incubators in start-ups proposed to be insulated from the rigors of Section 56(2)(viib) of the
Income-tax Act, 1961
Any consideration received by start-ups for issuance of shares over Fair Market Value (FMV) to incubators, not to
be taxed in the hands of the start-up
The term “incubator” is yet to be defined for the above purpose
Where the idea is at development stage, FMV may be significantly lower than the value at which the capital investment
is made. This resulted in tax being levied under Section 56(2)(viib) of the Income tax Act. Currently, the investment by
VC funds in start-ups is exempted from operations of this provision. This is only an incremental step of exempting the
incubation in addition to VC funds. However, in the current business environment, there is a need to exempt all angel
investments (including domestic angel investments) for the start-ups to enable raising of funds freely from angel
investors as well.
Union Budget 2016: No change announced to give effect the proposed tax exemption for investments made above
FMV
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Capital gains tax exemptions
Objective - To promote investments into Startups by mobilizing the capital gains arising from sale of
capital assets
A capital gains exemption mechanism has been proposed for investors (class of investors to be specified)
investing in the Startup ecosystem
Capital gains invested in “Fund of Funds” recognized by the Government shall be exempted
Further, existing capital gains exemption for investment in newly formed manufacturing Micro, Small and Medium
Enterprises (MSMEs) by individuals shall be extended to all Startups
For Startups, investment in computer or computer software (used in core business activity) to qualify as purchase
of “new assets” to promote technology driven start-ups
An exceptional initiative that shall make investors to invest in start-ups rather than capital gains bonds or house
property. This initiative may augment the funds available to various VCs/ AIFs for investment in start-ups.
Union Budget 2016:
− LTCG invested in a Government specified Start-up “Fund of Funds” to be exempt up to a limit of INR 5 million
subject to conditions (Sec 54EE)
− Maximum investment that can be made is capped at INR 5 million - Exemption would also be subject to an
investment lock-in of 3 years
− Capital gains exemption from sale of residential property by individual/HUF for investment in startups, subject to
individuals / HUFs holding more than 50 percent share capital and / or voting rights, post such investment; such
start-ups are allowed to use capital proceeds in computer assets within one year from the date of subscription of
shares
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Other changes proposed in Union Budget 2016
To introduce amendments to the Companies Act, 2013, in order to mend the enabling environment for Start-ups;
so much so as to enable registration of companies within one day
With a view to support internal and external innovation, the Railway Budget proposed a sum of INR 500 million to,
inter-alia, provide innovation grants to Start-ups
Tax rate of 10 percent is proposed for persons resident in India, earning royalty income in respect of a patent
developed and registered in India to boost indigenous manufacturing and promote the ‘Make in India’ campaign
Equalisation Levy - Chapter VIII of Finance Bill 2016
New levy introduced with the subject chapter which would operate different from the main Act
Government considered the recommendations of the OECD in Base Erosion and Profit Shifting (“BEPS”)
project under Action Plan 1
Final levy of 6 percent chosen over usual TDS withholding and is a final levy at the time of payment to the
non-resident for specified services. Disallowance in case deduction not made.
Specified services defined to mean online advertisement, any provision for digital advertising space or
any other facility or service for the purpose of online advertisement and includes any other service as
may be notified by the Central Government in this behalf
Reduction of time period for qualification for long term capital on sale of unlisted securities - from 3 years to 2
years in the budget speech (has not formed a part of the Finance Bill)
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Concluding thoughts
Startup India could prove truly transforming if it succeeds in providing a framework to foster the brightest minds
among them
Looking beyond the veil of PR and rhetoric, it seems a pretty tall order. Sceptics would be waiting with a bated
breath to pronounce it mere fantasy and a failure
The Government Action Plan has come at a moment when the Indian economy is in need of fresh capital and
robust regulatory environment. If implemented in true spirit, it can place India on a high trajectory
Better clarity on indirect taxes particularly the applicability of service tax on activities of ecommerce marketplaces,
at least until GST sees the light of day is being eagerly anticipated both by entrepreneurs and investors
In summary, while Startup India is a great first step in the right direction and will probably help startups to some
extent, it will probably not make a dent on the exodus of India's Flipkarts or InMobis to Singapore in any
meaningful way. Will it help small startups become the next Flipkart or InMobi? That really depends on the
execution and we will come to know only after the next few years.
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Relaxations announced by RBI for start-ups
Regulatory
relaxations by RBI
Enabling all start-ups to receive foreign venture capital investments, enabling unrestricted transfer of
shares from FVCIs to other parties
Permitting receipt of
investment on
deferred basis,
escrow/ indemnity
arrangement for up
to 18 months
Simplifying consequences of delayed FDI transaction reporting
Permitting start-ups
to raise INR
denominated ECBs
with relaxations
pertaining to eligible
lenders; issue of
innovative FDI
instruments by
start-ups; issue of
sweat equity etc
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Identification of businesses covered under the
definition
A business is covered under the definition if it aims to develop and commercialize:
a new product or service or process; or
a significantly improved existing product or service or process,
that will create or add value for customers or workflow
The mere act of developing:
products or services or processes which do not have potential for commercialization; or
undifferentiated products or services or processes; or
products or services or processes with no or limited incremental value for customers or workflow
would not be covered under this definition
Annexures
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Identification of businesses covered under the
definition (Contd..)
In order for a “Startup” to be considered eligible, the Startup should -
be supported by a recommendation (with regard to innovative nature of business), in a format specified by
DIPP, from an Incubator established in a post-graduate college in India; or
be supported by an incubator which is funded (in relation to the project) from GoI as part of any specified
scheme to promote innovation; or
be supported by a recommendation (with regard to innovative nature of business), in a format specified by
DIPP, from an Incubator recognized by GoI; or
be funded by an Incubation Fund/Angel Fund/ Private Equity Fund/ Accelerator/Angel Network duly
registered with SEBI* that endorses innovative nature of the business; or
be funded by GoI as part of any specified scheme to promote innovation; or
have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business
being promoted
Annexures
* DIPP may publish a ‘negative’ list of funds which are not eligible for this initiative
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Inter-Ministerial Board
An Inter-Ministerial Board setup by DIPP to validate the innovative nature of the business for granting tax related
benefits
Approval from the Inter-Ministerial Board shall not in any manner, limit or absolve the entity from any liability
incurred in case of any misrepresentation/ fraud arising from submission of such application and/ or supporting
such application
Annexures
36. OPEN HOUSE & DISCUSSIONS
THANK YOU
Views expressed in the presentation are personal
Sandeep Jhunjhunwala, FCA, ACS, B.Com (H)
E: Jhunjhunwala.sandeepr@gmail.com
M: +91 97401 55469
37. Presentation Overview
4 pillars of Accounting
Basis of Accounting
Financial Statements
Financial Fundamentals
Accounting Basics
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The Accounting Pillars
Content All the transactions of a business can be broken down into 4 major categories/ pillars:
Assets
Liabilities
Expenditure
Income
Whether one is Apple Inc, Google or Facebook or running a tea stall, all the transactions would come under one of the
4 categories above!
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The Accounting Pillars
Content
Assets
Those items which you
paid for which will give you
benefit for more than 1
year are called assets.
Simple!
You buy a laptop, that’s an
asset. Will last 2/3 years
You buy a car, that’s an
asset. Will last 3/4 years
You buy a pen, that’s not an
asset. Will not last > 1 year
You buy a meal, that’s not an
asset. Will last 30 mins!
Expenditure
Items which you paid
money for, which are NOT
assets is expenditure
The laptop you bought is not
expenditure. It’s an asset
The car you bought is not
expenditure. It’s an asset
The pen you bought is
expenditure. It’s an not asset
The meal you bought is
expenditure. It’s an not asset
Liabilities
Money that you received
which you need to pay
back to someone at a
future point in time is a
liability
You purchased items from a
vendor on credit. That’s a
liability. After the credit
period, you need to pay the
vendor
You received Rs 150,000
from a customer. That’s not a
liability
You received Rs 5,000 from
the bank as interest. That’s
not a liability
Income
Money that you
received which you need
NOT pay back to someone
is income. You receive
income for services/
products you provide
You received Rs 150,000
from a customer. That’s an
income. The money is paid to
you for a service/ product
you provided. You don’t need
to give it back to the
customer. You’ve earned it!
You received Rs 5,000 from
the bank as interest. That’s
not a liability. The money is
paid to you for depositing
money in a bank. You need
not give it back to bank.
You’ve earned it.
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Summary
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Financial Statements
Content
Balance Sheet
• Picture
• Indicates the financial health of a company at a point in time
• Assets (Cash, AR, Inventory, Fixed Assets, Goodwill & intangible assets)
• Liabilities (Salaries, AP, deferred revenue, debt)
• Equity (Paid up capital, retained earnings)
Profit & Loss
Account
• Summary of Income & Expenditure
• A movie, tells the financial story of a company over a span of time
• All profit and loss statement would have a heading stating a period of time with a start date and an
end date
Cash Flow Statement
• Summary of Cash Inflow & Outflow
• This statement tracks the core activity money in for sale and money out to cover expenses
• Other Reports such as Cash Burn reports, Budget vs Actual Reporting
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Financial Fundamentals
Content
Bottom Line
=
Revenue -
COGS -
Expenses
Budgets, Projections,
Cash Burn
Top line
Revenue/ Sales
Gross Sales/
Revenue
regardless of
cost, liabilities
Bookings =
Financial value
of business that
you have under
contract
Revenue, COGS, Gross
Margins, expenses
Runway =
Cash divided by
cash burn, not
necessarily equal
EBITDA
Dashboards -
One Page to
communicate
progress to key
stakeholders
(investors,
employees, etc)
EBITDA: Earnings Before
Interest, Taxes,
Depreciation &
Amortization
Milestones -
Events that drive
value in the
company
(commercial,
market,
technical)
42. Contents
Summary
Content
Annexures
What do you need to think?
Content What are your costs? (money out)
What are your revenue streams? (money in)
How’s your cash burn?
What are your short-term financial goals?
What are your long-term financial goals?
44. Contents
Summary
Content
Annexures
Content
Accrual Based Accounting System
Accrual Basis Accounting
− Revenue recognized when earned
− Expenses recognized when incurred –matched to same period as related revenue
Cash Basis Accounting
− Revenue is recognized when cash is received
− Expense recognized when cash is paid
− Cash basis accounting system can produce a Profit & Loss but not a balance sheet
What’s missing in a cash basis system?
− Tracking money owed to you: unpaid invoices, daily merchant account activity, longer term holdbacks or
reserves
− Assets: Capitalized computers and equipment, other assets of the company
− Tracking money you owe others: Accounts Payable (unpaid bills), Revenue share due to partners
− Equity
45. Contents
Summary
Content
Annexures
Content
Accounting Pre and post funding
Open business banking account
Separate personal and business expenses
Keep records of receipts and invoices
Be mindful of tax obligations
Collect payments
Select payroll provider
Stay on top of stock records
Set up a low-cost, accrual-based accounting
structure that can grow with you
Set foundation for future growth
Build financial infrastructure
Clarify funding objectives
Manage cash-flow
Create clean financials for investors
Hire professionals to help company become
GAAP compliant (Generally Accepted
Accounting Principals)
Pre-fundingStage
Post-fundingStage
Your financial strategy deepens and you’ll gain
better understanding of your business
46. Accounts Payable/ Receivable/ Taxes
Content
AccountsPayable
Set up system early to
help maximize cash flow
and create essential
financial reports
Choose best tracking
system for company
needs
Enter every expense:
receipts, bills, etc
Establish invoice AP
schedule
Place vendors on net 30
payment terms
Build reputation of
financial stability
AccountsReceivables
List all open invoices
and balances
Create “friendly” invoices
(and print hard copies)
Put payment terms in
writing for new clients
Establish credit
guidelines
Create collection
timeline
Improve cash collections
by creating a clear
payment collection
process
Taxes
Even in the early stages,
you’ll want to be mindful
of tax considerations
Select correct legal
entity for company
Understand all tax
obligations and
registrations
Separate business and
personal finances
48. Contents
Summary
Content
Annexures
Content
Types of entities and related compliances
Type Proprietorship Partnership Private Limited
Company
Limited Liability
Partnership
Ownership Any Business owned by
a individual
Business owned by
minimum of 2 partners
Created under the
Companies Act with 2
shareholders (OPC also
introduced) and minimum
of 1 lakh share capital
Private limited company
with the flexibility of
partnership
Compliance Low Low High Medium to High
Income tax return ITR 4 ITR 5 ITR 6 ITR 6
Credibility perception Low Low to Medium High High
Flexibility High High Low Low
Formation No legal formalities
except shop and
establishments
registration
Partnership agreement to
be drafted
To be registered and
incorporated under
Companies Act. MoA and
AoA to be drafted
To be registered and
incorporated under LLP
Act with MCA.
Partnership agreement to
be filed with MCA.
Liability Unlimited liability of
Proprietor
Unlimited liability of
partners
Limited to the extent of
share capital
Limited to the extent of
partners’ capital
Taxation Taxed at Individual rates Taxed at 30% Taxable at 30% Taxable at 30%
Audit Tax Audit required only if
turnover exceeds 1cr
Tax Audit required only if
turnover exceeds 1cr
Statutory Audit is
required irrespective of
turnover
Statutory Audit is
required subject to
turnover and capital
threshold
49. Contents
Summary
Content
Annexures
Content
Consideration for the structure
Ownership Control
Management Control
Capital/ Investment
Profits repatriation and Tax Issue
− Dividend distribution tax is not applicable for sole proprietorship, partnership firm and LLP
− Surcharge on tax is not applicable to an individual, a firm and LLP whereas company it is applicable after
INR 10 million
− Sole proprietorship is not liable to deduct TDS till it is liable for tax audit
Estimated life of a business
Commercial considerations
50. Contents
Summary
Content
Annexures
Content
Applicability of Statutory Compliances
Statutory
Compliance
Sole Proprietor Partnership Firm AOP/ BOI LLP Body Corporate
Excise Yes Yes Yes Yes Yes
Service tax Yes Yes Yes Yes Yes
Tax deduction at
source (TDS)
Yes Yes Yes Yes Yes
Value added tax
(VAT)
Yes Yes Yes Yes Yes
Central sales tax
(CST)
Yes Yes Yes Yes Yes
Statutory Audit No No Yes Yes* Yes
Tax Audit Yes** Yes** Yes** Yes** Yes**
Audit
Documentation
Yes* Yes* Yes* Yes* Yes*
Applicability of
revised Schedule
VI
No No No No Yes
MCA Reporting
(XBRL)
No No No Yes Yes
Income Tax
Return
Yes Yes Yes Yes Yes
51. Contents
Summary
Content
Annexures
Content
Handle with care - Cash & TDS
Disallowance of expenditure for payment in cash for expenses exceeding INR 20,000
100 percent penalty on loans/ deposits taken in cash exceeding INR 20,000
100 percent penalty on loans/ deposits paid in cash exceeding INR 20,000
Non-Deduction and Non-Deposit of TDS in time shall make the expenses not deductible for income tax purposes
Delay in deposition of TDS attracts interest
If e-TDS return is not submitted by the Deductor, then it is very difficult to get the credit for the amount deducted
from Income Tax Department
In absence of PAN (or other documents yet to be specified under Section 206AA) of deductee, TDS to be done on
payment at the higher rate of 20 percent irrespective of the rate applicable
Quoting correct PAN is the most critical
52. Contents
Summary
Content
Annexures
Content
Other Planning aspects
Make capital purchases before September 30th to claim depreciation for the full year
Split the profits in family and reduce average tax
Include clause of ‘salary to partners’ in partnership agreement
Directors can take salary from the company
File your return of income always before due date
Plan advance tax and pay on time
Based on your business model choose appropriate method of accounting - cash or mercantile (Companies have to
follow mercantile method of accounting)
Cost of compliances is lesser than the cost for non-compliances!