Why a Startup India certificate may be worth no more than a piece of paper

It rarely opens up the door to angel or VC funding and even the tax breaks it offers are usually meaningless

It is tough being a bootstrapped start-up. Ask Abhishek Verma, he has the battle scars to prove it. He is the founder of Quikmile, a tech-enabled logistics start-up. The firm has built a vehicle-tracking and transport management system for transporters, logistics companies, fleet owners through which they can track and manage their assets in real time.    

Incorporated in June last year, the company was working out of a three-bedroom flat-cum-office in Delhi NCR region. It is currently being funded by Verma and his teammate's own savings, and loans from friends and family. 

It isn't as if they have been looking out for investors, but no great offer has come their way. Almost three months back, Verma and his teammates hit upon the idea of registering themselves under the incumbent government’s flagship start-up India initiative.

They thought a certificate and recognition from the government might open a few closed doors. “See, for us it has been a struggle from day one. We knew it when we left our jobs to start a company of our own. What we wanted was some help along the way initially, to enable us to survive and may be thrive later. That is why we thought of applying for the start-up certificate. We thought it would help us secure a government loan and also help us in getting funds from venture capitalists and angel investors,” said Verma.

Armed with the certificate, Verma and his team again started the process of raising funds. But nothing seems to have changed. “What we found after having extensive talks is that banks do not provide mudra loans or assistance under start-up India schemes to private limited companies that are less than a year old. On the other hand, VCs and angel investors only fund private limited companies,” Verma said.

What does the certificate promise?

According to the official website of the Start-up India initiative, the certificate gives a company income tax exemption for a period of three consecutive years and exemption on capital gains and investments above fair market value. It provides for easy winding up of a firm within 90 days. It also helps fast-track up to 80 per cent rebate on filing patents. It also promises to help facilitate funds for investments into start-ups through alternate investment funds.

Even if one goes by the numbers on the government’s Start-up India portal, only 129 enterprises have been able to secure funds out of the 15,000-odd companies registered under the initiative.

Commerce ministry officials on their part claim that the idea of a certificate was not about helping a budding firm get funds. “We have made it clear from the beginning that recognition from the government as a start-up is the basic thing that a firm needs to have, to have access to easier norms on everything from taxation, to patents and ease of doing business,” an official with the Department of Industrial Policy and Promotion, said.

Other government officials summed up this view by arguing that the idea behind the certification is to get a grip on the start-up ecosystem in the country and have a track of the statistics involved in the nascent sector, such as amount of employment created, taxation generated and business done.

Tax exemptions only on paper

Many claim that the criteria for tax exemption is skewed and not made according to the ground realties. “Start-up India recognition certificate provides tax exemption up to three years to a start-up, but that only applies if start-up is profitable. Anyone who has run a business or start-up before should know that start-ups are rarely profitable in the early years, so this benefit is useless,” said Vikas Yadav, who has just built an app-based service start-up in the retail space.

Start-up India progress

According to official statistics, 55 per cent of these start-ups are located in tier-I cities, while 27 per cent and 18 per cent are based out of tier-II and tier-III cities, respectively. According to senior officials, some 130,424 jobs have reportedly been created by 11,727 start-ups, at an average of 11 jobs per enterprise.

Current rules stipulate that any firm set up as a private entity in the form of a limited company, partnership firm or a limited liability partnership, with a turnover less than Rs 25 crore in any of the previous financial years, can be recognised as a start-up.

According to a Start-up India official, the main motivation behind getting this recognition for start-ups will be the ease of handling cumbersome bureaucratic hurdles and red tape which come along the way.

“Start-ups will be permitted to self-certify compliance with nine labour laws and environmental laws. In the case of labour laws, no inspection will be conducted for a period of three years. There will also be single window clearances for approvals, registrations and filing compliances among other things,” start-up India says on its website.

Startup India scheme at a glance

Number of firms registered under learning and development Module: 234,715

Number of firms registered under start-up India Hub: 292,025

Number of start-ups recognised under the scheme till date: 15,424 

Number of start-ups funded so far under the scheme: 129