An Outlook on issue of sweat equity shares by the Startups

The Government of India initiated the Startup India Scheme under the leadership of PM Narendra Modi. The Startup India Registration Process was introduced to nurture and encourage the growth of startups in India.

This scheme offers numerous benefits to the startups that register under it. The scheme has a broad vision of development of the economy along with the creation of job opportunities in the country.

Startup India Scheme

The ultimate objective of the Startup India scheme is to trigger the sense of innovation among upcoming entrepreneurs. The startup India scheme was established to trigger employment in the country and encourage economic growth. Through this initiative, the government is striving to embrace new ideas, research, and innovation. Let’s explore the benefits of Startup India registration.

Benefits of Startups in India

• Easy compliances and simpler form of handling the incorporation
• Easy and fast track exit for unsuccessful startups in India
• Various exemptions and tax benefits on Capital gain
• Funding facility by infusing more capital into the startup action plan
• Innovation and development of a new product market
• A Scalable Business model with high potential for the creation of wealth

Eligibility for Startup India Scheme

The eligibility criteria for startup India program is as follows;

• A Registered Company/LLP/Partnership Firm
  The business must be registered under any of the following forms of business organization in India;
  • As a Private Limited Company under the Companies Act, 2013
  • Registered as a Partnership Firm under the Indian Partnership Act, 1932
  • Registered as a Limited Liability Partnership under the Limited Liability Partnership Act, 2008.

• Turnover Limit
  The turnover of the business must be less than 25 crores per year

• Less than 5 years old
  The age of business from the date of registration must not be of more than 5 years

• Must be a New Business Entity
  The business must not be a result of split or restructure of an existing business

• Innovation Friendly
  The startup must be involved in innovation or development of new products, services or processes or significantly improving an existing one. Creation of wealth or employment is also an eligibility criterion.

• DIPP Certificate
  It is mandatory to obtain certification from the Inter-Ministerial Board as set up by DIPP (Department of Industrial Policy and Promotion). This document is needed to certify the innovative functioning of the business.

Taxation Benefits for Startups

Startup company post getting incorporation can apply for tax exemption under section 80 IAC, Section 56 of the Income Tax Act. The startup can avail the benefits of tax for 3 Financial years out of its first 10 years since incorporation.

• Criteria for availing exemption under section 80 IAC
  The startup must be Private limited company or Limited liability Partnership and have been incorporated after 1ST April 2016 along with that the entity should be a recognized setup.

• 100% Tax Rebate
  If the annual turnover exceeds 100 crores, the startup is eligible for 100% tax rebate on profits for a period of 3 years in a period of 7 years.

• Criteria for availing exemption under section 56 of the Income Tax Act
  For availing the exemption under section 56, the entity should a DPIIT Recognized.
  For availing the exemption under section 56, the entity should a DPIIT Recognized.

• Exemption under section 54EE
  Exemption under section 54EE is available for the eligible Startupson long term capital gains, if LTCG is invested in a fund notified by central government within a time duration of 6 months from the date of transfer of asset.

• Investments above the FMV
  The tax has been exempted by the government levied on the investment above the fair market value. Investments made by the resident angel investor or funds which are not registered in Venture capital fund is exempted.

Can Startup Companies issue Sweat Equity Shares?

• “Sweat Equity” shares mean equity shares issued by a company to its employees or directors at a discount or for consideration other than cash. In other words, it refers to the allotment of equity shares to employees as compensation for the efforts and hard work (aka sweat) in providing intangibles, like growth or success, for the company. The issuing of “sweat equity” allows the company to attract and retain its employees by rewarding them for their contribution.
• Start-ups can now issue equity shares to their employees for up to 10 years from the date of their incorporation or registration.
• The Ministry of Corporate Affairs (MCA) has amended the Companies (Share Capital and Debentures) Rules, 2014, to allow start-ups to issue sweat equity shares not exceeding 50 per cent of its paid-up capital.
• The earlier limit of five years was changed to bring the MCA provision in line with the Department for Promotion of Industry and Internal Trade’s order.
• Industry experts say the move will help start-ups better incentivize their staff and retain talent. This will also act as an alternative medium of compensation for employees and avoid pay cuts.

Conclusion

The Indian government has launched the Startup India scheme to boost employment in the country. It also supports innovation and research by providing the base for new business ideas seeking funds to thrive in the competitive space. Being a government-driven initiative, the Startup India scheme hosts an array of features that support the development and embrace change for a better future. It is also likely to increase the employment rate significantly by creating jobs for different sectors.