A startup is basically newly found company by one or more people which aim at bringing to the market some unique product or service. In early stages these companies lack monetary funding and therefore require financial support from the government. One of such supporting schemes is Startup India scheme which needed amend the definition of startup in India and the same was done by bringing in Patent (Amendment) Rules, 2017.
Earlier, there were three criteria in Patent Rules to decide whether a company falls into the ambit of startup. Firstly, it should not have been incorporated/registered for more than 5 years. Secondly, the turnover of the company should not exceed 25 crores in the period of that 5 year. Thirdly, the working of the company should be on innovation, deployment or commercialization of new product, process or service driven by the technology of intellectual property. It also states that no company can be called a startup if it is created by splitting or reconstructing an already existing company. Further, mere acts of creating a product that do not have potential for commercialization, that are undifferentiated and are with no or limited incremental value for the customers, would not be termed as startup.
In 2017, a sea change came to the definition of startup with much simpler rules. According to the Patent (Amendment) Rules, 2017,
(a) “An entity in India recognized as a startup by the competent authority under Startup India Initiative.”
(b) “In case of a foreign entity, an entity fulfilling the criteria for turnover and period of incorporation/ registration as per Startup India Initiative and submitting declaration to that effect.”
This broad definition given in this amendment and made dependent on the notifications would mean that now there is no need to amend the patent rules again and again and the definition could be changed by a simple notification.
To understand the definition of startup, we need to refer the definition given by the DIPP (Department of Industrial Policy and Promotion) notification of April, 2018. An entity shall be considered as a startup if it satisfies all the following conditions:
- If it is incorporated/registered up to the period of 7 years and 10 years in case of biotechnology, as any of the followings, Private Limited Company (as defined in Companies Act, 2013) or Partnership Firm (registered under Partnership Act, 1932) or Limited Liability Partnership (registered under Limited Liability Partnership Act, or One Person Company (as defined in Companies Act, 2013). Provided that such entity is not formed by splitting up or reconstruction of a business already in existence.
- The turnover of the entity, for its respective period of 7 years or 10 years, do not exceed more than 25 crores. The entity would cease to be a startup if it exceeds 25 crores.
- If the 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.
After getting recognized as startup, under Startup India initiative, an entity can apply for income tax exemption under section 80 IAC of the Income Tax Act and can avail exemption for three consecutive financial years of its first 10 years of incorporation.
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