C H A P T E R

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START-UP
1.1 BACKDROP
A country of 130 crore population can’t create jobs for everyone.
Entrepreneurship has to be incentivised. Job providers have to be
created who occupy themselves productively and create avenues
for employment for others. To boost job-creation, Government
incentivises start-ups by giving them tax incentives and creating a
start-up ecosystem.
The idea behind encouraging start-ups is to transform the nation
from a country of job-seekers to a country of job-creators.

1.2 START-UP
Wikipedia defines ‘start-up’ as under:
“A start-up or start-up is started by individual founders or entre-
preneurs to search for a repeatable and scalable business model.
More specifically, a startup is a newly emerged business venture
that aims to develop a viable business model to meet a marketplace
need or problem.................... Start-ups face high uncertainty and do
have high rates of failure, but the minority that go on to be success-
ful companies have the potential to become large and influential.
Some start-ups become unicorns, i.e. privately held startup com-
panies valued at over $1 billion. According to TechCrunch, there
were 279 unicorns as of March 2018, with most of the unicorns
located in China, followed by the United States. The largest unicorns
founded as of October 2018 included Ant Financial, ByteDance, DiDi,
Uber, Xiaomi, and Airbnb.”

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Para 1.2 START-UP 2

According to Wikipedia, ‘entrepreneurships’ and ‘start-ups’

are similar. However, the scope of the former term is wider
and covers all new businesses including self-employment and
businesses that never intend to grow big or become registered.
‘Start-up’ refers to a new business that intends to grow beyond
the solo founder, have employees, and intend to grow.
Any new enterprise that has a scalable business model and intends to
grow beyond the solo founder, have employees and intends to grow is
a ‘start-up’. A ‘start-up’ entity may take any legal form-proprietorship
partnership, LLP, private limited company, public limited company
etc. However, in order to obtain recognition of DPIIT (Department
for promotion of Industry and Internal Trade), the start-up entity
must be a registered partnership firm or a LLP or a private limited
company and must satisfy other conditions in the Latest Startup
Notification (LSN) issued by DPIIT [See Chapter 2]. In order to be
eligible for tax holiday under the Income-tax Act, the start-up must
be a private limited company or an LLP and DPIIT recognised.
DPIIT recognised start-ups are eligible for the following benefits:
 Intellectual Property Rights (IPR) benefits.
 Relaxation in public procurement norms.
 Self-certification under Labour & Environment Laws.
 Faster exit for start-ups.
Question arises whether a start-up is also eligible to be classified as
MSME to obtain benefits under the Micro, Small and Medium En-
terprises Development Act, 2006 (MSMED Act, 2006) (Appendix 13).
Also whether and what is the difference between an MSME under
the MSMED Act, 2006 and New MSME Notification (NMN) and a
start-up under the LSN. These issues are discussed hereunder.

1.2-1 What is the revised definition for MSMEs? What are the
changes in the existing legal definition/classification
The Central Government has, vide Notification S.O. 2119(E), dated
26.06.2020 [New MSME Notification (NMN) [See Appendix 14]],
notified a composite criteria of investment and turnover for classi-
fying the enterprises as micro, small and medium enterprises. The
Notification also specifies the form and procedure for filing the
3 START-UP Para 1.2

memorandum (“Udyam Registration”). The Notification comes into

force with effect from 01.07.2020 and is in exercise of the powers
conferred by sub-section (1) read with sub-section (9) of section
7 and sub-section (2) read with sub-section (3) of section 8, of the
Micro, Small and Medium Enterprises Development Act, 2006 and
in supersession of the notifications S.O. 1702(E), dated the 1st June,
2020, S.O. 2052(E), dated the 30th June, 2017, S.O. 3322(E), dated the
1st November, 2013 and S.O. 1722(E), dated the 5th October, 2006.
Para 1 of the NMN specifies a composite criteria of investment and
turnover for classifying the enterprises as micro, small and medium
enterprises. Accordingly, an enterprise shall be classified as a micro,
small or medium enterprise on the basis of the following criteria,
namely:—
(i) a micro enterprise, where the investment in plant and machinery
or equipment does not exceed one crore rupees and turnover
does not exceed five crore rupees;
(ii) a small enterprise, where the investment in plant and machinery
or equipment does not exceed ten crore rupees and turnover
does not exceed fifty crore rupees; and
(iii) a medium enterprise, where the investment in plant and
machinery or equipment does not exceed fifty crore rupees
and turnover does not exceed two hundred and fifty crore
rupees.
The revised definition of MSME applicable with effect from 01.07.2020
is based on composite criteria of turnover limits and limits of invest-
ment in plant and machinery or equipment. The same limits apply
to both manufacturing and service enterprises.
Existing MSME classification (applicable upto 30.06.2020)
Criteria: Investment in plant and machinery or equipment
Classification Micro Small Medium
Manufacturing Investment ≤ Investment > Rs. 25 Investment > Rs. 5
Enterprises 25 lac Lac but ≤ Rs. 5 crores but ≤ Rs. 10
crores crores
Services Enter- Investment ≤ Investment > Rs. 10 Investment > Rs. 2
prises 10 lac Lac but ≤ Rs. 2 crores but ≤ Rs. 5
crores crores
Para 1.2 START-UP 4

Revised MSME classification applicable w.e.f. 01.07.2020

Criteria: Composite criteria of Investment in plant and machinery
and turnover [as per New MSME Notification (Appendix 13)]
Classification Micro Small Medium
Manufacturing/ Investment ≤ Investment > Rs. Investment > Rs.
Service Enter- Rs. 1 cr and 1 cr but ≤ Rs.10 10 crores but ≤
prises turnover ≤ Rs. crores and turn- Rs. 50 crores and
5 cr over > Rs. 5 cr but turnover > Rs. 50
≤ Rs. 50 cr cr but ≤ Rs. 250 cr

1.2-2 What is the effective date for coming into force of the revised
composite classification criteria of MSMEs?
The revised classification criteria as per the NMN come into force
with effect from 01.07.2020.

1.2-3 Whether startups will be regarded as MSMEs as per the

revised definition?
Yes. They will be regarded as MSMEs provided they satisfy the
investment limits and turnover limits in the definitions of MSME.
An enterprise can be an MSME as well as a startup by satisfying the
definitions of both MSME in NMN as above and of startup as per
LSN. MSME and Startup legal status are not mutually exclusive. Only
partnership firms, LLPs and Companies can have both the status of
“MSME” and of startup under the LSN. Proprietorships, HUFs, Public
limited companies, AOPs, Cooperative Societies can be MSME but
not startup as defined in LSN.
Startups will cease to be regarded as “startups” under LSN the mo-
ment they cross the 100 cr turnover ceiling limit or 10 years have
lapsed since incorporation. Even after an entity ceases to be a startup
as above, it will continue to be MSME as per NMN so long as it does
not exceed the turnover limit of Rs. 250 cr and investment limit of
Rs. 50 cr. Likewise an entity may lose its MSME status if investment
limit of Rs. 50 cr is exceeded but retain its startup status turnover is
Rs. 100 cr or less and 10 years have not lapsed since incorporation.

1.2-4 What is the legal difference between an MSME and a

startup?
MSME is defined by the MSME Act. Startup is defined by the DPIIT’s
5 START-UP Para 1.2

Startup Notification No. GSR 127(E), dated 19.02.2019 [i.e. New Start-
up Notification (NSN)]. Turnover limit to quality as ‘start-up’ under
LSN is Rs. 100 crores to qualify for DPIIT recognition. Turnover
limit to qualify as MSME is Rs. 250 crores. An enterprise can be an
MSME as well as a startup by satisfying the definitions of NMN as
well as NSN respectively.
The distinction between MSME and startup can be summed up thus
as under:
Sr. MSME Startup
No.
1. Defined by NMN issued under the Defined by LSN
MSMED Act, 2006
2. Investment limits and turnover Only turnover limit of Rs.100 cr is
limits should both be satisfied to applicable. No investment limits in
be regarded as MSME the definition of startup
3. MSME status will exist as long as Startup status will last till turnover
investment limits and turnover exceeds Rs.100 crores or 10 years
limits are not exceeded from date of incorporation are
completed, whichever is earlier
4. Turnover limit for MSME Status is Turnover limit for Startup Status
Rs.250 crores is Rs.100 crores
5. Investment ceiling for MSME sta- No investment ceilings to be re-
tus is Rs.50 crores. If that is exceed- garded as startup under LSN
ed, enterprise ceases to be MSME
6. Enterprise can enjoy MSME sta- Startup status under LSN is only
tus for any length of time after its for 10 years from date of incor-
incorporation so long as its invest- poration
ment does not exceed Rs.50 cr and
turnover does not exceed Rs.250cr
7. To be recognised as MSME, enter- To be recognised as startup, en-
prise must file Udyam Registration terprise must file application for
DPIIT Recognition in terms of LSN
8. If investment limit of Rs.50 crores If investment limit of Rs.50 crores
is not exceeded and turnover limit is exceeded but turnover limit of
of Rs.100 crores is not exceeded but Rs.100 crores is not exceeded and
10 years have lapsed since date of 10 years have not elapsed from
incorporation, then enterprise will date of incorporation, enterprise
be MSME but will not be a startup will not be regarded as MSME but
will be regarded as startup
Para 1.2 START-UP 6

Sr. MSME Startup

No.
9. MSME enterprise can have any Only partnership firms, LLPs and
legal form of organisation i.e. pro- private limited companies will be
prietorship or partnership firm or eligible for startup status
a limited liability partnership (LLP)
or a company (whether public lim-
ited or private limited) or Hindu
undivided family (HUF) or AOP or
cooperative society
10. Enterprise can follow any business To qualify as a startup, Businesses
model to qualify as MSME model must be working towards
innovation, development or im-
provement of products or services
or business model must be scalable
with high potential of employment
generation or wealth creation
11. Enterprise will be an MSME even Enterprise will not qualify as a
if it is formed by splitting up or startup if it is formed by splitting
reconstruction of business already up or reconstruction of business
in existence already in existence
12. MSME private limited companies Startup private limited companies
which do not qualify as startups are are exempted from angel tax if in-
liable to angel tax on shares issued vestments made or to be made by
at premium if issue price is higher all investors including family and
than Fair Market Value friends do not exceed Rs.25 crores
13. No tax holiday for an MSME unless Tax holiday u/s 80-IAC of the
it qualifies as a startup Income-tax Act, 1961 for a startup
which is an LLP or a private limited
company
14. No tax exemption to capital gains Tax exemption under section 54GB
from sale of residential property of the Income-tax Act, 1961 to cap-
of promoter if the same is invest- ital gains from sale of residential
ed into a private limited company property of promoter if the same
which is an MSME but does not is invested into a private limited
qualify as a startup company which is a startup
15. Benefits under the MSMED Act Benefits under the MSMED Act are
available to MSMEs not available to startups unless they
qualify as MSMEs by satisfying the
investment limits in the definition
and file Udyam Registration

It can be seen from above that an enterprise may cease to be start-

up but continue to be regarded MSME and vice versa.
7 START-UP Para 1.2

1.2-5 Can an enterprise satisfy the definition of MSME and startup

and get the best of both the worlds i.e. benefits under MSMED
Act as well as LSN?
Yes. An enterprise can claim benefits under both MSMED Act as well
as LSN if it is a partnership firm or LLP or private limited company
recognised by DPIIT and 10 years has not elapsed from the date of
its incorporation and it satisfies the investment limits in NMN and
files Udyam Registration online.

1.2-6 How to compute investment in Plant and Machinery

Para 4 of the NMN deals with calculation of investment in plant and
machinery or equipment and provides as follows:
(1) The calculation of investment in plant and machinery or
equipment will be linked to the Income Tax Return (ITR) of
the previous years filed under the Income-tax Act, 1961.
(2) In case of a new enterprise, where no prior ITR is available, the
investment will be based on self-declaration of the promoter
of the enterprise and such relaxation shall end after the 31st
March of the financial year in which it files its first ITR.
(3) The terms “plant and machinery” and “equipment” shall have
the meaning as assigned to the plant and machinery in the
Income-tax Rules, 1962 framed under the Income-tax Act,
1961 and shall include all tangible assets (other than land and
building, furniture and fittings).
(4) The purchase (invoice) value of a plant and machinery or equip-
ment, whether purchased first hand or second hand, shall be
taken into account excluding Goods and Services Tax (GST),
on self-disclosure basis, if the enterprise is a new one without
any ITR.
(5) The cost of certain items specified in the Explanation I to
sub-section (1) of section 7 of the Act shall be excluded from
the calculation of the amount of investment in plant and
machinery.
The cost of following items to be excluded in the computation of the
value of plant and machinery or equipment:
u equipments such as tools, jigs, dies, moulds and spare parts for
maintenance;
Para 1.2 START-UP 8

u consumable stores;
u cost of installation of plant and machinery;
u research and development equipment;
u pollution control equipment;
u generation sets and extra transformer installed by the under-
taking as per the regulations of the State Electricity Board;
u bank charges and service charges paid to the National Small
Industries Corporation or the State Small Industries Corpora-
tion;
u procurement or installation of cables, wiring, bus bars, electrical
control panels (not those mounted on individual machines), oil
circuit breakers or miniature circuit breakers which are nec-
essarily to be used for providing electrical power to the plant
and machinery or for safety measures;
u gas producer plants;
u transportation charges (excluding GST, sales tax and excise)
for indigenous’ machinery from the place of manufacturing
to the site of the factory;
u technical know how for erection of plant and machinery;
u storage tanks which store raw materials, finished products only
and are not linked with the manufacturing process;
u fire fighting equipments.

1.2-7 How to compute turnover for the purpose of turnover ceil-

ings in NMN?
Para 4 of the NMN deals with calculation of turnover and provides
as under:
(1) Exports of goods or services or both, shall be excluded while
calculating the turnover of any enterprise whether micro, small
or medium, for the purposes of classification.
(2) Information as regards turnover and exports turnover for an
enterprise shall be linked to the Income-tax Act or the Central
Goods and Services Act (CGST Act) and the GSTIN.
(3) The turnover related figures of such enterprise which do not
have PAN will be considered on self-declaration basis for a
9 START-UP Para 1.2

period up to 31st March, 2021 and thereafter, PAN and GSTIN

shall be mandatory.

1.2-8 Whether any registration will be required to be recognised

as MSME under the revised classification with effect from
01.07.2020?
Para 2 of the NMN deals with becoming a micro, small or medium
enterprise and provides as under:
(1) Any person who intends to establish a micro, small or medium
enterprise may file Udyam Registration online in the Udyam
Registration portal, (called ‘Udyam Parichay’) based on self-dec-
laration with no requirement to upload documents, papers,
certificates or proof.
Note :
The words “any person who intends to establish a micro, small
or medium enterprise” tends to convey the impression that
existing MSMEs who are not registered under Udyog Aadhaar
upto 30.06.2020 can’t file Udyam Registration online.
This is not so as can be seen from screenshots from the new
portal given below as it allows those who don’t have Udyog
Aadhaar Memorandum (UAM) by giving previous years annual
turnover.
(2) On registration, an enterprise (referred to as “Udyam” in the
Udyam Registration portal) will be assigned a Permanent Iden-
tity Number to be known as “Udyam Registration Number”
(3) An e-certificate, named “Udyam Registration Certificate” will
be issued on completion of the registration process.
Para 6 of the NMN deals with registration process and provides as
under:
(1) The form for registration shall be as provided in the Udyam
Registration portal.
(2) There will be no fee for filing Udyam Registration.
(3) Aadhaar number shall be required for Udyam Registration.
(4) The Aadhaar number shall be of the proprietor in the case of
a proprietorship firm, of the managing partner in the case of
Para 1.2 START-UP 10

a partnership firm and of a karta in the case of a Hindu Undi-

vided Family (HUF).
(5) In case of a Company or a Limited Liability Partnership or a
Cooperative Society or a Society or a Trust, the organisation
or its authorised signatory shall provide its GSTIN and PAN
along with its Aadhaar number.
(6) In case an enterprise is duly registered as an Udyam with PAN,
any deficiency of information for previous years when it did
not have PAN shall be filled up on self-declaration basis.
(7) No enterprise shall file more than one Udyam Registration:
Provided that any number of activities including manufacturing
or service or both may be specified or added in one Udyam
Registration.
(8) Whoever intentionally misrepresents or attempts to suppress
the self-declared facts and figures appearing in the Udyam
Registration or updation process shall be liable to such penalty
as specified under section 27 of the Act.
Step-wise screenshots with numbers are given below showing the
registration process on the portal.