Poyni Bhatt is a founding team member and former Chief Executive Officer of SINE, the technology business incubator at IIT Bombay until October 2023. She has an experience of 38 years in industry and academia of which she spent nearly 20 years with SINE. Poyni is a qualified legal and compliance professional- Fellow member of the Institute of Company Secretaries of India.
Technology business incubators are one of the very important stakeholders in Indian startup ecosystem. Various ministries and departments under the Government of India and state governments have increasingly leveraged incubators as channels to implement their innovation and entrepreneurship programs. While most government entrepreneurship programs have been initiated in the last decade, the Department of Science and Technology (DST), Government of India was the first department to have started supporting entrepreneurship way back in 1980s. The National Science and Technology Entrepreneurship Board (NSTEDB) (now renamed as Technology, Translation and Innovation- TTI Division) under DST was one of the early divisions who started Science and Technology Parks (STEPs) in the last century, and Technology Business Incubators (TBIs) in early 2000s. Since the last decade many ministries and divisions such as Ministry of Electronics and Information Technology (MeitY), Biotechnology Industry Research Assistance Council (BIRAC) under Department of Biotechnology (DBT), Atal Innovation Mission (AIM) under the NITI Aayog, Startup India initiative under DPIIT, iDex initiative under the Ministry of Defence and almost all State Governments have launched startup initiatives to promote entrepreneurship. All the incubators supported under various Government initiatives are not-for-profit organisations incorporated as ‘Trusts under the Public Trust Act or Societies under the Society Registration Act’ or ‘Section 8 companies under the Companies Act, 2013’.
To encourage entrepreneurship and extend further support to incubators, the Government from time to time have extended fiscal benefits, exemptions to the Incubators under various ‘Acts and Regulations’. These benefits were notified at different points of time and were applicable to the incubators under the Government initiatives prevalent at that point of time. However, these notifications were not open ended in terms of timeframe, and hence they had no prospective applicability. The incubators supported under various Government schemes started after the date of announcement of benefits/ exemptions were not entitled to those benefits/ exemptions. Thus, the benefits / exemptions offered to the incubators are not uniformly extended to all business incubators supported/ financed by various central and state Government schemes. By an estimate, there are more than 400 incubators across the country supported under various central, states and public sector startup schemes. Given that most incubators carry out agenda of the central and state governments, there is a case to bring evenness for applicability of various provisions.
Broadly, the provisions need attention for modifications to bring in all central, state and public sector supported incubators for similar treatment, are under the ‘Income Tax Act’ and the ‘Central Goods and Services Tax Act’.
Income Tax Act:
i. Definition of Incubator and Incubatees:
Exemptions under S.12 AA of the ‘Income Tax’ permit an incubator to hold investment by way of acquiring equity shares of an incubatee. However, the provisions are extended to only those TBIs or STEPs as are to be notified by the ‘Ministry of Science and Technology’, Government of India. These provisions were notified in 2007 under the ‘Income Tax Act’. During this timeframe, ‘Ministry of Science and Technology’, Government of India was the main department that was supporting incubators under ‘Technology Business Incubator’ Scheme of NSTEDB. Since then, there are many other government departments and ministries such as DPIIT, BIRAC-DBT, AIM-Niti Aayog, MeitY, Startup missions of various state governments have launched their ‘Technology Business Incubators’ to achieve national cause of innovation and entrepreneurship driven economy. Hence, the definition of the incubators also needs to include the incubators supported beyond ‘Ministry of Science and Technology’, Government of India, that is under the startup missions/ initiatives of the state, central governments and public sector enterprises.
Similarly, under the said provisions of the Income Tax Act, incubatees are also to be notified by the Government of India in the ‘Ministry of Science and Technology’. Instead of recognising incubatees by way of notification by the ‘Ministry of Science and Technology’, Government of India, there is need to recognise startup entities that are incubated with recognised incubators supported under various central, state and public sector undertaking or any agency of the ‘Central Government or State Government’, as incubatees. This would be in resonance with the dynamic nature of startup ecosystem.
ii. Permissible investments by incubators:
Further, the Rule 17C (vi) of Income Tax Act limits the incubator to hold the investment only in form of equity shares of an incubatee by an incubator. However, several state and central government programs mandate incubators to invest by loans or convertible debentures. Hence, there is a need to modify the provisions to permit incubators to hold investment by acquiring equity shares, preference shares, other securities convertible to equity of an incubatee by an incubator or by way of loan.
Central Goods and Services Tax Act:
Central Goods and Services Tax Act via Entry 48 under the Heading 9983 of Chapter 99 of extends exemptions from CGST, SGST and IGST for the service provided / to be provided by Technology Business Incubators. However, the exemptions are extended only to ‘TBIs or STEPs’ recognised by the ‘National Science and Technology Entrepreneurship Board (NSTEDB)’ of the ‘Department of Science and Technology’, Government of India or ‘Bio-incubators’ recognised by the ‘Biotechnology Industry Research Assistance Council (BIRAC)’, under the ‘Department of Biotechnology (DBT)’, Government of India. Here too, the above provisions were notified under the erstwhile ‘Service Tax Act’. During this timeframe most incubators were supported by NSTEDB-DST and/or BIRAC. The same provisions were also reflected under the combined ‘Goods and Services Tax Act, 2017’. Since the first announcement of the ‘Exemption of Service Tax’ for incubation services, there are many other Government departments and ministries such as ‘DPIIT, BIRAC-DBT, AIM-Niti Aayog, MeitY, Startup missions of various state Governments’ and ‘Public Sector Enterprises’ have launched their ‘Technology Business Incubators’ support programs to achieve national cause of innovation and entrepreneurship driven economy. Hence the definition of the incubators also needs to include the incubators supported under the startup missions/ initiatives of the State and Central Governments other than ‘Ministry of Science and Technology’, Government of India.
Similarly, like the ‘Income Tax Act’, the ‘Chapter 27 of the Goods and Service Tax’ also defines incubatee as an entrepreneur located within the premises of a ‘Technology Business Incubator (TBI)’ or ‘Science and Technology Entrepreneurship Park (STEP)’ recognised by the ‘National Science and Technology Entrepreneurship Development Board (NSTEDB)’ of the ‘Department of Science and Technology’, Government of India and who has entered into an agreement with the TBI or the STEP to enable himself to develop and produce hi-tech and innovative products. This definition leaves out incubatees incubated with incubators other than those incubated with TBI or STEP under NSTEDB, state and public sector undertaking initiatives. Hence here too, there is a need to bring all incubatees supported under various central, state and public sector undertaking initiatives.
Conclusion:
Given the different definitions and applicability of various provisions, there is a need for harmonisation by revising various ‘Acts and Regulations’ to be inclusive and creating a level playing field for all incubators supported under various central, states and public sectors initiatives. A pointer to this could be the ‘Schedule VII Companies Act’, 2013, which pertains to the ‘Corporate Social Responsibility (CSR)’. Schedule VII of the ‘Companies Act’ has the most comprehensive definition of the incubators under various Governments and public sector programs. The clause (ix)(a) of the Schedule VII of the Companies Act, 2013 defines the incubators are those that are funded by ‘Central Government or State Government or Public Sector Undertaking’ or any agency of the ‘Central Government or State Government’ as a permitted activity for receiving CSR funds. This definition may become a base for definition/ description of various incubators across various Acts and Regulations.
To sum up, definitions of “incubatee” and “incubator” across all ‘Acts and Regulations’ need to be kept uniform. The suggested definition could be
a. “incubatee” shall mean such incubatee as are incubated with any Technology Business Incubator or Science and Technology Entrepreneurship Park as are funded by Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government, and who has entered into an agreement with the Incubators.
b. “incubator” shall mean such Technology Business Incubator or Science and Technology Entrepreneurship Park as are funded from various agencies of Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government; established for the purpose for supporting Start up activities in the country.
Further the permissible investment by the incubators may include investment by way of loan or acquiring equity shares, preference shares and other securities convertible to equity of an incubatee by an incubator which aligns with various investment instruments in startup ecosystem.
Having uniformity in various Rules, Regulations and Acts for the common cause will reduce confusion and bring simplicity, and is also is need of the hour. Bringing all incubators and incubatees on parity will help them focus on implementing their agenda of impacting innovation and entrepreneurship landscape of the country.