Author: Akash Swami, Law Student at Lloyd School of Law, Greater Noida
Abstract
This article examines the intricate legal landscape that regulates startups in India. Although India has established itself as a prominent center for startups on the global stage, the legal ecosystem remains complex. It outlines the key regulatory, compliance and structural challenges faced by emerging businesses and provides insights into navigating the legal environment for sustainable growth.
Introduction
A startup venture could be defined as, a new business that is in the initial stages of operation, beginning to grow and is typically financed by an individual or small group of individuals. India has rapidly emerged as one of the most attractive global destinations for startups and multinational corporations (MNCs) alike. As of 2024, it holds the position of the third-largest startup ecosystem globally, with more than 100,000 officially recognized startups (DPIIT Annual Report, 2024). With its expanding consumer base, growing digital infrastructure, and supportive government schemes like Startup India and Make in India, the country presents immense business opportunities. However, both domestic startups and foreign MNCs face numerous legal and regulatory challenges in setting up operations in India. The challenges span across incorporation, taxation, labour, intellectual property rights, and data protection, making legal compliance a critical aspect of startup survival. These challenges often hinder ease of doing business and can act as roadblocks to growth and investment. The need to align innovation with compliance is more important than ever for long-term sustainability.
Business Structure and Incorporation Issues:
The choice of business structure forms the legal foundation of any startup and directly influences its regulatory obligations, funding capacity, and liability exposure. In India, early-stage entrepreneurs often opt for Private Limited Companies, Limited Liability Partnerships (LLPs), or One Person Companies (OPCs), each governed by distinct statutory frameworks.
The Private Limited Company, regulated under the Companies Act, 2013, is the preferred model for startups intending to raise capital, scale operations, and attract venture funding. It provides benefits such as limited liability, perpetual succession, and the ability to issue shares to investors, making it highly suitable for scalable businesses.
Alternatively, the Limited Liability Partnership, governed by the LLP Act, 2008, is favored by startups that prioritize operational flexibility and minimal compliance costs. LLPs are not required to conduct statutory audits unless their turnover exceeds ₹40 lakhs or capital contribution crosses ₹25 lakhs, thus offering early-stage relief from financial and regulatory burdens.
The One Person Company (OPC), introduced as an innovation under the Companies Act, 2013, allows a single entrepreneur to enjoy the benefits of incorporation while retaining full control. However, the OPC structure comes with limitations. If the paid-up capital of a One Person Company (OPC) crosses ₹50 lakhs or its annual turnover exceeds ₹2 crores, it is legally required to convert into a private limited company, which results in increased compliance obligations.
Technical delays on the Ministry of Corporate Affairs (MCA) portal (MCA21), such as system downtimes and slow processing of incorporation forms (SPICe+), document scrutiny and rejections, particularly concerning address proof, object clauses, or director identity validation, which result in repeated resubmissions and extended timelines.
These issues often delay access to essential statutory registrations, such as Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN), Goods and Services Tax (GST) registration, and the ability to open current bank accounts—factors that directly impact early operations and investor readiness.
To address the procedural inefficiencies and structural complexities faced by startups during incorporation, the following legal and policy measures are recommended such as Use SPICe+ Form on MCA21 portal to enable the simultaneous application for registration, along with PAN, TAN, GST, ESIC, and EPFO. Recommend choosing an LLP structure initially for businesses seeking minimal compliance requirements. Support the establishment of state-level business support centers to expedite document verification processes.
Regulatory and Licensing Challenges:
Although the Startup India initiative is designed to promote innovation and simplify entry into the market, startups still encounter significant legal and administrative hurdles, particularly concerning sector-specific licensing and regulatory compliance. These challenges often create delays, increase operational costs, and disincentivize early-stage entrepreneurs, especially in regulated sectors. Startups operating in highly regulated sectors such as healthcare, financial services, food technology, and education must obtain approvals from specialized regulators before commencing operations.
For instance: Food-tech startups are governed by the Food Safety and Standards Authority of India (FSSAI) under the Food Safety and Standards Act, 2006. Fintech startups dealing with public funds or digital lending platforms must obtain prior authorization from the Reserve Bank of India (RBI) under the Payment and Settlement Systems Act, 2007 and, where applicable, register as Non-Banking Financial Companies (NBFCs). Startups engaged in investment advisory services or equity-based platforms must seek registration under applicable SEBI (Investment Advisers) Regulations, 2013.
The challenge lies not only in the diverse and overlapping requirements but also in the lack of standard timelines for approval, which can delay product launches and investor onboarding.
Startups are often required to register with multiple authorities (e.g., GST, EPFO, ESIC, Shop and Establishment departments), each with its own compliance timelines and penalties for delay. Startups operating across states face non-uniform regulations, resulting in duplication of effort and regulatory fatigue.
This compliance overload, especially in the absence of dedicated legal teams in early stages, significantly distracts founders from product development and market expansion.
To reduce regulatory friction and promote compliance efficiency, the following policy and structural measures are recommended such as Expansion and Standardization of the National Single Window System (NSWS) in which the Government should prioritize the mandatory onboarding of all state and sector-specific regulators onto the NSWS portal, providing startups with a unified digital interface to apply, track, and manage all licenses and approvals. This would prevent duplication and allow real-time updates from ministries like the Ministry of Health, RBI, and SEBI.
Intellectual Property Protection:
In the age of innovation-driven entrepreneurship, intellectual property (IP) plays a pivotal role in determining a startup’s competitive advantage and valuation. Whether it is a software algorithm, brand identity, product design, or proprietary business model, effective IP protection is crucial not only for legal security but also for attracting investment and scaling sustainably. Despite having a well-established legislative framework, Indian startups continue to face significant challenges in registering, managing, and enforcing their IP rights.
India’s IP regime is governed by a robust set of statutes, including: Patents Act, 1970, Trademarks Act, 1999, Copyright Act, 1957, Geographical Indications of Goods (Registration and Protection) Act, 1999. India is also a signatory to several international IP treaties, such as the TRIPS Agreement and the Madrid Protocol for international trademark registration.
IP filings, particularly for patents and trademarks, are often delayed due to backlog and procedural inefficiencies in the IP offices. Trademark registration can take 6–18 months, while patent grants may take 2–5 years depending on technical complexity.
While registration grants statutory protection, enforcement of IP rights through litigation is costly and time-consuming—often beyond the reach of early-stage startups. Many founders lack awareness of how and when to register IP. Often, trademarks are not registered early, leading to later disputes over brand ownership and misuse.
In case of PhonePe Pvt. Ltd. V. BharatPe (2021) the Delhi High Court examined the likelihood of confusion under Sections 11 and 29 of the Trademarks Act, 1999, and emphasized the importance of prompt and proper trademark registration. The case highlighted how failure to secure branding early can lead to expensive litigation and brand dilution.
To foster a startup-friendly IP ecosystem, the following measures are recommended such as Startups should proactively register under Startup India to benefit from these cost-effective schemes, Regular IP audits can also help in identifying and valuing intangible assets, especially before fundraising or mergers, Startups targeting international markets should be encouraged to use the Madrid Protocol for international trademark registration etc.
Taxation and Financial Compliance:
Financial and tax compliance remains a significant legal burden for startups in India. Although the government has introduced various incentives and exemptions under the Startup India initiative, the existing tax structure and regulatory scrutiny—especially regarding valuation and funding—can deter innovation and investment.
Startups are typically required such as, Filing of Income Tax Returns (ITR) annually, Deduct and deposit TDS (Tax Deducted at Source) as per Chapter XVII-B of the Income Tax Act, register under GST, file monthly/quarterly returns, and issue tax invoices, Maintain Books of Account and Statutory Audit (if applicable) under Sections 44AB and 44AA of the Income Tax Act and Section 134 of the Companies Act etc.
Historically, Section 56(2) (viib) of the Income Tax Act, 1961—commonly known as the Angel Tax Provision— It considered the excess amount received by unlisted companies from resident investors, beyond the fair market value (FMV), as taxable income under “income from other sources,” leading to stringent tax scrutiny for startups. In Vodafone International Holdings v. Union of India (2012), the Supreme Court emphasized that it reinforced the principle of tax certainty and the limits of extraterritorial jurisdiction, highlighting the need for clear rules in valuation and international transactions.
The CGST Act, 2017 mandates multi-tiered tax filings, reverse charge mechanisms, and place-of-supply rules that are often challenging for early-stage ventures. Mistakes in classifying goods or services or issuing invoices can lead to fines and interest charges. For DPIIT-recognized startups, failure to maintain financial discipline can disqualify them from availing tax benefits under Section 80-IAC (3-year tax holiday).
To reduce tax-related stress on startups, a mix of legislative relaxation, digital simplification, and proactive planning is necessary such as the Finance Act, 2023 amended Section 56(2) (viib) to exempt DPIIT-recognized startups from angel tax, including funds received from both resident and non-resident investors, Obtaining Advance Rulings under Section 96 of the CGST Act etc.
Data Protection and Technology Law Compliance:
With the proliferation of digital-first startups in India—particularly in sectors like fintech, ed tech, health tech, and e-commerce—data protection and cyber compliance have become critical components of legal due diligence. In an era where data is often referred to as the “new oil,” startups that collect, store, process, or transfer personal data are required to navigate a complex web of evolving information technology laws, privacy regulations, and cybersecurity mandates. Startups operating in India must comply with the following key laws governing data and digital operations such as Information Technology Act, 2000, Digital Personal Data Protection Act, 2023 (DPDPA) etc.
Due to the nascent stage of the DPDPA, there remains ambiguity in its interplay with sector-specific data rules (e.g., RBI’s guidelines on digital lending, SEBI’s rules for financial intermediaries). This results in legal ambiguity for fintech and health tech startups, which are required to adhere to both the DPDPA and industry-specific regulations. The DPDPA permits cross-border data transfers unless expressly prohibited by a government notification.
However, startups that use foreign cloud infrastructure or integrate with global platforms (e.g., AWS, Google Cloud) face uncertainty about future data localization mandates. In April 2022, CERT-In mandated that all entities maintain system logs for 180 days and report cybersecurity breaches within 6 hours—a regulation that increased compliance costs significantly for small tech startups.
To ease the compliance burden and enable lawful data governance, startups may adopt the following strategies such as Startups should integrate data protection principles into product architecture from the early development stage like Using default encryption, collecting minimal data, clearly stating privacy policies on websites and apps etc.
The Ministry of Electronics and Information Technology (MeitY) and DPIIT should collaborate to provide compliance toolkits for startups operating in digital sectors, Offer certified training modules and standard operating templates for privacy policy.
Conclusion:
The legal environment for startups in India is complex but improving. By identifying regulatory bottlenecks and adopting early compliance strategies, startups can de-risk operations and attract better investments. Future reforms should prioritize startup-specific regulation, centralized licensing, and online enforcement to truly unlock India’s entrepreneurial potential.
FAQ:
- What challenges do startups face during incorporation?
Technical glitches on the MCA portal (MCA21), Delays in approvals of SPICe+ forms and statutory registrations (PAN, TAN, GST), Document scrutiny and resubmission issues and Lengthy timelines for bank account openings and regulatory compliance.
- Which regulatory bodies govern sector-specific licenses in India?
FSSAI for food-tech startups, RBI for fintech or digital payment startups and SEBI for investment and advisory platforms.
- What is the Angel Tax and how has it been amended recently?
Under Section 56(2) (viib), Angel Tax taxed startup funding above FMV as “income from other sources.” However, the Finance Act, 2023 now exempts DPIIT-recognized startups (including foreign investments) from this provision.
- How should startups handle cybersecurity and data compliance obligations?
Startups should incorporate data protection by design, use encryption and access controls, Follow CERT-In guidelines (e.g., log retention, breach reporting) and Maintain clear privacy policies and obtain informed user consent.
- What is the role of DPIIT in supporting startups legally?
The Department for Promotion of Industry and Internal Trade (DPIIT) recognizes eligible startups for benefits like tax exemptions, IP fee rebates, and self-certification and collaborates on initiatives like Startup India, funding support, and ease of doing business.
References:
Companies Act, 2013
Income Tax Act, 1961
Limited Liability Partnership Act, 2008
Digital Personal Data Protection Act, 2023
DPIIT Annual Report, 2024
FSSAI Act, 2006
Vodafone International Holdings v. Union of India, (2012) 6 SCC 613
Phone Pe Pvt. Ltd. v. Bharat Pe, 2021 SCC On Line Del 1511
WIPO Global Innovation Index, 2023
