The finance minister has proposed a host of incentives for India’s startup ecosystem, including deferring of taxes levied on employee stock ownership plans (ESOPs), a dedicated early-stage fund, and fresh tax rebates based on a company’s turnover.
The minister also proposed a centralized investment clearance cell and a digital platform for filing intellectual property rights (IPR).
However, the efficacy of the government’s moves will be tested, considering that measures announced in previous budgets have not always translated into meaningful gains for the startup ecosystem.
The biggest move was the deferral of tax payments on capital gains related to ESOPs for startup employees. At present, employees typically pay tax when they exercise their options and when they finally sell their shares. ESOPs serve as an important compensation tool for them, particularly in fast-growing startups, whose valuations multiply at a fast rate. In the past few years, a few hundred employees of Flipkart, Ola, and Paytm, among others, have netted crores of rupees through ESOP schemes.
The finance minister has now proposed deferring the tax payment on the exercise of ESOPs by five years, or until an employee leaves the company, or when he/she sells the shares, whichever is earlier. However, in some cases employees will have to pay tax twice. If an employee holds the shares for a long-term expecting a buyback deal, then the quantum of shares redeemed will be taxed at 20%, in line with the Finance Act 2018 as long-term capital gain.
The tax deferment is a “great move to attract high-quality talent” to Indian startups, said Anup Jain, managing partner, Orios Venture Partners. “However, it would have been better if ESOPs were taxed only at redemption, as the liability has been deferred by five years, not eliminated. Also, this benefit is currently available only to the 200-odd IMB (inter-ministerial board) registered startups, thus it is best that all startups who intend to issue ESOPs get an IMB certificate,” he said.
The budget also introduced a tax holiday for startups, wherein companies with an annual turnover of up to Rs 25 crore will be allowed a tax deduction of 100% of its profits for three consecutive assessment years. In case a startup’s total turnover exceeds Rs 25 crore in a year, the minister proposed increasing the turnover limit from the existing Rs 25 crore to Rs 100 crore.
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