Budget 2020: Startups hope ESOP tax deferment just the start of more relief

Published: February 3, 2020 1:22:57 AM

Union Budget 2020 India: Startups hope that the tax deferment is just the start of more relief on the ESOP dual taxation front.

Budget 2020 India, Budget 2020-21Budget 2020-21: According to Siddharth Pai, Founding Partner, 3one4 Capital, the announcements made on ESOPs will hold good only for companies incorporated after April 1, 2016 which are with Inter-Ministerial Board (IMB) recognition.

By Srinath Srinivasan

Union Budget 2020 India: Startups were the main focus in the aspirational side of Budget 2020. Some announcements were directly aimed at startups while the others were aimed at equipping the startup ecosystem. Currently, there is dual taxation on employee stock ownership plans (ESOP) shares. The FM announced the proposal of deferring tax payment by five years or until employees leave the company or when they sell their share, whichever is earlier. This is expected to enable talent attraction and retention in startups.

“The introduction of some sort of a tax relief on ESOPs was one of the biggest asks from the startup industry – this deferment of tax payment by five years is one of the biggest welcome moves. This is a good start and I hope we see more focus on this going forward,” says Harshil Mathur, CEO and co-founder, Razorpay.

However,according to Siddharth Pai, Founding Partner, 3one4 Capital, the announcements made on ESOPs will hold good only for companies incorporated after April 1, 2016 which are with Inter-Ministerial Board (IMB) recognition. “There are two levels in startup India—startups under DPIIT’s recognition and the ones recognised under IMB as per Income Tax Act. The universe of startups under IMB is far less compared to the ones registered under DPIIT. This mutes the benefits of the announcements,” explains Pai.

Apart from this, the turnover rate for startup companies claiming tax deductions was raised to Rs 100 crore from the earlier Rs 25 crore and to a period of 10 years from seven years. In the first three consecutive assessment years, eligible startups will be allowed 100% of their profits to be deducted. “This will allow them to reinvest the money back into the business and help it grow and is the most important announcement made in the Budget,” says Ravi Pardhi, co-founder and CTO, Skillbox. For MSMEs, the government also announced a subordinate debt in the form of quasi equity, where in government will own some equity in these businesses but at a lower hierarchy without overpowering other stakeholders.

The Budget also announced seed funding to support ideation and development of early stage startups in India. There will also be a centralised investment clearance cell for “end-to-end facilitation, support, and pre-investment advisory” to help startup take off. Announcements made under various technological initiatives also saw startups being a significant part. The announcement of data centre parks, once implemented, will help startups relying on consumer data to power their business, benefit greatly as a huge chunk of rural areas will be connected by FTTH on Bharathnet. This will give them access to data from local bodies, from panchayats to anganwadis.

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A new national policy on statistical data will help modernise data collection, integrate processing and disseminate information in a timely manner. For startups in infrastructure space or ‘construction-tech’ startups, the announcement that their expertise will be utilised for ‘value added services’ in infrastructure projects was well-received.

The FDI announcements made for skill development, full-time online programmes, having more foreign students study in India, India’s own SAT exam and INDSAT were also welcome. “It’s great to see the government’s focus on education. The FDI part was in waiting for a long time, glad to have it come through – it will really help us make a big leap,” said Akshay Chaturvedi, founder & CEO, Leverage Edu.

Do you know What is Finance Bill, Short Term Capital Gains Tax, Fiscal Policy in India, Section 80C of Income Tax Act 1961, Expenditure Budget? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

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