In her Budget speech of 2020, Hon’ble Finance Minister Nirmala Sitharaman rightly expressed concerns over the unimpressive evolution of ‘Start-up India’ initiative despite immense support by the government in the past.
- By Shripal Lakdawala
Entrepreneurship has always been at the heart of Indian economic development. In her Budget speech of 2020, Hon’ble Finance Minister Nirmala Sitharaman rightly expressed concerns over the unimpressive evolution of ‘Start-up India’ initiative despite immense support by the government in the past (viz. angel tax relief, relaxation in carry-forward and set-off of tax losses, tax holiday benefits, foreign direct investment, etc). To revive the sluggish start-up ecosystem in India, the following tax amendments have been proposed:
Rationalisation of tax holiday provisions
It has been proposed that the existing provisions of section 80-IAC of the Income Tax Act be amended to provide for a deduction of an amount equal to 100 per cent of the profits derived by an eligible start-up for three consecutive assessment years out of ten years (as against out of seven years currently) at the option of the taxpayer, subject to the condition that the total turnover of its business does not exceed Rs 1 billion as against Rs 250 million currently. This will widen the base for startups eligible for claiming tax holiday benefits and hopefully boost the growth in the early years of a start-up.
Deferment of taxation of Employee Stock Option Plans (ESOPs)
Equity incentives viz. ESOPs is an effective payout strategy followed by start-ups to reward and retain its valuable employees as it entails no cash outflows. However, the applicability of withholding tax/TDS at the time of allotment of such shares leads to cash outflow from employers and tax cost in the hands of the employees. Hence, while there is no immediate cash benefit, there is a cash outflow on account of tax. Keeping the interests of the start-ups and its employees in mind, it is proposed to exempt the equity benefits on the allotment of shares and defer to the earliest of the following:
- Five years from the end of the year of actual allotment or
- From the date of sale of such specified security or sweat equity share by the taxpayer; or
- From the date on which the taxpayer ceases to be the employee of the start-up
The above may solve the long-standing cash-flow problems of the start-ups on the payout of equity incentives as well as attract and retain high potential talent at start-ups.
Raising turnover threshold for audit
Under the relevant provisions of the Income Tax Act, every person carrying on business is required to get their accounts audited, if the total turnover in business exceeds Rs 10 million in any previous year. It is proposed to increase this threshold limit from INR 10 million to INR 50 million in cases where –
- The aggregate of all receipts in cash during the previous year does not exceed five per cent of such receipt
- The aggregate of all payments in cash during the previous year does not exceed five per cent of such payment.
The above measure has been introduced to lower the burden of cost of compliance on small businesses. The Indian spirit of entrepreneurship has remained undefeated even in the face of strong storms. Though the above-mentioned measures may be considered a welcome step by Indian entrepreneurs, the bigger question still remains – Is this enough to uplift the economy and give a boost to the sluggish start-up ecosystem in India?
Shripal Lakdawala is the Partner at Deloitte India. Jatan Shah, Senior Manager and Mishika Poddar, Deputy Manager at Deloitte Haskins & Sells LLP also contributed. Views expressed are the authors’ own.