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Budget 2020: Start-ups get five-year tax holiday on ESOPs

India's start-up ecosystem expectedly welcomed the move. Padmaja Ruparel, Founding Partner, IAN Fund, noted that the Budget represents a big win for the ecosystem

twitter-logo Goutam Das        Last Updated: February 1, 2020  | 17:20 IST
Budget 2020: Start-ups get five-year tax holiday on ESOPs
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A few days ago, Business Today caught up with Kunal Shah, Founder of CRED and FreeCharge. "The government cannot create jobs," he quipped. "Start-ups will." Shah, therefore, had a simple ask from the Minister of Finance, Nirmala Sitharaman. He would like to see consistency in the country's taxation policies - a long-term view of taxation is easy on investors, particularly those brining in the big bucks. "No nation has become prosperous without foreign capital," he said.

Shah, in short, was asking that the government empathise with investors. We need to wait and watch on that but the Budget, for now, appears to be empathetic towards entrepreneurs. There appears to be a realisation of what Shah says. Start-ups are job creators.

FULL COVERAGE:Union Budget 2020

Sitharaman announced three measures.

Most start-ups use an employee stock option plan (ESOP) to attract and retain talented employees. "ESOP is a significant component of compensation for these employees. Currently, ESOPs are taxable as perquisites at the time of exercise. This leads to cash-flow problem for the employees who do not sell the shares immediately and continue to hold the same for the long term. In order to give a boost to the start-up ecosystem, I propose to ease the burden of taxation on the employees by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is earliest," she said.

The Minister went on to announce another benefit. "An eligible start-up having turnover up to Rs 25 crore is allowed deduction of 100 per cent of its the profits for three consecutive assessment years out of seven years if the total turnover does not exceed Rs 25 crore rupees. In order to extend this benefit to larger start-ups, I propose to increase the turnover limit from existing Rs 25 crore to Rs 100 crore. Moreover, considering the fact that in the initial years, a start-up may not have adequate profit to avail this deduction, I propose to extend the period of eligibility for claim of deduction from the existing seven years to 10 years," she noted.

The last measure has to do with the ease of doing business. The Minister proposed to set up an Investment Clearance Cell to provide end-to-end facilitation and support, including pre-investment advisory, information related to land banks and facilitate clearances at central and state level.

India's start-up ecosystem expectedly welcomed the move. Padmaja Ruparel, Founding Partner, IAN Fund, noted that the Budget represents a big win for the ecosystem. "We are pleased to see that the government has paid heed to our concerns and rolled out the reforms like five year tax holiday for ESOP, tax exemption for startups with turnover <Rs 100 crore for 10 years, reducing DDT and the establishment of a seed fund that will definitely serve to spur the startup activity in the coming years. More importantly, this budget has informed the industry of the empathy the government caters towards Indian enterprises," she said.

"This positive sentiment is evident in the government's drive to roll out "no tax harassment" policies along with the establishment of the investment clearance cell for assisting entrepreneurs in India," Ruparel added.

Also Read: Budget 2020 Speech Live Updates: Budget will boost people's income, enhance purchasing power, says Nirmala Sitharaman

Also Read: Budget 2020: Nirmala Sitharaman pays homage to former FM Arun Jaitley

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