Budget 2022: Rationalise taxation on shares received under ESOP from start-ups

Budget 2022 is around the corner and like every year, individual taxpayers would have already built their expectations from the Budget. The key focus of this budget would be to support growth by reviving both consumption and investment, especially considering the need for fiscal stimulus to the economy. Some of the changes which may be announced in the Budget, meeting taxpayers’ expectations while keeping the growth agenda in mind, have been analysed below:

 

Possibility of change in tax rates/ additional deductions/ exemptions: The government has introduced a concessional tax regime (CTR) with effect from financial year 2020-21 for individuals and HUFs. Under the CTR, the eligible taxpayers’ income can be offered to tax at lower tax rates but without most deductions/ exemptions. Considering the government’s policy of lower tax rates with no deductions/ exemptions, it is expected that there should be some alignment between both the regimes to bring a simpler and more beneficial regime for individual taxpayers.

Introduction of infrastructure bonds which could provide relief against capital gains: The government has a clear focus to boost infrastructure in the economy. At the same time, there is a need to increase long term savings by individuals. Keeping both these objectives in mind, it is expected that investment in infrastructure bonds could be expanded to provide tax relief against specified capital gains.

Rationalisation of taxation on shares received under Employee Stock Option Plan (ESOP) from start-ups: Taxation of shares received upon allotment under an ESOP plan (as salary income) creates undue financial burden on start-ups and their employees. At present, for “eligible start-ups” (which satisfies certain conditions), the withholding tax on ESOP is deferred to the earlier of the following:

          (a) date of sale of shares;
          (b) completion of 48 months from the end of the relevant assessment year in which shares were allotted or                   transferred;
          (c) date of cessation of employment with the relevant start-up

It is expected that the above benefit of deferment of withholding tax on ESOPs should be extended to all registered start-ups.

Rationalisation of taxation of long-term capital gains on sale of unlisted securities: Currently, a non-resident taxpayer is liable to pay tax at 10 per cent without indexation on sale of unlisted securities. However, a resident taxpayer is liable to pay tax at 20 per cent with indexation on sale of such securities. The government may consider rationalisation to address this disparity in income tax rates between non-resident and resident taxpayers.

Alignment of surcharge on income from mutual funds: In case of dividend income from shares, the maximum surcharge applicable is 15 per cent. However, on income from mutual funds, the surcharge on income tax goes up to 37 per cent. It is expected that surcharge rates on dividend income from shares and income from mutual funds (at least from equity oriented mutual funds) may be brought at par.

We will need to wait and watch to see how many of these expectations will be met when the Budget announcements are made.

(The author is Tax Partner, EY India.)