Union Budget 2020 proposes seed-funds for new startups, relaxes ESOP tax for 5 years

indica News Bureau-

The 2020-21 budget based on three themes – Aspirational India, Economic Development and Caring Society also gave a new hope to start-ups as the finance minister Nirmala Sitharaman said “Entrepreneurship has always been the strength of India.”  The government has proposed to provide seed fund to support early-stage startups.

INR 27,300 Cr has been allocated for the development and promotion of industry and commerce for the year 2020-21. To boost the support ecosystem and funding prospects for such startups, the government will set up an Investment Clearance Cell portal to offer “end to end” facilitation and support, including pre-investment advisory, and facilitate clearances.

Sitharaman proposed a slew of measures to ensure ease of doing business for Indian startups and made proposals to ease cash-flow problem by relaxing the burden on start ups. 

“During their formative years, start-ups generally use Employee Stock Option Plan (ESOP) to attract and retain highly 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”, said the finance minister. 

But, there is a catch. The Union Budget 2020 speech does not spell out the fact that double taxation has been removed — it only talks about the deferred timeline for the applicability of tax.

However according to Live Mint, ESOPs have become instrumental in the Indian startup ecosystem to woo high-value employees and retain talent. The likes of Razorpay, Oyo, Flipkart, Moglix, BharatPe have already announced their ESOP plans and even the buybacks. Exemption of taxes on ESOPs will further encourage companies to introduce ESOPs in their companies at a large level, which in turn will allow them to attract world-class talent while keeping employee costs in check.

The government has announced to provide early-life funding for startups, and instituting a seed fund to support ideation and development of early-stage startups. 

“An eligible start-up having turnover up to 25 crores is allowed deduction of 100% of its the profits for three consecutive assessment years out of seven years if the total turnover does not exceed 25 crore rupees. In order to extend this benefit to larger start-ups, I propose to increase the turnover limit from existing 25 crore to 100 crores. 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 7 years to 10 years”, added Sitharaman. 

At present, there are over 416 venture funds who have a focus on the early-stage startups in India. But in 2019, the seed stage funding continued to fall across the major startup hubs in India. With $252 million in funding, the seed-stage deal value fell by 44% (compared to 2018) as only 306 seed funding deals were recorded. When it comes to early-stage seed funding, the Indian startup ecosystem is going through a slowdown, reported Live Mint.



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