The Indian startup ecosystem was eagerly waiting for Union Finance Minister Nirmala Sitharaman’s Budget speech on February 1, hoping that there would be measures that facilitate ease of doing business in the country, while at the same time solve some knotty tax issues around ESOPs, LTCG, and GST. The Startups face a regular cash flow problem where they have to deposit GST based on their invoices rather than revenue receipts.
Finance Minister Nirmala Sitharaman, the Union Budget for 2020-21 did introduce some significant announcements for MSMEs and the startup community. While announcements for MSMEs were aimed at reducing the stress on the working capital requirement, for startups it aimed to rectify an anomaly around ESOPs, which has been a long-standing wish of the community. Union Finance minister announced three important initiatives to promote start-ups Viz:
1) The government proposes to provide early life funding, including a seed fund to support the ideation and development of early-stage Startups.
2) During their formative years, ESOP (employee stock ownership plan)which is a significant component of compensation for startup employees. (ESOP) is a type of employee benefit plan which is intended to encourage employees to acquire stocks or ownership in the company.
Under these plans, the employer gives certain stocks of the company to the employee for negligible or fewer costs which remain in the ESOP trust fund, until the options vests and the employee exercises them or the employee leaves/retires from the company or institution.
These plans are aimed at improving the performance of the company and increasing the value of the shares by involving stockholders, who are also the employees, in the working of the company. ESOPs help in minimizing problems related to incentives.
Currently, ESOPs are taxable as perquisites at the time of exercise. This leads to cash-flow problems 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 startup ecosystem, the FM proposed 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.
3) Further, an eligible startup having turnover up to Rs 25 crore is allowed a deduction of 100% of its 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 startups, Sitharaman proposed to increase the turnover limit from the existing Rs 25 crore to Rs 100 crore. Moreover, considering the fact that in the initial years, a startup may not have adequate profit to avail of this deduction, Sitharaman proposed to extend the period of eligibility for the claim of deduction from the existing 7 years to 10 years.
Moreover, the Government proposed ₹3,000 crores for ‘Skill India’ to provide relevant skill training to the youth in the country, which could, in turn, provide a skilled workforce for startups. Stressing about the importance of skills and training to the workforce, the Finance minister in her budget speech revealed, “There is a huge demand for teachers, paramedical staff and caregivers in foreign countries. However, their skills do not match in accordance to demand by employers. So, my government proposes ₹3,000 crores for skill development.”
Sitharaman announced a new policy to enable the creation of data center parks for private and public sectors, which will provide a major lift to startups that bank heavily on consumer data for their businesses.
This would encourage to enable the private and public sector firms to incorporate data into their business, and even in anganwadis, government schools, police stations, and panchayats,” Sitharaman said.
The minister also assured that the government will soon set up a digital platform to ease the registration of IPRs developed by entrepreneurs and startups.