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The Finance Minister in the Union Budget 2020-2021 had made some significant announcements for the Startup community. The startups being the key focus area in the budget, the center’s move has been acclaimed by the Indian startup ecosystem. Nirmala Sitharaman, in her Budget speech, announced that a startup with an annual turnover of up to Rs. 25 crores would be allowed a deduction of 100 percent of its profits. Also, she said that in case a startup’s total turnover exceeds Rs. 25 crores in a financial year, the turnover limit will be increased from the existing Rs. 25 crores to Rs. 100 crore for the purpose of claiming exemption. The Government will also provide tax relief to employees eligible for Employee Stock Options (ESOPs). She also announced Seed Fund aid funding for early-stage startups.
Table of Contents
For registration of startup, four significant steps
must be followed:
The central Government
announced some tax relief in the budget for startups. The turnover limit and
time span to claim tax relief has been increased for startups.
The tax on notional benefits on the conversion of
employee stock options plan, also known as ESOP into shares. ESOPs are
generally used by startups to compensate their employees by offering them the
option to purchase shares at a future period for a rate set by a methodology.
ESOP has a Vesting period and Exercise period. Under the current regime,
employees are subjected to tax in the year when they decide on their option to
purchase the shares, leading to tax incidence despite not incurring any cash
gain. The tax is calculated by the difference between the market value and
exercise price of shares.
The Union Budget 2020 resolved this cash flow issue:
According to the new provisions introduced,
Employee Stock Options Plan (ESOPs) of startups, employees will be liable for
tax in any one of the three cases:
Job growth is essential to boost consumer demand in the economy. Keeping this in mind, Budget 2020 announced the concept of Seed Startup Fund for early-stage startups. To remove the procedural hindrance faced by the startup owners, the Government announced plans for investment clearance, advisory cell and online portal for protection of Intellectual Property Rights. The Government is supporting startups on the path of innovation.
Looking at the concerns of the institutional investors, including private equity or venture capital funds that have provided substantial investments to the startups, the Government has decided to remove the Dividend Distribution Tax (DDT). This move will attract investors from the global market for startups.
Amidst all expectations, the Finance Minister revealed a Budget that focuses on the interests of startups. On one side, there were various encouraging allocations and policies around the startup ecosystem and healthcare, whereas, on the other side, there were some elements left unaddressed. The Government focused on enabling ease of doing business either it is through the seed fund to support the early-stage startups or the advisory cell on investment. A portal for an end to end management for faster clearances for businesses is also introduced. Startups in India are mostly kept outside the benefit of the Government or related entities as their customers or partners. Hence, overall it is a positive initiative for the growth of startups.
Read, Also: Income Tax Changes to be expected in Budget 2020-2021.
Deepti is a Law graduate with an avid interest in reading and very proficient in summarizing legal cases. She has enough experience in handling legal affairs of the company. In the initial days of her career, she has worked as a legal researcher and has 3+ years of experience.
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