How Budget 2020 Boosts the Startups of India?


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.

How to register Startups in India?

For registration of startup, four significant steps must be followed:

steps for startup registration

Key Points in Budget 2020 for Startups

  1. The Government recommends providing early life funding which includes a seed fund to support ideation and development for early-stage Startups.
  2. During the initial years, the Employee Stock Option Plan or ESOP was an essential component of compensation for startup employees. Currently, the Employee Stock Option Plan or ESOPs are taxable as profits at the time of exercise. These may lead to a cash-flow problem for the employees who do not sell the shares immediately and continue to hold the same for the long-term. To boost the startup ecosystem, the Finance Minister proposed to ease the burden of taxation on the employees by extending the tax payment by five years or till they leave the company or when they sell their shares, whichever is earlier.
  3. Furthermore, a startup having turnover up to Rs. 25 crores is offered 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. For extending this benefit to larger startups, Nirmala Sitharaman in the budget proposed to increase the turnover limit from the existing amount of Rs 25 crore to Rs 100 crore. Moreover, because in the initial years, a startup may not have adequate profit to avail this deduction, the period for the claim is extended from the current 7 years to 10 years.
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Government Provides Tax Relief to Startups in Budget 2020

Tax Benefit on Increase in Turnover limit and time

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 eligibility limit prescribed under the provisions of the Income Tax Act was Rs 25 crore and the period for claiming tax benefit was seven years.
  • Startups having turnover up to Rs 100 crore can now claim 100 per cent deduction on their profit for computing tax liability for three consecutive years out of 10 years since the date of its incorporation. But to avail of this benefit the turnover should not exceed Rs 100 crore.

Tax Benefits on ESOPs or Employee Stock Options Plan

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:

  • Five years after exercising the option.
  • The year in which they sell shares.
  • The year when the employee leaves the company, whichever is earlier.
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What is Seed Fund for Startups announced in Budget 2020?

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.

Private Equity and Venture Capital Funds for Startups

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.

Wrapping Up

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.

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