Two major initiatives for startups in the Budget — relaxation in tax on employee stock options (ESOP) and tax holiday on profits for startups — have both come under fire.The fine print of the Budget reveals that these are only applicable to companies that qualify under Section 80-IAC, which may limit the benefit to only a few hundred startups formed after 2016. ESOP and tax holiday exemptions only apply to about 200 startups recognized by the inter-ministerial board.Over 27,000 startups are registered with the department for the promotion of industry and internal trade (DPIIT).“In order to give a boost to the startup ecosystem, I propose to ease the burden of taxation of ESOP on employees by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is earliest,” the FM said while presenting the Budget.ESOPs are currently taxed when they become eligible for allotment, which puts a financial burden on employees as they may not be able to sell them at the same time. Employees are also taxed twice, at the time of exercising and at the time of selling (capital gains tax). Startup lobby groups like IndiaTech, IVCA, and LocalCircles had requested the government to simplify this by taxing ESOPs just at the time of liquidity or sale.The FM also eased norms for the 3-year tax holiday on profits for startups, taking the turnover limit to Rs 100 crore from Rs 25 crore and the period during which it can be exercised to 10 years from 7 years. But the Budget’s fine print states only 80-IAC startups can benefit from these measures.The condition that employees pay taxes when they leave a company and a time limit of five years also restrict the benefit of the move. “If startups want to attract talent, it’s tougher to get it from larger startups (as employees have to pay tax on existing ESOPs if they leave). So, in a way, negative impact for younger/smaller startups,” said Vivekananda Hallekare, founder of scooter-sharing startup Bounce. His startup, valued at $500 million recently, does not qualify as it was registered in 2014. Startups had also asked for parity of long-term capital gains (LTCG) for unlisted shares, given that most firms are private. While LTCG on listed shares stands at 10%, on unlisted it is at 20%.The FM also announced several other new measures for startups, as she said the “Indian spirit of entrepreneurship which weathered several storms over the centuries inspire and motivate us. We recognize the need to support and further energize this spirit.”Published in Economic Times on February 2 | Source: https://bit.ly/37lVswoClick here for content on actionable insights that you can use to deal with the business impact of COVID-19!Click here for a blog on how ESOPs can become meaningful rewards in an employee’s career.
ESOP & Cap table
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