Budget 2020: ESOP tax relaxation, early-stage fund for startups

Sitharaman, who presented the Union Budget for FY21, also announced new measures including centralised investment clearance cell, setting up of data center parks, and a digital platform for filing intellectual property rights (IPR).

To resolve the issue of dual taxation on ESOP shares held by employees, the minister proposed deferring the tax payment by five years, or until employees leave the company, or when they sell their shares—whichever is earlier. ESOPs serve as an important compensation tool for employees and for startups as they help reduce attrition rates and retain top talent.

At present, startup employees are required to pay tax whenever they sign up for ESOPs with a vesting schedule and also pay taxes on capital gains whenever they redeem their ESOPs.

An eligible startup with an (annual) turnover of up to ₹25 crore will be allowed a deduction of 100% of its profits for three consecutive (tax) assessment years out of the first seven years. In case a startup’s total turnover exceeds ₹25 crore in a year, Sitharaman proposed increasing the turnover limit from the existing ₹25 crore to ₹100 crore.

“Moreover, considering that during the initial years a startup may not have adequate profits to avail this deduction, I propose to extent the period of claim of deduction from the existing 7 years to 10 years," Sitharaman said during the Budget session that started on Friday.

The minister also said the government will directly provide seed funding to support ideation and development of early-stage startups in India. Additionally, the minister proposed setting up of a centralised investment clearance cell for “end-to-end facilitation, support, and pre-investment advisory" provided at both the Center and state levels.

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.

“The government will setup a policy to enable setting up of data centre parks throughout the country… It will enable our private and public sector firms to incorporate data into their business, and even in anganwadis, government schools, police stations, and panchayats," Sitharaman said.

The nationalised data center will be supported by government-sponsored fiber connectivity project BharatNet, which plans to cover over 100,000 gram panchayats by the end of 2021.

The minister also said the government will soon set up a digital platform to ease registration of IPRs developed by entrepreneurs and startups.