India’s startup community appears to have reacted positively to the Union Budget 2020.
The strongest reaction came over the changes in ESOP rules, which had been a long-standing demand of the startup ecosystem. Until now, employee stock options were taxed when they were vested. As per the new rules announced by Finance Minister Nirmala Sitharaman, the stocks would be taxed at the time of their sale, or 5 years after vesting, or when an employee leaves a startup, whichever comes first. This avoided double taxation for startup employees, and many startup founders tweeted their appreciation for the move.
“ESOP tax reform is here. Big win for the startup ecosystem!” said Snapdeal CEO Kunal Bahl, who’d previously said that this would be one of his big demands from the budget would be changes in how ESOPs were taxed.
ESOP tax reform is here. Big win for the startup ecosystem! ?? @nsitharaman #BudgetSession2020 https://t.co/VA4uQMssUp
— Kunal Bahl (@1kunalbahl) February 1, 2020
Paytm founder Vijay Shekhar Sharma was also appreciative of the changed rules. “Very happy and thankful to ESOP related changes done by Fin Min Nirmala Sitharaman madam. Beautifully defined and sorts out many issues,” he said.
Very happy and thankful to ESOP related changes done by Fin Min @nsitharaman madam.
Beautifully defined and sorts out many issues. ????
— Vijay Shekhar (@vijayshekhar) February 1, 2020
Apart from founders, investors too seemed pleased with the changes. Great work Nirmala Sitharaman on the new treatment of ESOPS – lesser of 5 Years or when benefit is realised!!!” said Sanjay Swamy, Managing Partner at Prime Venture Partners. “Big Step forward!” he added.
Great work @nsitharaman on the new treatment of #ESOPs – lesser of 5 Years or when benefit is realised !!!
Big Step forward!
— Sanjay Swamy (@TheSwamy) February 1, 2020
Similar thoughts were echoed by Rehan Yar Khan from Orios Venture Partners. He said it removed the double tax on ESOPS, and also solved a key issue for startup in retaining quality talent.
ESOPS: Tax at the time of sale or at end of 5 years or when employee leaves startup. Whichever 1st.
Removes the double tax on ESOPs.
Solves a key issues for Startups attarcting quality talent. @IndianVCA @letsventurein @SidPai275
— Rehan Yar Khan (@rehanyarkhan) February 1, 2020
Apart from the change in ESOP rules, there were several other sops in store for the startup ecosystem. One came in the form of lower taxes — the budget said that eligible startups with a turnover of up to Rs. 25 crore would be allowed a deduction of 100% of their profits for three consecutive tax assessment years out of the first seven years. In case a startup’s total turnover exceeded ₹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.
Nirmala Sitharaman also said the government will directly provide seed funding to support ideation and development of early-stage startups in India. Additionally, the Finance 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.