Budget 2020: Startups welcome delayed ESOPs, experts say decision to help will lend greater flexibility

Budget 2020: One of the biggest announcements from Finance Minister Nirmala Sitharaman in Union Budget 2020 came in the form of five-year tax holiday on employees' stock ownership plan (ESOPs) for start-ups, a move that has been welcomed by both startups themselves as well as experts. "To boost startups, tax burden on employees due to tax on ESOPs to be deferred by five years or till they leave the company or when they sell, whichever is earliest," the finance minister said in her budget speech in Parliament.

This is a welcome move as the current law levies tax on allotment of shares pursuant to exercise of options resulting in possible liquidity issues, said Divya Baweja, Partner, Deloitte India.

The move is also expected to provide a greater flexibility to the employers and employees in structuring of their employment prospects, said SR Patnaik, Partner & Head - Taxation, Cyril Amarchand Mangaldas.

"There is a good announcement regarding deferment of taxes for ESOPs in the hands of employees which will be an important decision for the employees to own shares in the employer without getting worried about organising cash to pay taxes. This will also provide a greater flexibility to the employers and employees in structuring of their employment prospects," he said.

Anil Kumar Gupta, Partner, MicroSave Consulting (MSC) said that inclusion of things like artificial intelligence (AI), machine learning (ML) along with entrepreneurs in the Budget speech is a good sign for the industry. He said that recognising start-ups having a turnover of 100 crore for tax holiday will boost their growth.

"Interestingly budget talks about artificial intelligence (AI), machine learning (ML) and Internet of Things (IoT) at quite a few places. It also refers to entrepreneurs and start-ups also. This focus is a good sign for entire start- up and technology community. Finally recognizing start-ups having a turnover of 100 crore for tax holiday will boost the growth stage start-ups. Setting up of investment clearance will help the budding entrepreneurs to build new solutions for India's diverse needs," he said.

Watch Union Budget 2020 Live TV Streaming Below on Zee Business:

How startups look at the announcement?

Most startups have welcome the decision hoping that it will help them grow in the formative years. "Thankful to the Hon'ble FM for accepting the start-up sector's request for ESOP taxation reforms. Also, the higher time & turnover limits for carry forward of losses for start-ups will enable them to optimize growth decisions in formative years," Kunal Bahl, CEO & Co-founder, Snapdeal said.

Looking at the decision from a different mirror, CashKaro Co-founder Swati Bhargava said that it will help startups retain their employees in the early stages. She said that extending the turnover limit from Rs 25 Crores to Rs 100 Crores for a company to continue enjoying the tax benefits offered to Startups, is also a liberating move on the part of the government.

"Micro-level initiatives such as deferring taxation on Esop by 5 years too is a significant step for Startups, as it will help them retain valuable employees, and not create cash flow related problems for the latter, which has so far been the case," she aid.

The Budget 2020, is a step in the right direction for a more promising time to come for India's startup environment, said Nakul Kumar, Co-Founder and COO, Cashify.  

"It is very encouraging to see that the Government has perceived startup as a key job creator as well as an engine of growth which form the backbone of our economy. Tax reforms on ESOPs, and increase the turnover limit for start-ups from Rs 25 crores to 100 crores will boost the start-up system and will lessen the burden from complying with complex red tapism," he said.

The proposal to remove dividend distribution tax on companies will also help startups, believes Manish Rathi, CEO and Co-founder, IntrCity by RailYatri. Finance Minister Nirmala Sitharaman while unveiling the Union Budget said the proposal would make India more attractive market for investment.
 
"The removal of Direct Dividend Tax will attract more investors and in turn strengthen the ecosystem. The introduction of the Investment clearance cell at center and state level will encourage people in the remotest parts of the country to become entrepreneurs," Rathi said, while reacting to the announcement.