Budget 2020: Tax incentives for startups expanded

Representative image

Finance Minister Nirmala Sitharaman, in her Budget speech on February 1, announced tax incentives for startups to further encourage entrepreneurship in India. This includes extension of tax holiday for start ups and tax benefits on ESOPs.

In order to give a boost to the start-up ecosystem, Sitharaman proposed to ease the burden of taxation on the employees by deferring tax payment on ESOPs by five years or till they leave the company or when they sell their shares, whichever is earliest.

ESOPs are one of the best options to attract skilled people. Currently, ESOPs are taxable as perquisites at the time of exercise. Startups stand to benefit immensely in attracting talent as employee stock options (ESOPs) turn tax friendly.

While they need a talented workforce, giving just high cash payout adds to the burden on cash-starved enterprises. This leads to cash-flow problem for the employees who do not sell the shares immediately and continue to hold the same for the long term.

Currently, startups with turnover up to Rs.25 crores are allowed deduction of 100% of its profits for three consecutive assessment years out of 7 years if the total turnover does not exceed Rs. 25 crore.

Under Budget 2020, Sitharaman has increased the turnover limit from existing Rs. 25 crore to Rs. 100 crores for the benefit of larger startups.

Further,  the Budget proposed to extend the period of eligibility for claim of deduction from the existing seven to 10 years since a start-up may not have adequate profit to avail this deduction during it's initial years.

Recently, the government set up the National Startup Advisory Council, chaired by Commerce Minister Piyush Goyal to advise the government on measures needed to build a strong ecosystem for nurturing innovation and startups in the country to drive sustainable economic growth and generate employment.

The council is being set up in the wake of a number of regulatory changes covering startups. These include reducing the amount of time spent on tax compliance to less than one hour a month along with easier incorporation processes. The move will also help in boosting the availability of global and domestic capital.

In Union Budget 2019, the government announced that it would setup around 80 “livelihood business incubators" and 20 tech business incubators in FY20, which according to Sitharaman will help to create 75,000 skilled entrepreneurs in agricultural industry sectors.

The Startup India initiative focuses on areas such as simplification and hand holding, funding support and incentives, and industry-academia partnership and incubation. So far the department has recognised 26,619 startups. Of these, maximum were in the IT services space which was followed by healthcare and life sciences, and education.