Union Budget 2020 Gives Start-ups A Shot In The Arm

New Delhi, February 1: An eligible start-up having turnover up to Rs 25 crore is allowed deduction of 100 per cent of its the profits for three consecutive assessment years out of seven years if the total turnover does not exceed Rs 25 crore. In order to extend this benefit to larger start-ups, the government proposed to increase the turnover limit from existing Rs 25 crore to Rs 100 crore, announced Finance Minister Nirmala Sitharaman during her Union Budget speech.

“Moreover, considering the fact that in the initial years, a start-up may not have adequate profit to avail this deduction, I propose to extend the period of eligibility for claim of deduction from the existing 7 years to 10 years,” Sitharaman said.

Start-ups have emerged as engines of growth for Indian economy. Over the past year, Indian government has taken several measures to hand-hold them and support their growth. During their formative years, start-ups generally use Employee Stock Option Plan (ESOP) to attract and retain highly talented employees.

ESOP is a significant component of compensation for these employees. Currently, ESOPs are taxable as perquisites at the time of exercise. This leads to a cash-flow problems for the employees who do not sell the shares immediately and continue to hold the same for the long-term. In order to give a boost to the start-up ecosystem, I propose to ease the burden of taxation on the employees by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is earliest.

Reacting to this announcement, Siddharth Jain, Co-founder, Vaahika said: “The increasing turnover threshold limit to Rs 100 crore and tax benefit time period to 10 years is another big push for startups. Also, deferring tax on ESOP's for startups is a big positive move that will help small startups in retaining talent. The increasing tax audit minimum turnover limit from the current Rs 1 crore limit to Rs 5 crore will benefit a large number of small and medium enterprises.”

However, the Budget speech failed to cheer the sentiments of the investors. The Sensex of the BSE fell more than 1,000 points around 3.14 p.m. on Saturday.