A new set of tax plan for startups in Union Budget 2019

Last Updated at: Dec 03, 2020
A new set of tax plan for startups in Union Budget 2019


  • DPIIT proposed simpler tax regulation on ESOP
  • Angel tax benefits for Category II AIF, currently concession available to Category I AIF
  • GST exemption for fund managers based in India

As the new government is due to present the full Budget in Parliament on July 5. The finance ministry is reportedly looking at ways to provide tax benefits for startups in an earnest attempt to encourage entrepreneurship and employment opportunities.

In the interim budget announced in February, Startups had got barely any mentions from the Startup-pro Modi government. So the upcoming full budget is much expected among entrepreneurs and investors.

The Department of promotion of industry and internal trade (DPIIT) and revenue department proposed different ways of tax sops for new business ventures, it includes simpler regulations on tax levied norms on Employee Stock Ownership Plan (ESOP) at the time of sale of shares.

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Two stages of ESOP taxation:

At the time of allotment of shares after he has exercised his option on the completion of the vesting period, the difference between fair market value and the exercise price is calculated and taxed accordingly.

Second, it was levied when the employee opts to sell the allotted shares. That is the profit made upon selling those shares are taxed as capital gains earned during the year.

Many Startups use ESOP as an important means to attract good talents, as they cannot afford to pay very high salaries and it’s also used as a retention mechanism, often taxing them is not feasible. At the same time levying tax dilute the essence of providing ESOP option.

Besides, DPIIT is looking out for the possibility of providing angel tax benefits to Category II AIF (Alternative Investment Funds), a concession currently available to Category I AIF investors.

Category I AIF invest in a startup or early-stage ventures, social ventures, SMEs, infrastructure projects which government considers as socially or economically desirable. Category II AIF does not undertake leverage or borrowing other than to meet day-to-day activities such as real estate funds, PE funds, funds for distressed assets.

The department is also seeking other tax benefits for AIFs to give a push to fund new businesses, for instance, the loss should be passed on to investment partners just like the profit of AIF.

Also, there is a plan for a goods and service tax (GST) exemptions for fund managers based in India as the tax does not apply to those offshore. As the GST related matters are outside the realm of budget, this proposal is unlikely to be accepted.


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