How Budget 2020 Shapes the Start-up Ecosystem

Last Updated at: February 17, 2020
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How Budget 2020 shapes the startup ecosystem

This post is written by Poornima Jayaram

 

A national policy framework for startups was launched in February 2016 called the Startup India Action Plan. Through which new Startups in India can avail of regulatory and tax benefits, capital gains tax exemption, as well as access to government funding if they fulfil certain criteria. A two-level certification will have to be carried out to ensure that a company is a part of the Startup India Plan.

While from 2014-2019, the focus of the government has been on boosting innovation and propping up the startup ecosystem, with the Union Budget 2020, it will shift to turning around the economy and beating the consumer spending decline, the flagging GDP growth and many ailing sectors such as auto, real estate, agriculture, energy, and others. 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 recognized 26,619 startups. Of these, the maximum was in the IT services space which was followed by healthcare and life sciences, and education.

The word “startup” found at least 15 mentions in Nirmala Sitharaman’s budget speech, so we go ahead to look up how it affects the Startup environment.

1. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

Before budget 2020

Under the existing Taxation regime, employees are subjected to tax in the year when they exercise their option to purchase the shares, leading to tax incidence despite not incurring any cash gain. The tax is paid on the difference between the market value and exercise price of shares. This ended up giving the employee more burden before incurring any gain.

After budget 2020

Budget 2020 fulfils a long-standing request of the startup community. It proposes to ease the tax burden of ESOP on employees by deferring the tax payment in three instalments as below

— > By 5 years or

— > Till they leave the company or

— > When they sell their shares, whichever is earliest.

Impact of the change

ESOPs have become instrumental in the Indian corporate and startup ecosystem to woo high-value employees and retain talent. Exemption of taxes on ESOPs will further encourage companies to introduce ESOPs in their companies at a large level, which in turn will allow them to attract world-class talent while keeping employee costs in check. This will encourage more startups to get incorporated and create jobs. It will make it easier for startups to incentivize good talent and attract more skilled talent.

But Instead of being rolled out to the over 27,000 DPIIT-registered startups, the government restricted this to the mere 500-700 startups recognized by the Inter-Ministerial Board (IMB), moreover, Taxation at the exit would have been more fruitful than deferment.

Get Legal Advice now

2. ADVISORY PANEL

The budget also proposes to provide early life funding, including a seed fund (seed funding is a form of financing in which the owner of a business receives money in exchange for a part of the equity of his/her company. It is called ‘seed’ because it happens at the very beginning of the business before even the latter generates any money) to support the ideation and development of early-stage startups. “The proposed seed funding support for ‘ideation and development’ of early-stage startups would not only invite more people to take the entrepreneurship plunge but also extend hands to the existing startups.

A dedicated investment clearance cell for providing end-to-end facilitation and support including pre-investment advisory, information on land banks and quicker clearance of funds at the state-level will boost the entrepreneurship culture.

Clarity:

Single investment clearance cell is a step forward in bringing consistency and clarity for entrepreneurs and investors. Its implementation will take us closer to developed countries where entrepreneurs can start businesses in one working day.

Credit Literacy:

Education focus is much-needed, both online as well as through investments in the space. Hope financial literacy and credit literacy are included in the curriculum so that millions of first-generation taxpayers can manage their money better.

Consumption:

Simplification and reduction of income tax will leave more money with individuals and drive consumption. This should be followed by the increased availability of credit, without which access to resources will remain with those who are already wealthy.

The change in the tax structure for start-ups is sure to impact India’s position in the “Global Ease of Doing Business” charts next year. It is a very clear sign to start-ups that the government has also invested in their success and would like to remove as many barriers that keep entrepreneurs awake at night.”

TAX REFORMATION

  1. Before Budget 2020

Previously the eligibility limit, under the provisions of the Income Tax Act, was Rs 25 crore turnover and the period to claim the tax benefit was seven years.

  1. After Budget 2020

The central government announced tax relief for startups as part of its efforts to boost the ecosystem in the country. Accordingly, the turnover limit and eligibility period for startups to claim tax relief have been increased. Startups with a turnover of up to Rs 100 crore can now claim a 100 per cent deduction on their profit for computing tax liability for three consecutive years out of 10 years since its incorporation

  1. Impact of the change

“The higher time and turnover limits for carrying forward of losses for startups will enable them to optimize growth decisions in formative years, The longer timeline “will allow startups to take more risks, innovate on a larger scale and contribute to the economy in a much more significant manner

100 percent deduction up to Turnover of 100 crores is aimed at countering the lack of liquidity in non-conventional but promising startups that may not attract private investors. Increasing the eligibility scale from 7 years to 10 years will discourage the infantilization by SMEs for tax avoidance.

It is a liberating move on the part of the government. Offering a three-year extension to increase the eligibility of startups to claim this deduction is a boon for young companies who are slowly moving towards profitability.

 

0

How Budget 2020 Shapes the Start-up Ecosystem

182

This post is written by Poornima Jayaram

 

A national policy framework for startups was launched in February 2016 called the Startup India Action Plan. Through which new Startups in India can avail of regulatory and tax benefits, capital gains tax exemption, as well as access to government funding if they fulfil certain criteria. A two-level certification will have to be carried out to ensure that a company is a part of the Startup India Plan.

While from 2014-2019, the focus of the government has been on boosting innovation and propping up the startup ecosystem, with the Union Budget 2020, it will shift to turning around the economy and beating the consumer spending decline, the flagging GDP growth and many ailing sectors such as auto, real estate, agriculture, energy, and others. 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 recognized 26,619 startups. Of these, the maximum was in the IT services space which was followed by healthcare and life sciences, and education.

The word “startup” found at least 15 mentions in Nirmala Sitharaman’s budget speech, so we go ahead to look up how it affects the Startup environment.

1. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

Before budget 2020

Under the existing Taxation regime, employees are subjected to tax in the year when they exercise their option to purchase the shares, leading to tax incidence despite not incurring any cash gain. The tax is paid on the difference between the market value and exercise price of shares. This ended up giving the employee more burden before incurring any gain.

After budget 2020

Budget 2020 fulfils a long-standing request of the startup community. It proposes to ease the tax burden of ESOP on employees by deferring the tax payment in three instalments as below

— > By 5 years or

— > Till they leave the company or

— > When they sell their shares, whichever is earliest.

Impact of the change

ESOPs have become instrumental in the Indian corporate and startup ecosystem to woo high-value employees and retain talent. Exemption of taxes on ESOPs will further encourage companies to introduce ESOPs in their companies at a large level, which in turn will allow them to attract world-class talent while keeping employee costs in check. This will encourage more startups to get incorporated and create jobs. It will make it easier for startups to incentivize good talent and attract more skilled talent.

But Instead of being rolled out to the over 27,000 DPIIT-registered startups, the government restricted this to the mere 500-700 startups recognized by the Inter-Ministerial Board (IMB), moreover, Taxation at the exit would have been more fruitful than deferment.

Get Legal Advice now

2. ADVISORY PANEL

The budget also proposes to provide early life funding, including a seed fund (seed funding is a form of financing in which the owner of a business receives money in exchange for a part of the equity of his/her company. It is called ‘seed’ because it happens at the very beginning of the business before even the latter generates any money) to support the ideation and development of early-stage startups. “The proposed seed funding support for ‘ideation and development’ of early-stage startups would not only invite more people to take the entrepreneurship plunge but also extend hands to the existing startups.

A dedicated investment clearance cell for providing end-to-end facilitation and support including pre-investment advisory, information on land banks and quicker clearance of funds at the state-level will boost the entrepreneurship culture.

Clarity:

Single investment clearance cell is a step forward in bringing consistency and clarity for entrepreneurs and investors. Its implementation will take us closer to developed countries where entrepreneurs can start businesses in one working day.

Credit Literacy:

Education focus is much-needed, both online as well as through investments in the space. Hope financial literacy and credit literacy are included in the curriculum so that millions of first-generation taxpayers can manage their money better.

Consumption:

Simplification and reduction of income tax will leave more money with individuals and drive consumption. This should be followed by the increased availability of credit, without which access to resources will remain with those who are already wealthy.

The change in the tax structure for start-ups is sure to impact India’s position in the “Global Ease of Doing Business” charts next year. It is a very clear sign to start-ups that the government has also invested in their success and would like to remove as many barriers that keep entrepreneurs awake at night.”

TAX REFORMATION

  1. Before Budget 2020

Previously the eligibility limit, under the provisions of the Income Tax Act, was Rs 25 crore turnover and the period to claim the tax benefit was seven years.

  1. After Budget 2020

The central government announced tax relief for startups as part of its efforts to boost the ecosystem in the country. Accordingly, the turnover limit and eligibility period for startups to claim tax relief have been increased. Startups with a turnover of up to Rs 100 crore can now claim a 100 per cent deduction on their profit for computing tax liability for three consecutive years out of 10 years since its incorporation

  1. Impact of the change

“The higher time and turnover limits for carrying forward of losses for startups will enable them to optimize growth decisions in formative years, The longer timeline “will allow startups to take more risks, innovate on a larger scale and contribute to the economy in a much more significant manner

100 percent deduction up to Turnover of 100 crores is aimed at countering the lack of liquidity in non-conventional but promising startups that may not attract private investors. Increasing the eligibility scale from 7 years to 10 years will discourage the infantilization by SMEs for tax avoidance.

It is a liberating move on the part of the government. Offering a three-year extension to increase the eligibility of startups to claim this deduction is a boon for young companies who are slowly moving towards profitability.

 

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