Budget 2020: Now Perfect Ecosystem For Startups, Says Taxman

With Finance Minister Nirmala Sitharaman proposing to ease the taxation burden on ESOPs (employee stock option plans) for startups, the "so-called" last irritant for budding entrepreneurs have been removed and it is now a perfect ecosystem for them in the country, Central Board of Direct Taxes (CBDT) Chairman PC Mody has said.

Mr Mody said that most of the issues pertaining to startups were already addressed in last budget and the remaining matter on ESOPs was resolved this time.

The CBDT frames policy for the Income Tax Department and functions under the Finance Ministry.

"... So, the so-called last irritant for startups has also been removed... It is now a perfect ecosystem for the startups," he told news agency Press Trust of India.

In the Budget for financial year 2020-21, Ms Sitharaman proposed to ease the burden of taxation on the employees by deferring the tax payment on ESOPs by five years, till they leave the company or when they sell their shares, whichever is earliest.

During their formative years, start-ups generally use ESOPs to attract and retain highly talented employees. ESOPs are a significant component of compensation for these employees.

Currently, ESOPs are taxable as perquisites at the time of exercise. This leads to cash flow problem for the employees who do not sell the shares immediately and continue to hold them for the long term.

Explaining, Mr Mody said a point was raised if some kind of deferment could be made which is what "we have accepted".

"So an employee now can choose to defer his payment of tax on ESOPs, say up to 5 years provided they continue with the company," he said.

If that employee would quit from the company or sells those shares earlier, then it would be taxable at the time of sale but a facility has been given, he added.