Income Tax 06 Feb,2020
Benefit of deferred tax payment on ESOP is available to 250 Start-ups
Tarun KumarChartered Accountant

In the budget speech of Union Budget 2020, the Finance Minister (FM) acknowledged the role played by start-ups in the Indian economy. Start-ups have emerged as engines of growth for our economy. Over the past year, the government has taken several measures to hand-hold them and support their growth.

Giving Employee Stock Option Plan (ESOP) is a usual trend in start-ups where the companies give the option to their employees, instead of high salary, to save high cash outflows, as the resources are limited in the initial phase. ESOPs provide employees with ownership stakes in the company via stocks.

There was a long pending demand of start-ups to rationalize the provisions of taxation of ESOPs which are at present taxable at 2 stages. Since there is no actual cash gain in the hands of employee at the time of allotment of shares it was expected that FM should defer the taxation of ESOP's only to the point of sale rather than the point of vesting. The Union Budget 2020 deferred TDS or tax payment in respect of income pertaining to ESOP of start- ups.

FM announced the ease of taxation burden on ESOPs for start-ups in her budget speech. To give a boost to the start-up ecosystem, the burden of tax payment on the employees deferred by 5 years or till they leave the company or when they sell their shares, whichever is earlier.

Income-tax Act provides various benefits to start-ups. The benefits available to start-ups aren't automatic. These benefits are provided only to DPIIT recognised start-ups. Entities who wish to register with DPIIT can submit an application after satisfying the prescribed conditions. An online application can be filed from the website from the mobile app.

Section 80-IAC provides deduction of 100% profits to an eligible start-up for any 3 consecutive years out of 7 years (Proposed to be changed to 10 years in Union Budget 2020) from the date of its incorporation. A DPIIT recognized start-up is required to file Form 1 along with the specified documents to the Inter-Ministerial Board of Certification. The Inter-Ministerial Board is setup by Department of Industrial Policy and Promotion to validate start-ups for granting tax related benefits. This board shall validate start-ups for the Income-tax exemption under Section 80-IAC of the Act. As per data available on start-up India portal, more than 28,000 start-ups have been recognized by DPIIT, out of that only around 250 start-ups have been granted an exemption under Section 80-IAC of the Income Tax Act. Hence, the benefit of Section 80-IAC extended to less than 1% of the start-ups recognised by DPIIT.

It has to be noted that relaxation in respect of ESOPs has been extended only to eligible start-up referred to in section 80-IAC i.e. Only those start-ups which holds a certificate of eligible business from the Inter-Ministerial Board of Certification can avail this benefit. These ESOP provisions have been relaxed only for almost 250 start-ups and not for all the 28,000 start-ups recognized by DPIIT. The Finance Minister hasn't provided real benefit to start-ups with such proposed change. The government should extend the scope of these provisions at least to start-ups recognised by DPIIT and not just to section 80-IAC eligible start-ups. The widened scope of this will build a strong start-up ecosystem in India.