Income Tax 13 Feb,2020
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Boost for ‘Start – Up’ India
Santosh Maheshwari Partner/ Transaction Tax, BDO India

On 1st February 2020 honourable Finance Minister Nirmala Sitharaman presented the Union budget for the financial year 2020-21. The budget was woven around three prominent themes:

1) Aspirational India

2) Economic Development

3) Caring Society

The government has intended to introduce major reforms to boost the spirit of entrepreneurship in India. Start-ups are the engines of growth for our economy and plays a major role in creating employment opportunities and overall economic development of the country. In order to hand hold and support their growth, the government, accepting the request of start-up sector, has proposed to ease the tax burden of ESOP on employees by deferring the payment of perquisite tax (currently due at the time of exercise of ESOP) by 5 years or till they leave the company or till they sell their shares, whichever is earlier. The above steps have been taken to address the liquidity issue of Indian Start-ups. As a result of above measure, the employees now have flexibility of exercising and holding the shares for a longer term making it a long term capital asset. However, in a situation where an employee leaves his/her company without being able to sell the shares and the perquisite tax liability is more than the "full and final" amount which such employee is supposed to get, it will be interesting to see how a company deal with this situation. Further, in order to broaden the scope of eligible start-ups, the limit of turnover to be considered for determination of eligible start-up under Income Tax Act, 1961 has been increased from INR 25 Crores (USD 3.5 million) to INR 100 Crores (USD 14 million). As a result, high value start-ups can also reap the benefit by allowing them to attract world - class talent while keeping employee cost in check.

An added sweetener to the above favourable position is extension of block period during which an eligible start-up can choose three years of income tax deduction under section 80-IAC from 7 years to 10 years. As per Section 80IAC a start-up is eligible for 100% exemption from payment of income tax for a continuous period of three years from the year it opts for such exemption. It has been seen that start-ups may not have adequate profit to avail this deduction in the initial years of their operation. Extension of block by 3 years shall enable the start-ups to reap greater benefit of the exemption provided under section 80IAC.

In addition to above, Hon'ble FM also announced host of other measures to create more opportunities and remove road blocks from paths of entrepreneurs such as setting up of a dedicated early life funding (including a seed fund) to support ideation and development of early stage start-ups and centralised investment clearance cell to provide end-to-end facilitation and support, including pre-investment advisory and clearances at both centre and state level.

The government also acknowledges that while finance is life blood for a business organisation, data act as sensory organs which enables an organisation to respond to the dynamic nature of the market. Keeping in view such importance of data and information in current global scenario, the finance minister has proposed to set up data center parks to facilitate businesses/entrepreneurs to effectively use data at different stages of the value chain.

Further, under the theme of aspirational India, the government has emphasised on education and skill development in India. The government propose to announce new education policy and greater financing to education sector through Foreign Direct Investment and External Commercial Borrowing. While 100% FDI is approved under automatic route for investment in education sector, it is seen that foreign investors are reluctant to invest in not for profit entity.

While above are notable steps, we hope that the government continues to focus on eliminating roadblocks in the path of entrepreneurs and stimulate an environment for the growth of start-ups in India.

(Exchange Rate: 1 USD = 71.21 INR)

Authored by:

Santosh Maheshwari

(Partner/Transaction Tax BDO Bangalore)

Assisted by,

Sourav Modi & Adarsh Agarwal (Part of Bangalore Transaction tax Team))