The slew of measures proposed by Union Finance Minister Nirmala Sitharaman to support the country’s start-up ecosystem, including early-stage venture support, tax benefits on Employee Stock Ownership Plan (ESOP) and zero tax on profits for first three years, will not benefit at least 80 per cent of such firms, analysts feel.
On one hand, analysts say that measures such as no audit on companies with a turnover of less than Rs 5 crore, a comprehensive national logistics policy, and support for advanced technological innovations in healthcare and education sectors are good moves.
On the other, they feel the double whammy of 18 per cent Goods Services Tax and 10 per cent Tax Deducted at Source on all start-ups in the services sector should have been brought down but did not happen.
One of the major provisions in the budget laid out by the finance minister — deferment of taxes on ESOPs by a period of five years, or till the sale of shares, or when the employees leave the company — is, in fact, being described as a half-hearted exercise.
Considering that this measure under Section 80-IAC of the Income Tax Act will only be extended to 200-odd start-ups incorporated after 2016 and that are registered with the interministerial board, and not to over 20,000 start-ups registered with the Department for Promotion of Industry and Internal trade (DPIIT), the benefit is applicable to only a few start-ups.
Nasscom president Debjani Ghosh, in a post-budget CII national executive, meet with Sitharaman, has urged the minister to extend the provision of ESOP tax benefits to all the firms registered with DPIIT as well. Ghosh has also called the non-extension of 15 per cent corporate tax rate to IT service firms in Special Economic Zones, a miss in the Budget 2021.
“The ESOP tax deferment proposed in Budget 2021 is a welcome move. However, it is nowhere close to ideal, as it is beneficial only for a very limited pool of start-ups that are eligible under Section 80-IAC. ESOPs are most valuable when a start-up has raised multiple rounds of funding at increasing valuation. This is the only condition when they are the most liquid. The way Section 80-IAC is structured, the pool of start-ups that can potentially benefit from this is limited to 700-800 firms in best-case scenario; that is, just 20 per cent of all start-ups that have raised at least one round of external funding,” said Atit Danak, head of CoNXT, Zinnov, a management consultancy firm.
The second measure of levying no tax on profit of start-ups with a turnover of less than Rs 100 crore is again of little advantage to the companies in their early-stage phases, especially the bootstrapped ones.
“The measures seem to benefit some of the big start-ups that are funded by the foreign venture capitalists or investment giants, and not the ones whose funding is derived locally. The reason for the same is because a majority of the start-ups, including unicorns, do not follow a profitability model in the first few years of their inception, and hence, there is no chance that the provision of no-tax on profits for first initial years is of use,” said Kapil Jain, founder and CEO of Mumbai-based Graphitto Labs.
What is proposed?
FM has proposed deferment of tax payments on Employee Stock Ownership Plan (ESOP) by five years, or till the sale of shares, or when the employees leave the company, whichever is the earliest.
Why is it a dampener?
The measure is extended only to 200-odd start-ups registered with the interministerial board, and not to over 20,000 start-ups registered with the Department for Promotion of Industry and Internal trade (DPIIT)
Measures that benefit start-ups
Measures that aren’t: