Post budget, startups and investors lobby for 'startup friendly' ESOP taxation norms

Stakeholders from India’s startup ecosystem have urged the government to revisit announcements made in Budget 2020 with respect to ESOPs (employee stock ownership plan) for startups and make it industry friendly.

In a letter addressed to finance minister Nirmala Sitharaman, citizen engagement platform LocalCircles has asked the government to extend the scope of ESOP taxation to all startups recognised by Department for Promotion of Industry and Internal Trade (DPIIT). 

A copy of the letter dated February 3 was reviewed by TechCircle.

In addition, it is learnt that the recently set up National Startup Advisory Council has also floated a paper inviting comments and suggestions from startups and other stakeholders on proposed changes to ESOP taxation in Finance Bill 2020. The document was submitted to DPIIT on Monday. 

In their submissions, both the bodies argue that the recent announcements on the taxation of ESOPs as part of Budget 2020 are not beneficial to a majority of startups.

Read: Deferred ESOP tax payment in Budget 2020 doesn’t go far enough for startup employees 

“India currently has approximately 50,000 startups and approximately 27,000 are registered under DPIIT Startup India program. If we go by section 80-IAC (as mentioned in the Budget 2020 document), less than 250 startups operating in the country that are recognised by the IMB (Inter-Ministerial Board), will be eligible for this benefit. This would mean that 99.5% of the Indian startups will not be able to avail of the ESOP benefit announced in Budget 2020,” read the letter.

The submissions also indicate that the changes to taxation of ESOPs does not solve double taxation at the point of exercise and point of liquidation. The proposals suggest that ESOPs should be taxed only at the point of sale with a holding period of two to three years considered as LTCG (long term capital gains).

The NSAC submission also proposes the creation of a separate class of ‘employee equity’ for easy traceability and to prevent misuse of the tax relaxation.