DPIIT Proposes to Form Tax Sops for Startup Companies and Ease Norms for ESOPs

In the interim budget, which was held in February 2019, startup companies were inclusive of government’s focus.
  • BY Jaspreet Kaur

    Feature Writer, BusinessEx

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  • Jun 17,2019
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  • 10 Mins Read

Prior to the Union Budget, the re-elected government is planning to ease tax regulations for startup companies. Earlier on, the government redefined the startup definition and exempted angel tax on startups as well as angel investors. Now, the Modi-led government is proposing plans to ease business conditions for startup organisations anew. This time the government’s strategy is to create tax sops for startups and further, simplify regulations for ESOPs (Employee Stock Option Scheme).

A Plan to Encourage Entrepreneurship

The primary motive behind the implication of tax sops on startups and easing of ESOPs is to incentivize entrepreneurs and further, increase employment in India.

In the interim budget, which was held in February 2019, the government did not propose any plan for startup companies. During the budget, the government concentrated on rural and agricultural sectors, income tax, government schemes (national education mission, Integrated Child Development Scheme and MGNREGA), MSME (Ministry of Micro, Small and Medium Enterprises), Department of Fisheries and common masses. Startup companies were inclusive of the interim budget altogether.

Thus, DPIIT (Department for Promotion of Industry and Internal Trade) has now focused on startup companies and puts forward suggestions for tax sops.

“The Department for Promotion of Industry and Internal Trade and the revenue department have discussed a package of tax sops in the forthcoming budget, including simplified norms for levying a tax on employee stock option schemes (ESOPs) at the time of sale of shares,” sources told the daily news, The Times of India.

Current Structure of ESOPs  

In essence, an ESOP is a subset of an employee benefit plan wherein the employees are offered an ownership interest in the company. Under this plan, stocks, bonuses and profit-sharing plans are offered to the employees and it depends on the employees as to what he wants amongst them.

In the present time, ESOPs are levied when an employee uses the option and then a tax is imposed between the fair market price and the exercise price. Following this, there is a capital gains’ tax which is imposed when an employee sells his stocks. For a long period of time, startup companies have contended that ESOPs are a vital tool for employee retention and thus, imposing them is not right, according to a media report.

DPIIT Proposing Other Plans

Apart from simplifying ESOPs and forming tax sops, DPIIT is also planning to take moves to boost startup funding in the economy. The governing body is planning to give angel benefits to Category II Alternate Investment Funds (AIF), which is a type of concession that some Category I investors employ currently, according to the media report.

Other positive changes that the government tries to introduce are the way the profit of AIFs is a pass-through for partners and likewise, losses of the AIFs would be treated in the same manner.  

Further, there is a proposition of exempting GST for fund managers in the country as foreign fund managers don’t have any tax liability in this regard. However, there is a lesser probability to acknowledge this idea as GST-related issues are external to the current budget’s scope.




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