Budget eases tax payment norms for startups, ensures more on liquidity

Conceding to demands for improving liquidity options, Finance Minister Nirmala Sitharaman in the Union Budget on Saturday proposed easing of tax payments for startups with a view to promote growth of budding entrepreneurs.

“In order to give a boost to startup ecosystem, I propose to ease the burden of taxation on the employees by deferring the tax payment by five years or till they leave the company or when they sell, whichever is earliest,” she said while presenting the Union Budget for 2020-21.

ESOP (employee stock option plan) is a significant component of compensation for these employees, she said. Currently, ESOPs are taxable.

“This leads to cash flow problem for employees who do not sell their shares immediately and continue to hold the same for a long term,” the minister said.

Prime Minister Narendra Modi said the decisions in budget for startup would accelerate the economy and will provide new employment opportunities to the youth.

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Sitharaman said startups have emerged as an engine of growth for India’s economy and over the past year, the government has taken several measures to handhold them and support their growth.

During their formative years, startups generally use ESOPs to attract and retain highly talented employees, she added.

Further, the minister said that an eligible startup having a turnover of up to ₹25 crore is allowed a deduction of 100% of its profits for three consecutive assessment years out of 7 years, if the total turnover does not exceed ₹25 crore.

“In order to extend this benefit to larger startups also, I propose to increase the turnover limit from existing ₹25 crore to ₹100 crore. “Moreover considering the fact that in the initial years, a startup may not have adequate profit to avail this deduction, I propose to extend the period of eligibility for claim of deduction from the existing 7 years to 10 years,” Sitharaman said.

Dividend tax to be shifted from companies to recipients

The government also proposed to remove dividend distribution tax on companies, saying henceforth it will be shifted to recipients at the applicable rate.

Sitharaman said the proposal would make India more attractive market for investment.

“This is another bold move, which will further make India an attractive destination for investment” she said, adding it would result in a revenue sacrifice of ₹25,000 crore per annum.

Currently, companies are required to pay dividend distribution tax (DDT) on the dividend paid to its shareholders at the rate of 15% plus applicable surcharge and cess, in addition to the tax payable by the company on its profits.

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“In order to increase the attractiveness of the Indian equity market and to provide relief to a large class of investors, I propose to remove the DDT and adopt the classical system of dividend taxation under which the companies would not be required to pay DDT.

“The dividend shall be taxed only in the hands of the recipients at their applicable rate,” she said.

The system of levying DDT, she said, results in increased tax burden for investors and especially those who are liable to pay tax less than the rate of DDT, if the dividend is included in their income.

Further, non-availability of credit of DDT to most of the foreign investors in their home country results in reduction of rate of return on equity capital for them, she noted.

“Further, in order to remove the cascading effect, I also propose to allow deduction for the dividend received by holding company from its subsidiary. The removal of DDT will lead to estimated annual revenue forgone of ₹25,000 crore,” the minister said.

(With inputs from agencies)