Union Budget 2020: It’s Disappointing For Startups, Says Mohandas Pai

While the Union Budget 2020 has addressed a slew of issues such as disinvestments, tax exemption of sovereign funds, deferring tax payments by five years on ESOPs, the budget has failed to live up to the expectations of TV Mohandas Pai, former Infosys CFO and partner, Aarin Capital.

This is second straight Budget in which the government has failed to address the key announcements made in BJP pre-election manifesto.

Commenting on the latest Budget, Pai told Inc42,

“The budget is disappointing for startups as we do not see any moves to keep the promises of NDA from their manifesto.”

Budget 2020: What Were The Top Demands?

Earlier, sharing his expectations from the Union Budget 2020, Pai had stated that the government must focus on bringing tax parity on capital gains, taxing ESOPs on sale and not on exercise and full disbursal of fund of funds for startups.

“Today, long term capital gains tax on startups is 28% vs 11% for listed stock, so the local investment is not coming in!”

While addressing the ESOPs issue, Sitharaman stated, “In order to give a boost to the start-up 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 their shares, whichever is earliest.” However, the union budget 2020 failed to address the other demands.

“For startups, the budget 2020 has been disappointing. While deferring taxes on ESOPs in startups is a good move, the other big issues about tax parity and reduced TDS to improve working capital have not been addressed. The radical one-time reform was called for to improve local flow of funds to startups but budget us found wanting,” said Pai.

Welcoming Other Announcements From The Budget

While Pai asserted that the Budget does not do justice for startup ecosystem, he has welcomed some other key initiatives announced by the Sitharaman, today. On disinvestments plans and the upcoming IPO of LIC, Pai said,

“There are many other significant reforms in the financial sector which is a welcome step. This includes listing of LIC, increase in bond limits, tax exemption for sovereign funds, sale of IDBI, the gold bullion market etc which will deepen markets.”

Despite being quite slow, tax reforms have been the agenda of Modi government. In the last two years, the government has made some announcements including the abrogation of angel tax and slashing of the corporate tax rate.

In the Union Budget 2019, the finance minister had announced relaxation on some of the conditions for carry-forward and set-off of losses in the case of startups. The finance minister had also announced plans to extend the period of exemption of capital gains arising from the sale of residential house for investment in startups up to March 31, 2021, and the government also planned to relax certain conditions of this exemption.

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