Government Considering Proposals For Tax Exemptions on ESOPs, VC Investments In Startups

In a bid to make the environment more conducive for startups, the Government is considering proposals submitted by the ministry of communications and information technology on tax exemptions on stock options given to employees by startups, on capital gains that are invested in new ventures and those made from investing in new firms.

The proposals have been sent to the finance ministry as part of suggestions for next year’s Budget and are aimed at promoting the startup ecosystem, in line with the initiatives taken by Prime Minister Modi under ‘Start up India, Stand up India’ to boost startup activity in India.

The ministry has also suggested that individuals and corporates should not be taxed on capital gains if the money is invested in securities of startups. Startups should also be free to wind up. Towards this end, it has proposed “guidelines on valuation of startups and easy exits and no stigma for failure, like blacklisting, etc, for financial institutions” unless it’s for fraud.

Speaking to certain sections of the media, an official stated, “Some 70-80% of startups in the country are tech-related and we need to find a way to encourage private capital and long-term investment in Indian tech startups. We completely understand that we need to encourage investments, and taxes need to go down if capital funding has to flow into the startup ecosystem so as to recreate a Silicon Valley here.”

As per prevailing tax laws, angel investors in Indian startups have to pay 33% short term capital gains tax on all investments while long-term capital gains tax, involving a holding period of three years, is 20%. The investor community has been pressing for equality with stock markets, asking authorities to align the startup ESOP policy with that of the stock markets.

A report by NASSCOM has ranked India among the top five largest startup communities in the world and stated that such companies have led to the creation of more than 80,000 jobs. Friendlier proposals will be a much needed boost for the country’s startup system. Startups are raising significant amounts of capital, especially at the early-stage level, but they continue to struggle under cumbersome regulatory policies. Early-stage investing activity in India will get a big boost if the proposals are accepted. Additionally, changes in the ESOP policy would also act as an additional incentive for top talent to join startups.

In the same direction, in May, SEBI had roped in Infosys founder NR Narayana Murthy to head 18-member panel committee to advise on policy matters for the new regulatory framework for startups and alternative investment funds (AIFs). The move came at a time when SEBI had already announced its plans to relax listing norms to facilitate easy entry & exit of investors in startups. Additionally, the BSE has also formed an advisory group to fast-track the development of its platform – BSE Hi-Tech – an alternate fund-raising platform for startup firms.

According to the data available, more than $7 Bn has been invested in more than 600 startups, in India, in first three quarters of 2015. If the proposals on exemptions on VC investments are passed, the capital gains made could also find their way to the startup ecosystem, thus boosting it further and leading to creation of more jobs and entrepreneurial opportunities.

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