Budget 2020: Startup India 2.0 Rests On This Budget

Budget 2020 will be the definitive budget for Startup India 2.0. The hopes and aspirations of all Indian entrepreneurs and investors into startups lies solely on this budget. Startups have been the slowdown proof sector of the Indian economy, bolstering the expectation of Shri Narendra Modi that India’s $5 Tn vision will be met by new-age enterprises.

For this, India needs an accommodative tax policy that supports startups so that the investment case for Indian startups isn’t defined on the basis of post-tax returns alone. For context, the Long-Term Capital Gains on startups and unlisted securities is more than 2.5 times the rate on their listed counterparts. Several organisations and entrepreneurs have repeatedly met government to articulate their wishlist for the upcoming budget tomorrow. The key amongst these are below:

Harmonise The Tax Rate And Holding Period Between Listed And Unlisted Securities

India holds a unique distinction of differentiating between listed and unlisted securities in terms of the tax rate and holding period. The holding period to qualify for Long Term Capital Gains for startups and unlisted securities is double the holding period for unlisted securities.

The “superrich surcharge” of 37% was rolled back for listed securities but not unlisted securities, due to which the effective LTCG tax rate for listed securities is 11%+ whereas it’s 28%+ for unlisted securities. This is in spite of the gains from startups arising from primary investments into the company as opposed to the stock market, which contains primarily of secondary sales and transfers.

This is the single, most important ask of all entrepreneurs and investors into startups from Budget 2020.

Change The ESOP Taxation Regime

ESOPs are the democratisation of shareholding of a company and is amongst the single largest drivers of employee wealth anywhere in the world. As such, the Indian situation of employees requiring to take loans in order to pay the taxes on the exercise of their ESOPs is a blackmark against the Indian startup story.

Employees are taxed on the difference between their exercise price and the “fair market value” of the shares. They are further taxed at the point of sale at the difference between the sale price and the FMV. Due to Indian tax regulations, the FMV at the point of the exercise is taken as the price of the most recent round of funding, thus placing an undue economic burden upon employees for the startup doing well.

Taxing ESOPs at the point of sale will help make ESOPs attractive again and help create employee wealth while ensuring taxes are paid when the employee makes money, not on notional values.

Reduce The TDS Rate For Startups from 10% to 1%

Indian tech startups face a Tax Deducted at Source (TDS) rate of 10% on their revenue. This implies an effective post-tax profit rate of 33.33% to 45%, which is unheard of anywhere in the world (image). This affects the working capital of startups as a number of them don’t make profits and they need to wait 6-12 months after filing their returns to get their refund, further hurting working capital for startups.

This Budget 2020, they should reduce this to 1%, which will create the paper trail for the tax department without hurting the working capital of startups.

These three asks will help galvanise the startup community and give them the fillip needed to scale greater heights. The present government has bought startups to the forefront of the nation – now, we all look forward to them during this budget for Startup India 2.0.