Government plans to tax ESOPs for startups at time of actual sale

In the last couple of years, many startups employees got richer exercising their stock options through secondary exits. However, employees when exercise their options and convert ESOPs to shares, they are taxed.

To weed out this exercise, the government has suggested the finance ministry to tax shares granted by startups under their employee stock option plan only at the time of sale.

Esops should be taxed when the actual sale happens, a government official was quoted by ET report as saying. Finance Ministry may look at the matter and consider the proposals for the next budget.

Startups often offer ESOPs to employees to reward and retain them in the companies. In fact, stock option has, over the years, emerged as one of major temptations for young talents to work in startups.

In terms of reward, the stock offers far more monetary value than any corporate incentives. Several employees with the stock option in startups, such as Flipkart, Lenskart, Ola among many, have benefited out of secondary exits.

In 2018 alone, several startups through secondary share sale offered monetary benefit to their employees. Ride-hailing firm Ola employees got about $30 million in the Temasek deal; Paytm also allowed its employees to gained $47.2 million when Discovery Capital made investments.

Close to 30 employees in logistics firm Rivigo garnered over Rs 70 crore in ESOPS. Droom and Razorpay employees also got richer through stock options.

According to industry experts, ESOPs sell should take place when an investor comes in. If the government would be successfully implementing this it will save startups from issuing share certificates employees, who are then taxed on volatile valuations.

Other than providing a monetary benefit to employees, a favourable tax on ESOPS will help startups retain talents.