After proposing to defer tax payment on shares allotted by startups to their employees under the Employee Stock Option Plans or ESOPs by five years in the Union Budget, Finance Minister Nirmala Sitharaman has now asked for feedback from startups.
A major concern for startups post-budget is that the proposed ESOP taxation regime is applicable only to select startups, around 500-700 recognised by the Inter-Ministerial Board (IMB).
The Central Board of Direct Taxes considers only startups who are incorporated after April 1, 2016, and have a certificate from the IMB for being innovative, to qualify for the proposed tax benefits.
This does not even constitute one percent of startups operating in the country, who can benefit from the latest announcement.
In her first post-budget interaction with startups at Niti Aayog on Friday, Sitharaman said, “I thought we were coming back to you all to say that we have done this. You asked for it and we have done it. Now, (you say it’s) not good enough. Please define it yourselves on ESOPs. What is it? Is it a perk, is it a salary, is it to be taxed on day one, is it to be never taxed?”.
“Please make up your mind and tell me for once, I want to deal with a positive and open mind,” she added.
She further asked for formulation on ESOPs that is acceptable to startups. The FM also informed that she will meet Mohandas Pai, a former member of the board of directors at Infosys Technologies and now a well-known investor, in regard to the ESOPs issue.
During her budget speech on Feb. 1, the Finance Minister had proposed to defer tax payment on ESOPs by five years or till startups employees leave the company or when they sell their shares, whichever is earliest.
In their early years, startups use ESOPs to attract and retain employees. It is usually a significant component of compensation for employees with the hope that it will pay off big eventually.
The introduction of some sort of tax relief on ESOPs was one of the biggest asks from the startup industry.
Before the budget proposal, ESOPs were taxable at the time of exercising the options and when converting the ESOPs to shares. Employees at startups have often been critical of this clause as tax rates from the income of ESOPs sale are different for listed and unlisted companies.