Union Budget 2020: Startups get tax incentive boost

New Delhi: Finance Minister Nirmala Sitharaman on Saturday announced a host of measures including relaxing tax incentives and setting up of investment clearance cell for startups and entrepreneurs with a view to promote their growth.

The Minister has also proposed to provide early life funding, including a seed fund to support ideation and development of early stage startups.

She asked all the infrastructure agencies of the government to involve startups as they will help in rolling out value-added services in quality public infrastructure for citizens.

Sitharaman has proposed easing of tax payments for startups - a decision which was hailed by budding entrepreneurs. "In order to give a boost to startup 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, whichever is earliest," she said while presenting the Union Budget for 2020-21.

Employee stock option plan (ESOP) is a significant component of compensation for these employees, she said. Currently, it is taxable.

"This leads to cash flow problem for the employees who do not sell their shares immediately and continue to hold the same for long term," she said. During their formative years, startups generally use ESOPs to attract and retain highly talented employees, she added.

Further, the Minister said that an eligible startup having a turnover of up to Rs 25 crore is allowed a deduction of 100 per cent of its profits for three consecutive assessment years out of seven years if the total turnover does not exceed Rs 25 crore.

"In order to extend this benefit to larger startups also, I propose to increase the turnover limit from existing Rs 25 crore to Rs 100 crore.

Moreover, considering the fact that in the initial years, a startup may not have adequate profit to avail this deduction, I propose to extend the period of eligibility for claim of deduction from the existing 7 years to 10 years," Sitharaman said.

About investment clearance cell for entrepreneurs, the minister said the government will provide end-to-end facilitation and support including pre-investment advisory, information related to land banks and facilitate clearances at centre and also at the state level. The cell will work through a portal.

Commenting in the proposals, world trade information provider Connect2India founder and CEO Pawan Gupta said the proposed seed funding support for 'ideation and development' of early-stage startups would encourage more people to take the entrepreneurship plunge as well as support the existing players.