Tax on ESOPS deferred by 5 years, but start-ups want more:

Capital gains tax on unlisted securities unchanged

Start-ups and the investor community were left unimpressed as the Budget skipped the key demands, while offering only what t hey believe are incremental concessions to boost the ecosystem.

Harmonisation of capital gains tax rate for unlisted securities, removal of doubletaxation on employee stock options (ESOPS), and reprieve from tax deduction at source (TDS) were among the key demands.

The Budget has proposed to defer tax on ESOPS, extend the gamut of startups eligible for corporate tax concession and set up a new seed fund to help the industry.

What the government has done is not ver y significant, said Siddarth Pai, co -founder at venture capital firm 3one4 Capital.

The government has proposed that the payment of tax levied during the conversion of ESOPS into shares be deferred by five years. However, the tax will have to be paid if the employee leaves the firm or sells the shares before five years.

Further, the concession applies to only start-ups that were incorporated after April 1, 2016, and are cleared by the government-appointed inter-ministerial board (IMB), as specified under section 80-IAC of the Income Tax Act.

ESOPS are a key instrument to attract and retain talent in start-ups. However, currently, the allottee of ESOPS has to pay tax twice — once when ESOPS are converted into company shares (construed as salary income), and when shares are sold off for cash (considered as capital gains).

“It is great to see the government acknowledging the ambiguity around ESOP taxation but limiting it to factors such as turnover of ~100 crore, five years of employment or when the employee leaves the company might not fully solve the problem,” said Vivek Gupta, co-founder at Licious, a Bengaluru based start-up.

The government also proposed to extend corporate tax concession to eligible startups. A start-up with an annual turnover not exceeding ~100 crore, up from ~25 crore, can now avail exemption from paying tax on profits for a period of three years within a 10 -year window as against seven years earlier. In addition, a special seed fund has been proposed to directly i nvest in start-ups.