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Boosting India’s vibrant startups Ecosystem

skill-entrepreneurs-startups-team-marketexpress-inThe budget for the financial year 2020-21 (FY21) was the most difficult in a decade. Seeing the historical slowdown in the major sectors of the economy, the task to revitalize the lost glory was not at all easy for honourable Finance Minister (FM) Nirmala Sitharaman and her entire team. Having a considerable balance between fiscal arithmetic and rejuvenating the virtuous cycle for fast economic growth was the toughest choice. Amid all this hue and cry, she showed the road map and made number of announcements like- new optional slab rate for both Startups and personal income, deferring tax on ESOPs, abolished dividend distribution tax, 100% tax concession to SWF (sovereign wealth fund), 100% tax deduction for startups having turnover of Rs 100Cr, increase the threshold for audit of MSMEs to Rs.5Cr from currently Rs.1Cr, increase deposit insurance to Rs.5 lakhs from Rs.1 lakh, plan to invest over INR 100Cr in infrastructure, provision for Quantum technologies and many more.

In the Gazette of India, Ministry of Commerce and Industry’s notification Feb. 19th, 2019, the term start-up has been defined as an entity “up to ten years from the date of incorporation/registration, if it is incorporated as a private limited company, or registered as a partnership firm or a limited liability partnership in India and turnover has not exceeded Rs.100 crore in any of the financial year since the incorporation/registration”. It is not applicable to entities (entity) formed through the reconstruction of an existing business.

Startups are considered as innovators of new ways of doing business and creators of new ideas to fulfill the aspirations of billions of people. They are not job seekers rather than job creators. The strong start-ups’ ecosystem of any country is the major pillar of innovative business and the overall growth of the economy.

As per the latest IT industry body NASSCOM India’s 2019 report, India has the third-largest startup ecosystem in the world. There are 8900-9300 tech startups inspected during 2014-2019 in the country. Around 1300 startups added in the year 2019 itself. India is also the leading ecosystem for Unicorns (companies with a valuation of over $1 billion) in the world. There are 24 Unicorns in India – third largest in the world. The report also revealed that startups have created around 60,000 direct jobs and 1.3-1.8 lakh indirect jobs and they received $4.4 billion funding from January to September 2019.

Seeing the fascinating and prosperous future of startups, this year’s budget has provided a strong stimulus for further strengthening the vibrant future of the startups ecosystem in India. FM addressed the long pending and more demanding issues of tax payment on the Employee Stock Option Plan (ESOPs). Earlier the employees had to pay tax whenever they sign up for ESOPs, not only this they also need to pay tax on capital gains whenever they redeem their ESOPs. “This led to a cash flow problem of employees who do not sell the shares immediately and continue to hold the same for long-term,” this is what FM said during her budget speech on 1st Feb.2020.

Now in this budget, she addressed this issue by deferring tax payment on it by five years or till an employee leaves the company or when he/she sells the shares, whichever is earlier. This announcement will encourage startups to weaponize ESOPs schemes to attract and retain talented employees.

During the initial year of business, startups face lots of problems, including attracting and retaining young talented employees. Seeing the financial status of these startups during their initial time, they are incapable to pay a high level of compensation. Therefore, they use ESOPs as a significant component of compensation to compensate for the top class of employees. Now the deferring tax payment on ESOPs scheme is going to solve the problem of these startups up to some extent.

Seeing the profitable position of these startups in earlier stages, FM has announced the 100% tax deduction for three consecutive assessment years out of ten years for startups having turnover up to Rs.100 crore. Earlier such deduction was available only for startups having turnover not exceeding Rs.25 crore that too for seven years. This new proposal will cover more numbers of startups and a significant proportion of the total number of startups will get lots of scope for their further development.

Apart from these major announcements FM has also proposed the seed fund for funding ideation and helping early-stage startups. It is being speculated that all these startups centric budget proposals will further boost the start-ups’ ecosystem of India. It’s too early to comment on the actual dividends of such proposals. We shall have to wait and watch till further any glorious achievement of Indian startups.