January 18, 2021

Govt ‘s Proposed Tax Exemption on Startups

The Ministry of Communications and Information Technology have asked for tax exemptions on stock options offered to employees by startups. They are also extending this to capital gains accrued from making investment in new business ventures. These are measures that could have a major impace on startups in the event the policies are adopted.
The proposed policies have been forwarded to the finance ministry to be included in the next year’s budget. The policies are geared towards promoting the startup ecosystem. As per an official, “70-80% of startups in the country are tech related and we need to find a way to encourage private capital and long-term investment in Indian tech startups.”
The department of IT which is part of the ministry has also suggested that these exemptions be extended to directors as well. The startups are able to raise a good amount of capital, especially in the initial states, however, they continue to struggle with stringent regulatory demands. As per the existing tax laws, angel investors in startups are bound to make a payment of 33% short-term capital gains tax on all investments in Indian startups. The long-term capital gains tax, involving a holding period of three years is 20%.
The ministry has also advised that the individuals and corporates must not be taxed on capital gains in cases where the money is invested in securities of startups. The ministry also stated that the startups must also be free to shut down. The Prime Minister has highlighted in his Stand up India programme that promotion of entrepreneurship and job creation will be key areas for the government.
A National Association of Software and Services Companies (Nasscom) report has ranked India among the top five largest startup communities in the world and these companies are leading to creation of over 80,000 jobs.