Budget 2020 for startups – Band-aid instead of tourniquet?

The proposed change in policy now allows the required prerequisite tax to be deducted at the earliest of (a) the employee leaving the company; (b) the sale of the resultant shares by the employee; and (c) the fourth year from the end of the relevant assessment year. However, the scope of companies that would benefit from this has perhaps been left too narrow – the benefit has been made available only to employees of inter-ministerial board-certified startups alone (and not all DPIIT-registered startups), which currently make up a very small fraction of startups in the country.

The turnover limit for startups to be eligible for a deduction of three-years’ profits has been increased from Rs 25 crore to Rs 100 crore and the period of eligibility to claim this deduction has been increased from 7 to 10 years. It must be noted, however, that similar relaxations of turnover and eligibility periods for other regulatory concessions were already carried out earlier, and that this is merely a case of tax laws “catching up”.

Further, startups in specific sectors are likely to benefit from the initiatives announced by the government for those sectors – for instance, the announcement of an app-based invoice financing product and setting up of private sector data centres are expected to give rise to the next wave of FinTech startups while startups in the B2B logistics space should benefit from the push-in logistics, infrastructure, and warehousing sectors. The announcement of a seed fund to support certain early-stage startups will add a much-needed source of early-stage funding in a highly competitive fundraising ecosystem.

Startups will also incidentally benefit from the increase in equity investments, particularly FDI, that will now likely result from the removal of the requirement to pay dividend distribution tax and other proposed policy changes.

Much needed reliefs that startups would have greatly benefited from, such as extension of ESOP tax rationalisation to all DPIIT-registered startups, ease of transfer pricing compliances, steps to increase rupee capital in the market, and a further reduction in corporate compliances, have, however, been left out of the budget, which has made this budget, overall not the shot in the arm that the sector was hoping for.