Amendment and Benefit to eligible ‘Start-Ups’ under Finance Bill 2020

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Turnover Limit to Claim Deduction under Section 80-IAC has been Increased .

(Applicable from Assessment Year 2021-22]

Section 80-IAC of the Act was introduced by the Finance Act, 2016 to provide for deduction in respect of profits and gains derived by an eligible start-up. At present, Section 80-IAC provides that for claiming tax holiday, the turnover of an eligible start-up should not exceed Rs. 25 crores in the previous year relevant to the assessment year for which deduction under this section is claimed. The Finance Bill proposed to raise the turnover limit for claiming such exemption to Rs. 100 crore. Such an increase in the turnover limit to claim deduction under section 80-IAC brings this provision in parity with the threshold limit specified in the notification issued by the DPIIT.

Window to Claim Deduction under Section 80-IAC has been Increased to 10 years

[Applicable from Assessment Year 2021-22]

The Finance Bill proposes to provide deduction under section 80-IAC to eligible start-up for a period of 3 consecutive assessment years out of 10 years beginning from the year in which the eligible start-up is incorporated. Earlier, this deduction was available for 3 consecutive financial years out of the first 7 years.

A start-up generally takes 5-10 years to start earning the profits. The decision to provide an option to a start-up to claim deduction under Section 80-IAC for 3 years out of 10 years is a welcome change. If a start-up starts earning profit after 5 years, previously it could claim deduction only for two years and now it can claim a deduction for 3 years and such deductions will be higher as profits in later years will generally be more.

No Withholding Tax at the time of exercising ESOP by an employee of the eligible Start-Up

[Applicable from Assessment Year 2020-21]

Start-ups generally remunerate and retain their talented employee by giving them ESOP’s or Sweat Equity. These options stocks are perquisites in hand of the employees at the time of exercise and taxable under the head salary. Therefore, the employers are required to deduct the tax at the time these options are exercised. This provision is a burdensome for the employees as it reduces the cash flow in their hand and they do not get any immediate benefit from the shares allotted under the ESOPs. To reduce the burden of taxes, the deduction of withholding tax and payment of tax on such income has been deferred to the earlier of the following period:

  1. On the expiry of 48 months from the end of Assessment year in which ESOPs are exercised;
  2. At the date the assessee ceases to be the employee of the organization; or
  3. At the date of sale of shares allotted under ESOP.

In other words, the income from allotment of shares under ESOPs shall arise in the year itself in which the option is exercised, however, the payment of tax or deduction of tax at source, as the case may be, is deferred to the subsequent period.

EXAMPLE:

ABC Private Limited issues 1,000 shares under ESOP to Mr. X at an exercise price of Rs. 10 in Year 1. The fair market value of the option at the time the option is exercised is Rs. 50 per share. How the income arising from such allotment shall be taxed in the following scenarios:

  1. Mr. X leaves the company in Year 3 and sold the shares in Year 4 at a price of Rs. 100 per share or Rs. 40 per share.
  2. Mr. X continues with the company and sold the shares in Year  6 at a price of Rs.100 per share or Rs. 40 per share.
  3. Mr. X sold the shares in Year 4 at a price of100 per share or ? 40 per share.
ParticularsScenario 1Scenario 1Scenario 1Scenario 1Scenario 3Scenario 3
No. of shares allotted under ESOPs (A)1,0001,0001,0001,0001,0001,000
Issue price (B)101010101010
FMV at the time of allotment (C)505050505050
Income taxable under the
head salary [D = A (C – B)]
40,00040,00040,00040,00040,00040,000
Sale Price (E)100401004010040
Income / (Loss) taxable Un- der the head Capital Gains’
[F = A * (E – C)]
50,000(10,000)50,000(10,000)50,000(10,000)
Year 3
Income to be considered for deduction of tax under Section 19240,00040,000NilNilNilNil
Income taxable under the head Capital Gains50,000NilNilNilNilNil
Losses to be carried forwardNil(10,000)NilNilNilNil
Year 4
Income to be considered for deduction of tax under Section 192NilNilNilNil40,00040,000
Income taxable under the head Capital GainsNilNilNilNil50,000Nil
Losses to be carried forwardNilNilNilNilNil(10,000)
Year 5
Income to be considered for deduction of tax under Section 192NilNil40,00040,000NilNil
Income taxable under the head Capital GainsNilNilNilNilNilNil
Losses to be carried forwardNilNilNilNilNilNil
Year 6
Income to be considered for deduction of tax under Section 192NilNilNilNilNilNil
Income taxable under the head Capital GainsNilNil50,000NilNilNil
Losses to be carried forwardNilNilNil(10,000)NilNil

Consequential amendments have also been proposed in Section 140A (self-assessment tax), Section 191 (direct payment of tax by the employee) and Section 156 (notice of demand). Thus, the employers are not required to deduct tax from the income in the nature of perquisites arising from ESOPs and the employees are not required to pay tax during the previous year or at the time of filing of return. When the liability arises to pay the tax it shall be payable within 14 days from the happening of any the following period (whichever is earlier):

  1. On the expiry of 48 months from the end of Assessment year in which ESOPs are exercise &
  2. At the date the assessee ceases to be the employee of the organization; or
  3. At the date of sale of shares allotted under ESOP.

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