NASSCOM says Budget 2021 should ensure ESOPs are taxed only when shares are sold

NASSCOM says Budget 2021 should ensure ESOPs are taxed only when shares are sold
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  • With Budget 2021 around the corner, India’s IT body NASSCOM has submitted its suggestions for startups which includes further tax relaxations for employee stock ownership plans.
  • NASSCOM’s public policy head said that ESOPs should be taxed only when an employee sells the shares.
  • During Budget 2020, Finance Minister Nirmala Sitharaman had said that ESOPs can be taxed within five years or when they leave the company or when they sell their shares, whichever is earliest.
When India’s Finance Minister Nirmala Sitharaman announced tax relaxations for Employee Stock Ownership Plans (ESOPs) during Budget 2020, India’s entrepreneurs welcomed the decision. But one year down the line, they are having second thoughts.

“The Finance Minister had relaxed the conditions with respect to the Employee Stock Ownership Plans but that’s not sufficient based on the industry feedback. What the industry really requires is that the liability of paying the tax should be deferred to the time when the shares are actually sold by the employees,” Ashish Aggarwal, Nasscom’s Public Policy head shared the suggestions the IT body has sent to the government.

What Budget 2020 saidBudget 2021 demand from NASSCOM
ESOPs can be taxed within five years or when they leave the company or when they sell their shares, whichever is earliest.ESOPs should be taxed only when an employee sells the shares, when they have the liquidity.

Entrepreneurs too agree.
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“Most startups, irrespective of the sector they operate in, typically take more than five years to list themselves in the stock exchange and become a listed company or carry out an exit or sell-out. Second, it does not apply to an employee who is exiting a company as an employee. So, a person who has already spent several years in a company and wishes to move on, his ESOPs earned during employment will not be eligible for deferment of taxes. In crux, I would urge the government to review these preconditions to support the startup industry at large,” said Ankit Prasad, Founder and CEO, Bobble AI.

In the past year, multiple startups have been buying back shares from their employees as a way of rewarding them.

Recent startups which rolled out ESOP buyback plans
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Swiggy$7-9 million (reported value)
Unacademy$4 million
Urban Company$5 million
Zerodha$8.7 million
CRED$1.2 million

However, Archit Gupta, founder and CEO of ClearTax believes that just deferment of tax isn’t enough, instead some exemption of tax on sale of ESOPs should be brought in. “It can become an effective means to attract and retain talent,” Gupta told Business Insider.

But a crucial question still remains – who can avail this benefit? Aggarwal said the benefit should be extended to all startups and not just eligible startups. “DPIIT on its platform has over 40,000 startups but out of that only 400 are eligible startups, who have got an approval of certification for tax benefits,” he said.

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