Govt Mulls Tax Sops on Esops & VC Investments

IT min seeks relief on cap gains invested in new ventures & those made on investments

The ministry of communications and information technology has proposed tax exemptions on stock options given to employees by startups, on capital gains that are invested in new ventures and those made from investing in new firms. The moves could have a catalytic effect on such companies in the event the measures are adopted. The proposals have been sent to the finance ministry as part of suggestions for next year's Budget and are aimed at promoting the startup ecosystem, in line with the initiative that Prime tive that Prime Minister Narendra Modi announced in his Independence Day speech.

Some “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“, said an official.

The department of IT, which is part of the ministry, has also proposed that such exemptions on employee stock options (Esops) be extended to directors as well. Startups are raising significant amounts of capital, especially at the early-stage level, but they continue to struggle with opaque regulatory demands.

According to the current tax laws, angel investors in Indian startups have to pay 33% shortterm capital gains tax on all investments. Long-term capital gains tax, involving a holding period of three years, is 20%.

This contrasts with stock market investments, on which there is no long-term capital gains tax. Shortterm gains are taxed at 15% within a holding period of one year.

India's rapidly growing angel investor community has been calling for parity for some time, asking authorities to align the startup Esop policy with that of the stock markets.

The ministry has also suggested that individuals and corporates should not be taxed on capital gains if the money is invested in securities of startups. Startups should also be free to wind up, the ministry has suggested. To this end, it has proposed “guidelines on valuation of startups and easy exits and no stigma for failure, like blacklisting, etc, for financial institutions“ unless it's for fraud, said the official cited above.

The prime minister has signalled through his `Start up India, Stand up India' programme that promotion of entrepreneurship and job creation will be a focus area for the government.

ET had reported earlier that the Prime Minister's Office has held meetings to discuss ideas to make the environment more conducive for startups.

NEED TO ENCOURAGE INVESTMENTS

“We completely understand that we need to encourage investments, and taxes need to go down if capital funding has to flow into the startup ecosystem so as to recreate a Silicon Valley here,“ said the official cited above, adding that the government will move forward aggressively to foster innovation in technology.

A report by National Association of Software & Services Companies (Nasscom) has ranked India among the top five largest startup communities in the world and said such companies have led to the creation of more than 80,000 jobs.

Both proposals are “fantastic“, said Saurabh Srivastava, cofounder of the Indian Angel Network and Nasscom.

“It is a very, very positive step, and which could turn out to be transformational for the country's startup ecosystem,“ said Srivastava, also a member of the NR Narayana Murthy-chaired committee for Alternative Investment Funds of the Securities & Exchange Board of India (Sebi).“We're not asking for extra benefits, all we want is to be aligned with the public markets.“

Early-stage investing activity in India will get a big boost if the proposals are accepted, experts said.Any changes to this effect would also act as an additional incentive for top talent to join startups.

“Any relaxation of constraints will definitely percolate handing out of Esops through the chain of the organisation, which currently isn't the case in India, as it is in...the US,“ said Srikanth Meenakshi, cofounder of FundsIndia com, an online mutual fund platform backed by Aditya Parekh's Faering Capital, among others.

The Economic Times, New Delhi, 24th Dec. 2015

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