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VC Investments And ESOPs In Startups Could Soon Be Exempted From Taxes

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Continuing with its aggressive push to promote startup culture within the country and make it easier for young companies to do business, the Ministry of communication and information technology has proposed, what could possibly be the biggest reform till date — tax exception to startups in certain ways.

As per these new suggestions that have been sent to the finance ministry for next year’s budget, there will be 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.

According to the current laws related to tax, angel investors in Indian startups have to pay 33% short term capital gains tax on all investments while the long-term capital gains tax which involves a holding period of three years, is 20%.

On the other hand, in stock market investments, on which there is no long-term capital gains tax. However, short-term gains are taxed at 15% within a holding period of one year.

Along with the tax exception, the ministry has also suggested that individuals and corporate should not be taxed on capital gains if the money is invested in startup’s security.

Commenting about this, a government official told Economic Times,

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.

Once these suggestions are accepted by the government, early-stage investing activity in India will get a big boost and would also be an incentive for top talent to join startups.

This news comes just days after the Government cleared funds under its ‘Start up India, Stand up India’ initiative. Yesterday, SIDBI has cleared Rs. 930 fund from its fund-of-funds of around Rs. 2,000 crore in order to support early-stage startup VC funds.

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

Recently, government of India allowed relaxation in FDI rules for manufacturing, along with 15 other sectors and allowed all the manufacturers in the country – with or without foreign investment, to sell their goods online via e-commerce platforms without any restrictions or getting government approval.

As per a report from World Bank Group, on a scale of ease of doing business, India ranked 130 out of 189 countries. The countries where it is easiest to start a business remain Singapore, followed by New Zealand, Denmark, etc. The report notes that it takes around 27 days to start a business in India, and there are 14 procedures that need to be completed before one can start a business in India.

Earlier this year, the government decided to make some internal changes to the rules and policies, that would eventually promote flexibility in hiring norms and faster winding up of failed startups.


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