Booster for startups: 15% surcharge cap on LTCG, extension on tax advantages

(Written by Soumyarendra Barik)
In a transfer prone to increase investments in startups and make worker inventory choices (ESOPs) a extra profitable proposition to draw and retain prime expertise, Finance Minister Nirmala Sitharaman on Tuesday proposed to cap the surcharge on long-term capital positive aspects (LTCG) from shares of unlisted firms at 15 % within the Union Budget 2022-23.
“The long-term capital gains on listed equity shares, units etc are liable to maximum surcharge of 15 per cent, while the other long-term capital gains are subjected to a graded surcharge which goes up to 37 per cent. I propose to cap the surcharge on long-term capital gains arising on transfer of any type of assets at 15 per cent,” she mentioned in her Budget speech.
The proposal is prone to deal with a long-pending demand of traders of the startup ecosystem, who’ve been urging the federal government to introduce parity in surcharge on the LTCG from listed and unlisted firms, trade executives mentioned. “The change announced today will help startup founders, employees and domestic VCs selling unlisted shares, which in turn will set off a virtuous cycle of more investments in the startup ecosystem,” mentioned Siddarth Pai, managing associate of enterprise capital agency 3one4 Capital.

Investors like Pai and others normally select to place cash in high-risk startups within the unlisted market. The LTCG surcharge on positive aspects constructed from their funding in such startups earlier used to go as excessive as 37 per cent. “For ESOP holders, this change is a step forward to the long-awaited ask of tax parity between listed and unlisted securities. This will boost ESOPs as a means of attracting and retaining talent and increase rupee capital participation in the Indian startup ecosystem,” Pai added.

The announcement comes after what was a file breaking 12 months for startup funding in India. The nation noticed a file 42 startups flip unicorn — valued at over a billion {dollars} — in 2021. Overall, the startup ecosystem raised greater than $40 billion, in line with a report by Orion Venture Partners, an investor in early stage of startups.

The Budget additionally had different incentives for home startups, together with an extension within the tax advantages obtainable to eligible startups within the nation, by one 12 months, till March 2023.
“Eligible startups established before 31.3.2022 had been provided a tax incentive for three consecutive years out of ten years from incorporation. In view of the Covid pandemic, I propose to extend the period of incorporation of the eligible startup by one more year, that is, up to 31.03.2023 for providing such tax incentive,” mentioned the Finance Minister in her Budget speech.

To additional increase enterprise capital and personal fairness funding in startups, FM Sitharaman mentioned an professional committee could be created to look at and recommend “appropriate measures” on scaling up such investments.
The National Bank for Agriculture and Rural Development (NABARD) can even facilitate a fund with blended capital, raised beneath a co-investment mannequin, to finance startups within the agriculture trade. The expectation is that these startups would help Farmer Producer Organisations (FPOs) with equipment for farmers on a rental foundation on the farm stage, and expertise together with IT-based help.