Deferring TDS or tax payment in respect of income pertaining to Employee Stock Option Plan (ESOP) of start- ups.
ESOPs have been a significant component of the compensation for the employees of start-ups, as it allows the founders and start-ups to employ highly talented employees at a relatively low salary amount with balance being made up via ESOPs.
Currently ESOPs are taxed as perquisites under section 17(2) of the Act read with Rule 3(8)(iii) of the Rules. The taxation of ESOPs is split into two components:
i. Tax on perquisite as income from salary at the time of exercise.
ii. Tax on income from capital gain at the time of sale.
The tax on perquisite is required to be paid at the time of exercising of option which may lead to cash flow problem as this benefit of ESOP is in kind.
In order to ease the burden of payment of taxes by the employees of the eligible start-ups or TDS by the start-up employer, it is proposed to amend section 192 of the Act, and insert sub-section (1C) therein to clarify that for the purpose of deducting or paying tax under sub-sections (1) or (1A) thereof, as the case may be, a person, being an eligible start-up referred to in section 80-IAC, responsible for paying any income to the assessee being perquisite of the nature specified in clause (vi) of sub-section (2) of section 17 of the Act, in any previous year relevant to the assessment year 2021-22 or subsequent assessment year, deduct or pay, as the case may be, tax on such income within fourteen days —
(i) after the expiry of forty eight months from the end of the relevant assessment year; or
(ii) from the date of the sale of such specified security or sweat equity share by the assessee; or
(iii) from the date of which the assessee ceases to be the employee of the person;
whichever is the earliest on the basis of rates in force of the financial year in which the said specified security or sweat equity share is allotted or transferred .
Similar amendments have been carried out in section 191 (for assessee to pay the tax direct in case of no TDS) and in section 156 (for notice of demand) and in section 140A (for calculating self-assessment).
These amendments will take effect from 1st April, 2020.
[Clauses 68, 71, 72 & 73]
Extract of Relevant Clauses of Finance Bill, 2020
Clauses 68
“Clause 68 of the Bill seeks to amend section 140A of the Income-tax Act relating to self-assessment.
Sub-section (1) of the said section provides that where any tax is payable on the basis of any return required to be furnished under section 115WD or section 115WH or section 139 or section 142 or section 148 or section 153A or, as the case may be, section 158BC, after taking into account the amount of tax, if any, already paid under any provision of this Act, any tax deducted or collected at source, or any relief of tax claimed under section 89, any relief of tax or deduction of
tax claimed under section 90 or section 91 on account of tax paid in a country outside India, any relief of tax claimed under section 90A on account of tax paid in any specified territory outside India referred to in that section, and any tax credit claimed to be set off in accordance with the provisions of section 115JAA or section 115JD, the assessee shall be liable to pay such tax together with interest and fee payable under any provision of this Act for any delay in furnishing the return or any default or delay in payment of advance tax, before furnishing the return and the return shall be accompanied by proof of payment of such tax, interest and fee.
It is proposed to insert a new clause (vi) in the said subsection so as to provide that where any tax is payable on the basis of any return required to be furnished under section 115WD or section 115WH or section 139 or section 142 or section 148 or section 153A or, as the case may be, section 158BC, an assessee shall also take into account any tax or interest payable under the provisions of sub-section (2) of section 191.
This amendment will take effect from 1st April, 2020.”
Clause 71
“Clause 71 of the Bill seeks to amend section 156 of the Income-tax Act, relating to notice of demand.
The said section, inter alia, provides that when any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act, the Assessing Officer shall serve upon the assessee a notice of demand in such form, as may be provided by rules, specifying the sum so payable.
The proviso to the said section provides that where any sum is determined to be payable by the assessee or the deductor or the collector under sub-section (1) of section 143 or sub-section (1) of section 200A or sub-section (1) of section 206CB, the intimation under those sub-sections shall be deemed to be a notice of demand for the purposes of this section.
It is proposed to insert a sub-section (2) in the said section so as to provide that where income of the assessee of any assessment year, beginning on or after the 1st day of April, 2021, includes an income of the nature specified in clause (vi) of sub-section (2) of section 17 and such specified security or sweat equity shares as referred to the said clause are allotted or transferred directly or indirectly by the current employer, being an eligible start-up referred to in section 80-IAC, then tax or interest on such income included in the notice of demand shall be payable by the assessee within fourteen days after the expiry of forty-eight months from the end of the relevant assessment year; or from the date of the sale of such specified security or sweat equity share by the assessee; or from the date of the assessee ceasing to be employee of the employer who allotted or transferred him such specified security or sweat equity share, whichever is earlier.
This amendment will take effect from 1st April, 2020.”
Clause 72
Clause 72 of the Bill seeks to amend section 191 of the Income-tax Act relating to direct payment.
The said section provides that in the case of income in respect of which provision is not made for deducting income-tax at the time of payment, and in any case where income-tax has not been deducted in accordance with the provisions of Chapter XVII, income-tax shall be payable by the assessee directly. Explanation to the said section provides that in case the assessee fails to directly pay the tax on such income or part of it under the said section, then the person who is required to deduct any sum in accordance with the provisions of this Act shall be deemed to be considered as an assessee in default.
It is proposed to insert sub-section (2) in the said section so as to provide that the income of the assessee in any assessment year, beginning on or after the 1st day of April, 2021, include an income of the nature specified in clause (vi) of sub-section (2) of section 17 and such specified security or sweat equity shares as specified in the said clause, are allotted or transferred directly or indirectly by the current employer, being an eligible start-up referred to in section 80-IAC, the income-tax on such income shall be payable by the assessee within fourteen days after the expiry of forty- eight months from the end of the relevant assessment year; or from the date of the sale of such specified security or sweat equity share by the assessee; or from the date of the assessee ceasing to be the employee of the employer who allotted or transferred him such specified security or sweat equity share, whichever is earlier.
This amendment will take effect from 1st April, 2020.
Clause 73
“Clause 73 of the Bill seeks to amend section 192 of the Income-tax Act, relating to salary.
Sub-section (1) of the said section provides that any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.
Sub-section (1A) of the said section provides that without prejudice to the provisions contained in sub-section (1), the person responsible for paying any income in the nature of a perquisite which is not provided for by way of monetary payment, referred to in clause (vi) of sub-section (2) of section 17, may pay, at his option, tax on the whole or part of such income without making any deduction therefrom at the time when such tax was otherwise deductible under the provisions of sub-section (1).
It is proposed to insert new sub-section (1C) so as to provide that for the purpose of deducting or paying tax under sub-section (1) or sub-section (1A), as the case may be, a person, being an eligible start-up referred to in section 80-IAC, responsible for paying any income to the assessee being perquisite of the nature specified in clause (vi) of subsection (2) of section 17 in any previous year relevant to the assessment year, beginning on or after the 1st day of April, 2021, shall deduct or pay, as the case may be, tax on such income within fourteen days after the expiry of forty-eight months from the end of the relevant assessment year; or from the date of the sale of such specified security or sweat equity share by the assessee; or from the date of the assessee ceasing to be the employee of the person, whichever is earlier, on the basis of rates in force of the financial year in which the said specified security or sweat equity share is allotted or transferred.
This amendment will take effect from 1st April, 2020.”
Extract of Relevant Amendment Proposed by Finance Bill, 2020
68. Amendment of section 140A.
In section 140A of the Income-tax Act, in sub-section (1),––
(a) in clause (iv), the word “and” occurring at the end shall be omitted;
(b) in clause (v), for the word, figures and letters “section 115JD,”, the words, figures and letters “section 115JD; and” shall be substituted;
(c) after clause (v), the following clause shall be inserted, namely:––
“(vi) any tax or interest payable according to the provisions of sub-section (2) of section 191,”.
71. Amendment of section 156.
Section 156 of the Income-tax Act shall be renumbered as sub-section (1) thereof and after sub-section (1) as so renumbered, the following sub-section shall be inserted, namely:––
“(2) Where the income of the assessee of any assessment year, beginning on or after the 1st day of April, 2021, includes income of the nature specified in clause (vi) of sub-section (2) of section 17 and such specified security or sweat equity shares referred to in the said clause are allotted or transferred directly or indirectly by the current employer, being an eligible start-up referred to in section 80-IAC, the tax or interest on such income included in the notice of demand referred to in sub-section (1) shall be payable by the assessee within fourteen days––
(i) after the expiry of forty-eight months from the end of the relevant assessment year; or
(ii) from the date of the sale of such specified security or sweat equity share by the assessee; or
(iii) from the date of the assessee ceasing to be the employee of the employer who allotted or transferred him such specified security or sweat equity share, whichever is the earliest.”.
72. Amendment of section 191.
Section 191 of the Income-tax Act shall be renumbered as sub-section (1) thereof and after sub-section (1) as so renumbered, the following sub-section shall be inserted, namely:––
“(2) For the purposes of paying income-tax directly by the assessee under sub-section (1), if the income of the assessee in any assessment year, beginning on or after the 1st day of April, 2021, includes income of the nature specified in clause (vi) of sub-section (2) of section 17 and such specified security or sweat equity shares referred to in the said clause are allotted or transferred directly or indirectly by the current employer, being an eligible start-up referred to in section 80-IAC, the income-tax on such income shall be payable by the assessee within fourteen days–
(i) after the expiry of forty-eight months from the end of the relevant assessment year; or
(ii) from the date of the sale of such specified security or sweat equity share by the assessee; or
(iii) from the date of the assessee ceasing to be the employee of the employer who allotted or transferred him such specified security or sweat equity share, whichever is the earliest.”.
73. Amendment of section 192.
In section 192 of the Income-tax Act, after sub-section (1B), the following sub-section shall be inserted, namely:––
“(1C) For the purposes of deducting or paying tax under sub-section (1) or sub-section (1A), as the case may be, a person, being an eligible start-up referred to in section 80-IAC, responsible for paying any income to the assessee being perquisite of the nature specified in clause (vi) of sub-section (2) of section 17 in any previous year relevant to the assessment year, beginning on or after the 1st day of April, 2021, shall deduct or pay, as the case may be, tax on such income within fourteen days––
(i) after the expiry of forty-eight months from the end of the relevant assessment year; or
(ii) from the date of the sale of such specified security or sweat equity share by the assessee; or
(iii) from the date of the assessee ceasing to be the employee of the person,
whichever is the earliest, on the basis of rates in force for the financial year in which the said specified security or sweat equity share is allotted or transferred.”.
