Union Budget 2020-21 has undoubtedly paved the way for start ups to retain and recruit the human talent by issuing ESOP in the initial years when most of them face liquidity crunch.
The Union budget 2020-21 speech states in the words of honourable finance minister Nirmala Sitharaman, “I propose to ease the burden of taxation on the employees by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is earliest”.
Below is the analysis of ESOP grant from the perspective of Employee and Employer in an organization:
The proposal of deferment of the tax payment by five years or till one leaves the company or when one sell their shares, whichever is earliest has definitely provided a relief to employees in young start ups who were paying the tax at the time of allotment pre-budget 2020-21 which was unrealised adding up to their burden.
In this way the proposal laid down in union budget 2020-21 leads to one point taxation on the realised gain only.
B. Employer (Organizations)
By issuing ESOP, an organization is able to accomplish the threefold targets such as-
1. Expense Recognition:
On recognition of ESOP provision in accordance with the applicable accounting standards, an organization plan its expenses for each of the year considering the desired profitability, desired/ expected level of human resources, etc.
2. Tax Planning:
Next comes tax planning which is achieved after appropriate expense recognition. An organization is able to plan the tax liability after considering the deduction of employee benefit expenses in the statement of profit or loss.
3. Liquidity Crunch:
Being in the initial years of operation, an organization may face the crisis of liquidity crunch which is taken care of by ESOP issue in a way that expenses are recognized along with corresponding liability in the financial statements, for which the time of payment is delayed on account of imposition of vesting condition.
In a nutshell, an organization is able to take hold of expense recognition and tax planning accordingly without affecting the cash outflows in its cash flow statement thereby combating the crisis of liquidity crunch.
To conclude this, the proposal will surely help the start ups to better recruit, retain and attract the employees in a cost-effective way.
COON 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 a: 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 darify 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 perquiste 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 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 & 731)