Union Budget 2020-21 – Impact on Startups

Union Budget 2020-21 - Impact on Startups

Union Budget 2020 aims to boost the regressing Indian economy. Its thrust is on protecting domestic industries and accelerating economic development and growth. The small business could cheer as the new budget aims to encourage domestic production/consumption of goods across various sectors with Custom duty rationalization. The budget will also promote manufacturing facilities in the countries which in turn will create jobs across sectors, lead to investments and encourage capital consumption.

Entrepreneurs are the strength of India and to boost the startups, the finance minister has mentioned a host of much-awaited incentives for them. The key highlights include:


The new budget proposes that the startups with turnover up to 100 crores and in 10 years will not be taxed for 3 consecutive years. Earlier the limits were Rs 25 crore turnover and 7 years. As the Finance Minister mentioned during the budget session- “Moreover, considering that during the initial years a startup may not have adequate profits to avail this deduction, I propose to the extent the period of the claim of deduction from the existing 7 years to 10 years,”. However, the taxation changes in its current form apply to only to startups recognized by the Inter-Ministerial Board (DPIIT), therefore, restricting its scope.



Startups will be provided seed/early-stage fund to support development in the initial stages. Employees of startups who make use of employee stock ownership plans -ESOP will be able to avail tax benefits regarding the same. ESOPs serve as an important compensation tool for employees and startups as they help reduce attrition rates and retain top talent. They are frequently used by startups to compensate their employees, offering them the option to purchase shares at a future period for a rate derived by a methodology.

Each ESOP has a Vesting period, when the employee earns the right to purchase shares and the exercise period or when employees can exercise the right to purchase them. Until now the employees had to pay tax from the year they exercised their option to purchase the shares, even if the startup is not incurring cash gain. The tax was as per the difference between the market value and exercise price of shares. Budget 2020 resolves this issue of cash flow for the employees who do not sell the shares immediately and continue to hold the same for the long-term. The employees can defer the tax payment by 5 years or till they leave the company or when they sell their shares, whichever is earliest.

The proposed five-year deferment of tax payments on ESOPs by startup employees is a great move to attract talent to the start-up sector in the country.



Government is incorporating concepts like machine learning and artificial intelligence in the PMJAY scheme, startups can eye the health care center for growth.

Finance Minister had also announced the creation of data center parks for private and public sectors, which will provide a major lift to startups that bank heavily on consumer data for their businesses. The policy for building of data banks in the country is welcome since customers concerns about where their data is stored and who controls it is on the rise. A developed and competitive data bank ecosystem will be welcomed by start ups.

Faceless appeals and the newly announced ‘Vivaad se Vishwas’ scheme signal the Government of India’s commitment for a clean tax culture.

The government will soon set up a digital platform to ease the registration of IPRs developed by entrepreneurs and startups. Numerous other digital initiatives like an app-based invoice financing platform for MSMEs shall be launched.

Read more about Intellectual Property here: How to Register and Protect your Intellectual Property

The government aims to create Government e-Marketplace (GeM) thus creating a Unified Procurement System. The system shall serve as a single platform for the procurement of goods, services, and works across the nation. The platform shall benefit Medium, Small and Micro Enterprises (MSMEs) immensely.

The budget clears speaks of how the government appreciates (and intends to boost) small businesses and startups. All in all, this is a business friendly budget for industry in general and startups in particular if implementation of the budget measures is done correctly.


At The Filings.in, we specialize in all types of Financial and Legal compliance relating to startups. To take advantage of the provisions stated in the Union Budget 2020-21, drop us a note : [email protected] or call us on 044-46315959.


Leave a Reply

Your email address will not be published. Required fields are marked *