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Is the Indian Government Stifling Entrepreneurship?

Posted by tggokul on March 1, 2007

To be very honest, I am not exactly the smartest guy to be commenting on Government policies ( financial or otherwise), yet I feel compelled to blog about the latest taxation policy by the Government of India.

As many would know, the Finance Minister of India presented the budget yesterday for the year 2007-2008. There are a lot of policies that were brought into effect ( which I shall not delve into;partly because I am not interested and mostly because I have no frigging clue as to what he was talking about). One thing that caught my attention was the new rule under which ESOPs (Employee Stock options) would come under Fringe Benefit Taxation.  I will let the experts tell you what FBT means. But to put it in very lay man terms, it is a Tax the government imposes on an employer everytime the employer gives fringe benefits to its employees (eg. Transportation/accomodation). This tax was first brought into effect in 2005, and the fallout of that was all employee benefits were slowly phased out by the corporations ( Though, the employees were compensated through increase in their pay package)

ESOPs are arguably the most potent carrot sticks that are dangled by startups (or pre IPO companies. Public traded companies give out ESOPs as well, but they don’t give the same amount of returns as the former) in front of prospective employees. Imposing a tax on that would mean every time the employer gives out ESOPs to its employees, it needs to pay tax on that, which in turn would dissuade the company to give out ESOPs which would lead to fewer people joining these startups. Where is the incentive for an employee to join/stick around in a startup?

This is definitely a huge burden on startups that slog to make ends meet. It would have made more sense if this Tax was only for companies having a total revenue in excess of a certain value. That way only the Googles, Infosys’s and Wipros of the world come under this taxation bracket and the startups are left alone. To be honest, there probably is a lower limit that I am not aware of. Correct me if I am wrong on this one!

The finance minister has surely put entrepreneurship on the back-foot and it sure is not helping this already stuttering community.

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One Response to “Is the Indian Government Stifling Entrepreneurship?”

  1. […] Posted by tggokul on March 2nd, 2007 I happened to catch the Finance minister’s interview on TV yesterday where he was talking about the Fringe Benefit tax for ESOPs. […]

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