Nasscom Pushes for Startup-Friendly Tax Reforms in Budget 2026
As the Union Budget 2026 approaches, the Information Technology industry association Nasscom has submitted a comprehensive pre-Budget memorandum urging the government to address critical tax concerns affecting startups and technology companies across India. The recommendations aim to create a more favorable regulatory environment that supports innovation and growth in the digital economy.
Expanding ESOP Tax Benefits for Startups
One of the central proposals from Nasscom involves significant expansion of the Employee Stock Option Plan (ESOP) tax deferment framework. Currently, this benefit is available only to startups certified by the Inter-Ministerial Board, which represents fewer than 4,000 entities out of the 1.59 lakh startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).
Nasscom has specifically requested that ESOP tax deferment be extended to all DPIIT-recognized startups, arguing that this broader eligibility would make the regime more meaningful and help emerging companies compete with established businesses for top talent. The association emphasized that ESOPs serve as crucial tools for startups to attract high-quality professionals who might otherwise join larger corporations with more substantial compensation packages.
Additionally, Nasscom has proposed that ESOP costs should be made deductible under Section 37 of the Income Tax Act, which would further enhance the viability of equity-based compensation models for young companies operating with limited financial resources.
Clarifying Tax Treatment for Cloud Services
The association has also highlighted the need for explicit clarification regarding the tax treatment of foreign cloud providers utilizing Indian data centers. Specifically, Nasscom wants the government to confirm that hosting or co-location services provided by Indian data center operators do not create a permanent establishment for foreign cloud providers under Indian tax laws.
This clarification is considered essential to prevent unintended tax liabilities that could discourage global cloud providers from expanding their operations in India. Nasscom argues that arm's-length payments to Indian operators adequately cover all India-based functions, and foreign providers neither control the premises nor conduct business locally in a manner that would typically establish permanent establishment status.
Additional Recommendations for Tax Reform
Beyond ESOP and cloud taxation issues, Nasscom's Budget wishlist includes several other important proposals:
- Carry-forward of losses and depreciation: Extend benefits during mergers and acquisitions to all companies, including services firms that are currently excluded from certain provisions.
- SEZ Reinvestment Reserve: Allow Special Economic Zone units to utilize their reinvestment reserves for leased technology assets, cloud infrastructure, software subscriptions, interior work, facility improvements, and training expenses.
- Pre-deposit for tax appeals: Reduce the requirement from 20% to 10% of disputed tax demand, aligning with Goods and Services Tax (GST) rules to ease working capital pressure on businesses.
- Refund adjustments: Implement measures to prevent tax refunds from being offset against demands that have already been stayed by appellate authorities.
These recommendations come at a crucial time as India seeks to strengthen its position as a global technology hub while supporting domestic innovation through startup-friendly policies. The technology sector's contributions to economic growth, employment generation, and digital transformation make these tax considerations particularly significant for India's future development trajectory.
