The Budget is nothing short of an event in India, and everyone waits with bated breath to see what the finance minister will offer as sops and relief. As the Interim Budget 2019 nears, startups are wondering if the ease of doing business will be strengthened. Also, fintech startups are expecting to be a key focus area in the Budget.
Faced with inadequacies in GST, lack of tax incentives and the absence of sufficient impetus to women entrepreneurs in fintech and AI-driven enterprises, growth stage startups are hoping for some favourable amendments in existing policies or introduction of new sops.
The government needs to include provisions that incentivise digital payments for last mile customers. This could be in the form of instant cash-backs for customers, or tax rebates for merchants.
On the GST front, fintech companies working as financial intermediaries offering services through distributed agent network find the restriction under the reverse charge mechanism (RCM) cumbersome and costly. Under the current provision, a company cannot take services from unregistered agents from other states. The agent has to be registered under the GST Act in that state where they are present in order to claim input credit under RCM. Among fintech startups, most agents are unregistered since their income falls under the Rs 20 lakh bracket. If they have to claim RCM, they have to apply for registration in that state, which increases compliance costs significantly, not to mention the time and opportunity cost when doing so.
For the Business Correspondent industry working on the PMJDY (Pradhan Mantri Jan Dhan Yojana) programme, services are taxed at 18 percent GST. This is quite steep as the customer at the bottom of the pyramid has to bear this cost while availing financial services from the Bank Mitra. Though the recent circular has exempted rural PMJDY accounts under BSBD (Basic Savings Bank Deposit) from GST, it is difficult for banks to differentiate between rural BSBD accounts and rural PMJDY accounts under BSBD, and therefore the exemption is meaningless.
It would help if the GST rate is kept at nil for all transactions covered under financial inclusion services. A substantial number of people who are availing financial services from a Bank Mitra are from the low-income group, and a nil GST rate will be a significant benefit.
For growth-state startups, the government should consider tax incentives, especially for social impact-focused fintech companies. At present, there are tax sops for startups that have been incorporated between 2016 and 2021, with a tax exemption for three consecutive years out of seven years. Growth stage startups (those incorporated between 2010 and 2016), are deprived of these benefits. However, it is at this stage that growth stage start-ups start competing at a bigger scale nationally and internationally. In order to be competitive, benefits of tax sops for early-stage startups need to be extended to growth stage startups as well.
The government needs to provide support for R&D. Currently, only the Singapore government offers a 400 percent tax break for R&D startups. The Government of India could take a leaf from Singapore and encourage women entrepreneurs, especially those involving fundamental research in areas like AI in affordable healthcare, renewables and financial inclusion. Tax breaks and seed funding support will be some steps in the right direction to actively promote women entrepreneurs working with and in developmental sectors.
In the past few budgets, the government has given a huge impetus to startups through mentoring, favourable policies, and support in terms of recognition. With expectations that the government will take steps towards transforming India into an innovation-driven economy, the Indian startup sector is hoping to be a key focus this Budget.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)