Budget 2020: Fintech startups call for tax relief, GST reduction, clarity on ‘zero MDR’

Experts say that fintech and financial services are the “backbone of the economy”. Hence, a slew of new reforms and policies are called for to boost consumer spending and revive a slowing economy.

29th Jan 2020
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The run-up to the Union Budget 2020 has been dominated by talk of India’s declining GDP growth, now touching a six-year low, and the government’s promises of a $5-trillion economy even as most industrial sectors show signs of a slowdown. 


Financial experts, fintech founders, and tax analysts YourStory spoke to collectively agree that reviving investments and consumption demand will provide a much-needed boost to the economy. 

“These would be key to restore the confidence of both the common man and the market entities,” the founder of a wealth management startup told us. 


Fintech_Budget Expectations

Image: YS Design

The industry expects the government to revise tax slabs to ease the financial pressure on middle-income groups, which, in turn, will lead to increased spending. Instant loan and credit providers stand to gain if that happens.


Some have even called for a reduction in GST, and other tax incentives to revive informal, cash-dependent businesses. 


Sunil Badala, Partner, Financial Services (Tax) KPMG India, told YourStory, “The financial services sector being the backbone of the economy should see some key changes... We are hopeful for some changes on the tax front."


From our conversations with multiple founders and experts, here are the top expectations of the fintech sector from Union Budget 2020.




Tax benefits for lending startups

One of the biggest demands of the industry is in the segment of lending. 


Founders believe that easing access to credit is imperative in reviving consumer demand. Lending startups can do that only when they are assured of higher tax incentives and a supportive regulatory environment. 


Manish Khera, Founder-CEO of HAPPY, an online loan services facilitator, said,


“Lending startups are largely the ones that cater to people who are not served by the formal financial institutions. The access to liquidity has to be eased for such fintechs."


He added, “Though there are many funds that are established for them, the flow of money has its own unique challenges. There has to be rationalisation of the tax rate along with the increase in the minimum threshold for tax exemption.”


LoanTap

Founders also believe that tax benefits to startups that lend to people with no credit history can go a long way in expediting financial exclusion


Aurko Bhattacharya, Co-Founder of ePayLater, said,


“The digital lending industry has played a very important role in accelerating financial inclusion, helping India transition from a cash economy to a digital economy. Tax benefits are needed for regulated entities involved in digital lending. We expect the government to usher in a new set of reforms in the upcoming Budget and hope for higher tax relief and further clarity on Aadhaar-based eKYC.”




Incentivising digital payments for merchants

While digital payments may have taken off on the consumer side by riding on the ease of transaction brought about by UPI and other apps, it remains a challenge on the small merchant side, especially in businesses that are largely dependent on cash.   


Hence, merchants ought to be incentivised on accepting non-cash payments.


Nalin Agarwal, Founder and CEO of Snapmint, which provides purchase financing to consumers without any credit history in Tier II-V cities, explained,


“A sizeable chunk of merchants in Tier II cities onwards can be seen going back to cash transactions. Efforts thus should be made to incentivise these merchants for accepting digital payments, even if it is for a small percentage of the entire payment.”


Digital Payments

This will, of course, help them with the complex GST-filing process too, where formal documents and transaction evidence need to be provided. 


ePayLater Co-founder Aurko believes that financial inclusion remains a critical concern still, and incentivisation of digital payments on the merchant-side can address that.


He said,


“It can be achieved by taking steps to promote digital payments and improve the supporting infrastructure for digital payments. The government should introduce budgetary concessions for digital transactions and, thereby, reduce dependency on cash."




Reduction in GST and personal tax

Reduction is tax is a persistent demand from every stakeholder in the economy. But, more so now given the slowdown in consumption and investments. 


A large part of the cash economy is now under the GST lens. This has rendered many businesses unviable due to shrinking incomes. “It impacts the income and consumption of associated households, which are primarily in Tier II-V towns. A reduction in GST can thus play a critical role,” Snapmint Founder Nalin explains. 


Interestingly, GST reduction in specific areas like insurance is also being called for.


Aditya Agarwal, Co-Founder and CEO, Wealthy, said,


“The under-penetration of the insurance industry is an opportunity that can be leveraged. To take insurance to the nooks and crannies of India, where it is required the most, a reduction of GST, especially on health insurance, would prove to be a positive enabler."


GST

Besides GST, a majority of fintech founders agree that a reduction in personal tax rates is the immediate way to boost spending and improve cash flow in the economy.


Akshay Mehrotra, Co-Founder and CEO of EarlySalary, said,


“I wish the government gives serious thought to proposals suggesting a change in the existing tax slabs, to reduce the tax burden on the middle-income group. It is likely to pump in a lot of cash that will, in turn, ripple through various sectors of the economy.”


Ramki Gaddipati, Co-Founder and CEO, Zeta, concurs. 


“To increase consumer spending, I think the government could also reduce the personal income tax slabs so that people have more cash in hand,” he said. 




Clarity on zero-MDR regime

A ‘zero-MDR’ regime was one of the top promises made by FM Nirmala Sitharaman in Union Budget 2019. However, its implementation began only recently, with even UPI and RuPay transactions being brought in its ambit - a move that has divided the fintech sector.


MDR or Merchant Discount Rate is the fee merchants pay to banks for providing them with the point-of-sale infrastructure to accept digital payments. It is one of the reasons why most small merchants are reluctant to go digital. 


The bank splits the amount with the POS device enabler and card networks that facilitate the transaction. It is a source of revenue for them.


UPI

While zero MDR is a huge incentive for small merchants to accept digital payments, it stands to affect UPI-led payment apps and payment banks. Hence, the jury is out on the issue, and the industry seeks more clarity from the Budget.


EarlySalary CEO Akshay said,


The existing zero merchant discount rate policy is impacting many companies. We expect the government to provide more clarification on the zero-MDR regime.”


Alok Mittal, Co-founder and CEO, Indifi Technologies agreed.


He said, “We expect the government authorities to make public sector banks more inclusive and ease the rating mechanism to drive greater influx of capital in the market to further meet the demand of SMEs." 




Other expectations

A few fintech startups have also requested incentives on setting up data centres in India to scale up and expand into Tier II towns and beyond. 


Zeta CTO Ramki said, “Digital infrastructure needs another push, especially in the areas of banking and payments so that it can be made more inclusive for Tier II and III cities.”


Companies are also calling for a push on security standards for platforms offering financial services. It would be essential for people to gain confidence in dealing with digital currencies. 


ePayLater CEO Aurko said, “The introduction of the RBI sandbox comes across as a positive development made in this sphere, and the fintech industry expects more such policies and reforms this year.” 



(Edited by Evelyn Ratnakumar)


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