Fostering fintech growth in the decade ahead: expectations from Budget 2023

Over the past decade, the Indian government has taken proactive steps to support the growth of entrepreneurship and startups in the country. It is considered ahead of the curve compared to other global players.

In the fintech sector, the Indian government has been actively supporting the growth and development of fintech companies by providing a conducive regulatory environment, launching various schemes and initiatives, and promoting collaboration between the government, private sector, and academia. Additionally, the Reserve Bank of India (RBI) has issued various circulars and guidelines to support the growth of fintech companies and encourage digital payments.

The Union Budget 2022 introduced path breaking reforms to accelerate the growth of the fintech sector. 

Speaking of reforms that impacted the fintech sector in particular, Rs 1,500 crore was set aside in the 2021–22 budget for a proposed financial incentives scheme to promote digital modes of payment and boost the number of digital transactions. This financial support was continued for FY 2022–23 and allocated towards compensation for the revenue loss caused by the zero-merchant discount rate (MDR) on UPI, further developing the digital payment infrastructure and introducing innovative financial solutions in tier II and III cities and topping up the Rs 1,500-crore fund set aside for the 2021 operationalised Payments Infrastructure Development Fund (PIDF). Such measures and more have set up an immense backdrop for growth.

Currently, India's fintech market is growing at the fastest rate in the world. There are talks of UPI going global and a lot more. All this has become a reality because of current policies and measures that govern the current fintech market in the country, and these policies, with some amendments down the line, are strong enough to enable future growth in the sector.

Also, the fintech opportunity in India is immense, and despite the world-beating growth rates, fintech has still not even scratched the surface. The next billion population of India remains underserved, and the policies introduced in the Union Budget 2023 will decide the growth curve of the sector over the next decade and beyond.

The government is working in unison with the fintech industry in refining policies more favourably. The advent of UPI, real-time payments, digital wallets, and neo banks demands reinventing the regulatory framework, and the regulators have been abreast with it. Looking at the pace at which fintech is growing in India, and with innovations happening every day, it would be better if the industry and regulators work hand in hand towards policy compliance. 

Dual taxation of ESOPs

Another area of focus that affects not just fintech but the startup ecosystem as a whole is the dual taxation on Employee Stock Ownership Plans (ESOPs). ESOPs are taxable as income under the head of salaries. However, they get counted as capital gains when sold in the market, compelling employees to pay additional tax in line with their tax slab. Since dual tax is levied on the exercise of ESOPs and their sale in the market, it makes them less attractive to employees and creates a financial burden on startups. By exempting dual taxation on ESOPs, the Indian government can create a more favourable environment for startups and indirectly make it easier for them to attract and retain top talent, which is essential for any company to sustain growth and fuel innovation.

Promote savings and investment

While the upcoming budget may be geared towards augmenting the growth of the Indian economy, special attention should be given to ease the challenges faced by the common man and the salaried class. As we are still recovering from a global pandemic and tackling an ongoing global economic slowdown, people are looking to the government for answers to reduce unemployment, control inflation, and make essential goods and services more affordable. The salaried class is looking for some cheer on the personal tax front.

The policies introduced in the upcoming budget should create a savings and investment-oriented economy. Policies that encourage citizens to save and invest can help to create a more stable and diversified economy.

When citizens save money, it helps to create a pool of capital that can be used to fund investments in businesses, infrastructure, create jobs and promote economic growth. Investment opportunities can also help to create a more equitable economy by giving people access to the tools and resources they need to build wealth and achieve financial security. This can help to reduce income inequality and promote social mobility.

GST exemptions and greater incentives

Fintech startups in the country need more support from the government to ease their financial burden. GST exemptions for certain goods and services used by fintechs and other startups, such as software and IT services, aid in reducing costs and increasing profitability. There is a need to simplify the GST input credit framework in co-lending arrangements, as it is a common practice for fintech companies to collaborate with other financial services players. However, in the current GST framework, there is a potential loss of input credit in such arrangements. By ensuring that input credit is fully provided for, it will help prevent revenue leakage and ultimately result in benefits being passed on to the end consumer.

To support the growth of fintech startups in the country, the upcoming budget should help ease the financial burden on fintech startups, who often have a long-term horizon to profitability. Additionally, a reduction in GST rates on services provided by fintech startups would reduce the burden on customers and small merchants, and boost the growing digital payment space in India. A recent Tracxn report stated that fintech start-ups' fundraising has declined by 47% in 2022, highlighting the need for incentives schemes for domestic and foreign investments in the fintech space to boost the sector.

The Indian government should also consider reducing angel tax to encourage more angel investors to invest in Indian startups and increase the pool of capital available to them. Additionally, there is a need to increase the angel investor pool at the seed stage. 

Promote digital payments and domestic players

Given the increasing use of digital payments through feature phones and smartphones among the masses, the government can take additional measures to boost the use of digital payments among small businesses and consumers, offer subsidies to merchants who accept digital payments, and give incentives to consumers to increase the use of digital wallets.

Creating a first-generation technology platform worth billions is a difficult task, and any policy that provides a competitive advantage for Indian entrepreneurs over international companies will be a welcome step.

According to a finding by EY, India's fintech market is expected to grow to $200 billion in revenue by 2030 in comparison to $50 billion in 2021. Many optimistic projections confirm that the fintech sector will help propel India to a $5 trillion economy by FY25. However, to achieve this goal and reign as a leading global economy, we need to bridge the financial inclusion and infrastructural gaps at the grass-root level and build a more robust system from the very ground up, and the policies introduced in the upcoming budget will play a key role in achieving the same.

Upasana Rupkrishan Taku is the Chairperson of the MobiKwik Board and the Executive Director, Co-founder, and COO of the Mobikwik Group.