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India’s FY22 budget gives a leg-up to digital payments, brings tax relief for startups

Written by Moulishree Srivastava Published on     5 mins read

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India recently announced a seed fund with a corpus of USD 136 million.

India has rolled out a slew of measures to give a leg up to digital payments, fintech ecosystem, and home-grown startups in the Union Budget 2021-22 that was tabled on Monday by the country’s finance minister Nirmala Sitharaman.

The budget set aside a corpus of INR 1,500 crore (USD 205 million) to promote online payments that have soared in the country over the past nine months due to the pandemic restricting the physical movement.

Sitharaman said that the proposed scheme will provide financial incentives to promote digital modes of payment.

Moreover, she proposed to increase companies’ turnover limit for the tax audit. Currently, if a company’s turnover exceeds INR 10 million (USD 136,000), it needs to get its accounts audited. Last year’s budget had increased the limit for tax audit to INR 50 million for businesses which carry out 95% of their transactions digitally. Sitharaman proposed to increase this limit for tax audit for such persons from INR 50 million (USD 683,825) to INR 100 million (USD 1.3 million), “to further incentivize digital transactions and reduce the compliance burden.”

The budget also proposed to develop a world-class fintech hub at Gujarat International Finance Tec-City (GIFT), India’s first International Financial Services Centre (IFSC), that was set up as a multi-services Special Economic Zone (SEZ).

Startup

“The fintech hub will facilitate research, innovation, and development of new-age skills in fintech which will help in creating new job opportunities and attract quality talent to GIFT City,” said Tapan Ray, MD and group CEO, GIFT City.

For incentivizing the startups, Sitharaman extended the eligibility for claiming tax holiday for startups as well as exempted capital gains on investment in startups till 31st March 2022.

The budget also sought to make it easier for individuals to set up One Person Companies (OPCs). The proposed measures included letting OPCs grow without any restrictions on paid-up capital and turnover and allowing them to convert into any other type of company at any time. Furthermore, they reduced the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days and allowed Non-Resident Indians (NRIs) to incorporate OPCs in India.

According to Deepak Gupta, founding partner, WEH Ventures, an early-stage Indian VC, this is a positive decision for the startup ecosystem as NRIs will now have more leeway to incorporate in India and this should encourage some reversal of brain drain.

Anup Jain, managing partner, Orios Venture Partners said, “incorporation of one person company allowed without any restriction on paid-up limit is a welcome move for startups as two directors were necessary at a minimum and founders were forced to co-opt others under the companies act.”

This proposal follows the government’s announcement on setting up an INR 1,000 crore (USD 136 million) seed fund for backing early-stage startups last month.

“OPC incentivization will encourage individual innovators to come forward and pursue their passion without worrying much about the procedural hazards and compliance-related issues,” said Abhishek Joshhi, founder and practice head, Strengths Masters, a management consulting company.

Ankur Bansal, co-founder and director at venture debt firm BlackSoil said since the identity of a one-person company is distinct from that of its owner, the owner will not be sued in case of a legal issue, only the company will. “Also, an OPC will be eligible for government schemes such as those focused on MSME ones. Generally, there is lesser compliance to set up and run an OPC versus a normal company,” he said.

Another proposal that is likely to help the fast-growing insurance startups on the heels of the pandemic is the amendment of the Insurance Act, 1938 that increases the FDI limit from 49% to 74% in insurance companies.

“Hiking FDI to 74% is a revolutionary move that opens up the insurance sector for a big leap improving access to India’s underinsured citizens,”  Orios’ Jain said.

India’s finance minister proposed to extend social security benefits to gig employees and platform workers. Sitharaman said, “minimum wages will apply to all categories of workers, and they will all be covered by the Employees State Insurance Corporation.”

While direct measures like an extension of tax holiday and capital gains tax exemption for startups by one more year, OPC (one-person company) reforms, and setting up a fintech hub in GIFT city will have a positive impact on the startup ecosystem, “indirect measures like a massive increase in healthcare spending, higher capex, infrastructure building, and reducing some stress in the banking and financial system will also be a net positive for startups and VC ecosystem,” said Jatin Desai, managing partner, Inflexor Ventures.

However, some investors feel the budget did not focus enough on the startup ecosystem.

“The lack of focus towards the Indian startup ecosystem in the Budget 2021-22 is highly disappointing,” said Anirudh Damani, managing partner at Artha Venture Fund.

Although the budget announced a tax holiday for the startup community, he said that the fact remains that this will not benefit a majority of startups as most of them run in deficits in their initial years, and thus no tax benefits are useful for them.

“While the move to include NRIs in the OPC  (one person company) scheme is noteworthy, the government could have introduced tax incentives to encourage individuals and corporates to invest in startups or VC funds,” he said.

On the manufacturing front, Sitharaman said India will raise customs duty on some mobile phone parts including printed circuit boards (PCBs), camera modules, and connectors from nil to 2.5%.

“Domestic electronic manufacturing has grown rapidly. We are now exporting items like mobiles and chargers,” she said. “For greater domestic value addition, we are withdrawing a few exemptions on parts of chargers and sub-parts of mobiles.”

The move is like to force smartphone makers to move their component manufacturing operations into the country.

Overall, the budget proposal for 2021-22 was centered around six pillars–health and wellbeing; physical and financial capital, and infrastructure; inclusive development for aspirational India; reinvigorating human capital; innovation and research and development; and minimum government and maximum governance.

One of the major schemes under these themes included Aatmanirbhar Swasth Bharat Yojana—loosely translated as self-reliant healthy India scheme. It plans to spend INR 64,180 crore (USD 8.7 billion) over six years. It looks at developing capacities of primary, secondary, and tertiary care health systems, and strengthen existing national institutions while creating new ones to cater to the detection and cure of new and emerging diseases.

“The focus on the healthcare sector is likely to generate interest from the investor community, and we are confident that it will become a significant category in the startup ecosystem by 2023,” said Artha Venture’s Damani.

Meanwhile, the latest budget is geared toward bringing down the fiscal deficit, which is pegged at 6.8% of the GDP for FY22, to 4.5% by FY26.

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