SUMMARY
ESOPs must not be understood as a source of income at the point of their exercise
Industry experts want uniformity in the way long-term capital gains are taxed for listed and unlisted shares
Industry leaders expect the finance minister to announce an EV umbrella fund to extend funding support to the industry
Union Finance Minister Nirmala Sitharaman is all set to present the Union Budget 2023 at 11am on February 1, a day after the release of the Economic Survey 2022-23.
While globally, more than 220 tech companies laid off around 70,000+ people in 2023 alone, according to Inc42’s layoff tracker, Indian startups have laid off more than 21,000 employees since 2022.
Barring 2021, Indian startups have been trying to survive a tough funding drought by downsizing their teams in multiple restructuring rounds.
Given the scenario, startup founders expect the Union Budget 2023 to offer them some relief, so that they can navigate their ships in the stagnant waters of a tough funding winter.
On January 16, on the occasion of National Startup Day, PM Modi called startups the backbone of new India, which is set to become the third-largest economy in the world by 2029.
Being home to 7400+ fintech startups at present, India is expected to have over 42K fintech startups by 2025, creating an estimated market opportunity of $1.3 Tn by then, according to an EY report.
Similarly, with a CAGR of 43.13%, India could become the largest market for electric vehicles by 2030. Commercial EVs are predicted to constitute 70% of the market share, according to a report by Inc42 Plus.
The Modi regime has set big targets for the Indian startup ecosystem. One of the strides worth considering is that India registered 782 Cr UPI transactions worth INR 12.8 Lakh Cr in December 2022, 10X more than card transactions.
Thanks to UPI and fintech startups, India, at 48 Bn, accounted for the largest number of worldwide real-time transactions in 2021, almost 3X more than China at $18 Bn, and 6.5X more than the US, Canada, the UK, France and Germany combined, according to a report by ACI Worldwide.
Now, as Indian startups are trying to learn the value of being profitable amid a harsh funding winter, industry stakeholders want the finance ministry to intervene and support startups in their quest with various incentives and welfare schemes.
Let’s Take A Look at Some Of The Key Industry Demands
Tax ESOP At The Time Of Sale
Of late, ESOPs have become a cost-effective way of retaining and attracting talent. ESOPs of a listed or an unlisted company are offered at a price lower than the company’s fair market value (FMV) to employees after a certain time.
In many countries, ESOPs are taxed only when employees choose to sell their equities. However, in India, ESOPs are taxed twice – at the time of exercise and at the time of sale.
The country’s income tax department considers the difference of FMV and the nominal value of ESOPs as an income and, therefore, levies taxes accordingly. Similarly, if employees choose to sell their stake after 12 months or later, they are taxed for capital gains arising from ESOPs.
Startups have a long pending demand that the concept of FMV is futuristic in nature and since there is no market for unlisted shares, ESOPs must not be understood as a source of income at the point of their exercise. “The taxes should be applicable only on sale,” said Mohandas Pai, partner, Aarin Capital.
Adding to this, Deena Jacob, CFO, OPEN said that from a broader startup perspective, while the matters like ESOP taxation and taxation pertaining to liquidity for investors still remain the matters to be solved for, ease of doing business, tax relaxations and foreign investment ease would be the key areas to boost the funding environment for startups.
Bring Parity On Long Term Capital Gains (LTCG)
While the Modi government has undertaken some big tax reforms for startups, such as abolishing angel tax, a lot is yet to be done. Industry experts want parity in the way long-term capital gains are taxed for listed and unlisted shares.
While LTCG arising from listed shares are taxed at a concessional rate of 11.96% if held for more than 12 months, long-term gains from unlisted shares are taxed at 23.92% if held for more than 24 months.
Interestingly, foreign investors currently pay 10% on LTCG on unlisted companies, while domestic players pay 20%. Almost all investors that Inc42 spoke with have raised similar concerns.
The founder of Unlistedkart, Krishna Raghavan, said, “The capital gains taxation law is very complicated in India with respect to various classes of assets, tax rates, period of holding, and indexation benefits. A restructure of the same would bridge the gap between listed and unlisted equities.”
This would not only help boost the growth of many startups but also provide some relief to angel investors and VCs, Raghavan added.
Extend Inception Date To Meet Section 80IAC Criteria
Numerous startup founders have asked for an extension of the required date of inception of startups to claim benefits under Section 80IAC from the existing period of April 1, 2016 to April 1, 2023. Further, startup founders have demanded that the existing INR 100 Cr turnover limit to be extended to INR 500 Cr.
Introduce A Carbon Credit Policy
The EV industry has been facing a lot of issues, which need to be addressed in the Budget. For instance, fixed batteries in EVs attract 5% GST, while swappable batteries are slapped with 18% GST. Similarly, there is a 28% GST on EV parts but only 5% on EVs. The EV industry wants certain uniformity in taxes.
Industry stakeholders believe that carbon credits could foster EV growth in the country. A carbon credit represents a reduction of one tonne of carbon dioxide (CO2) emissions and could be sold by EV charging service providers to firms or companies looking to go carbon neutral, enabling the former to generate higher returns on investment. The government needs to look into a nationwide carbon credit policy.
Among other demands, the CEO and cofounder of BluSmart, Anmol Singh Jaggi, said, “In the new budget, we wish the government to do away with toll tax on EVs. This move will accelerate the use of EVs across state borders, thereby promoting cleaner fuel use for intercity transportation.”
Meanwhile, industry leaders expect the finance minister to announce an EV umbrella fund to extend funding support to the industry stakeholders. More incentives under the PLI scheme are also expected.
More Credit For MSMEs
Industry experts want the Union Budget to focus on credit growth for Micro, Small and Medium Enterprises (MSMEs) through measures like the expansion of the Emergency Credit Line Guarantee Scheme (ECLGS).
Jaya Vaidhyanathan, CEO, BCT Digital said, “Formally streamlining the co-lending system will ensure that tech-savvy players and banks come together to fuel economic growth. It will also aid the formulation of a standardised architecture on borrower data which financial institutions can use conscientiously for mutual benefit. A time-bound action plan for debt resolution via NARCL will help banks manage their stressed assets well, facilitating better business and credit growth.”
The cofounder and CEO of KreditBee, Madhusudan Ekambaram, said that the Union Budget can provide crucial support in continuing this momentum with measures like reducing or eliminating the loss of input credit, providing liquidity support, access to cheaper credit and encouraging co-lending.
Reduce TDS On Crypto Transactions
Reduction in TDS on crypto transactions to 0.01%-0.1% from 1% and allowing offsetting losses in one cryptocurrency against profit are some of the other key demands of the industry.
Sumit Gupta, the founder and CEO of CoinDCX said, “Notably, through our representation for the upcoming Union Budget 2023–2024, we have suggested that the rate of TDS be brought down to 0.01%. This lower rate will help Indian VDA businesses offer competitive prices to Indian VDA users and protect them from exposure to unregulated foreign exchanges.”
Crypto investments should be treated like any other investment and there should be a tax structure similar to the one for stocks and mutual funds, according to crypto stakeholders.
Speaking to Inc42, Subhash Chandra Garg, a former finance secretary, said that the government chose the harshest capital gains taxation regime for VDAs and also made it procedurally taxing by subjecting virtually all such transactions to a tough TDS and reporting system. “The government and the Reserve Bank of India (RBI) have been quite uncomfortable with crypto assets, which was clearly reflected in the chosen taxation regime,” he added.
A Budget For The Middle Class?
Given that the Union Budget 2023 is going to be the last full-fledged Budget of the Modi government’s second term, experts believe that the focus of the budget will be on the key voter class. The Union Budget 2023 may have an increased focus on infrastructure projects, which are towards completion, including agricultural and social welfare projects and initiatives.
There could be some good news for the middle class such as tax relaxations in the form of Section 80C bracket. All of these would indirectly help improve the liquidity in the market, which will ultimately be a positive for startups.
Besides, in 2022, we saw the launch of CBDC pilot as well as 5G services. While the finance minister is expected to present CBDC pilot data of both retail and wholesale, it is also expected to present the timeline for the next phase of adoption.
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