Ahead of the Union Budget 2018, the Internet and Mobile Association of India (IAMAI) has highlighted some of the key tax-related challenges that the country’s digital sector expects to be addressed in this year’s budget.
As per the IAMAI’s official statement, these issues are currently the biggest impediments to the growth of the Indian startup ecosystem and by extension, the digital sector.
Founded in 2004, the IAMAI is a not-for-profit industry body registered under the Societies Act, 1986. The organisation’s primary aim is to address the challenges facing the digital and online industries, including online publishing, mobile advertising, online advertising, ecommerce, mobile content and services, mobile and digital payments as well as emerging sectors such as fintech, edutech and healthtech, among others.
Headquartered in Mumbai, with additional offices in Delhi, Bengaluru and Kolkata, the association boasts a member base of over 300 Indian and MNC companies.
Following are some of the key expectations for the upcoming Union Budget as put forward by the IAMAI:
Resolution Of Angel Tax Fiasco
For the Budget 2018, IAMAI expects a resolution of the ongoing debate about angel tax. Currently, under Section 56 (II) of the Income Tax Act, share premium paid by investors for subscribing to shares in a private company is taxable in the hands of the company at 30% (exclusive of surcharge and cess) if and to the extent it is more than the FMV.
The industry body stated, “Angel tax has resulted in numerous startups facing Income Notice claiming a lion’s share of the investments they raise as tax liabilities.”
This has, in turn, brought about a staggering 53% drop in angel funding during the first half of 2017, as per a report by NASSCOM. Furthermore, the number of new startup incorporations last year slumped by almost 80% as compared to 2016.
One of the main concerns raised by the IAMAI pertains to the method of Fair Market Valuation (FMV) according to the Income Tax Act. A company’s valuation is based on a valuation certificate issued by a valued recognised by the Government of India.
At present, most valuers in the country rely on conventional methods of valuation that apply to mature enterprises with regular cash flows.
A spokesperson for the IAMAI explained, “Valuation of start-ups is a critical factor given that intellectual property and other intangibles involved at the start-up stage. Most technology startups raise money before monetisation and there is no underlying actual cash flow analysis available for traditional valuation methods. Most startups are almost always asset light and do not have assets in their books to justify their intrinsic value.”
In some cases, the Income Tax Department has also questioned discounted cash flow (DCF) valuation certificates and projections, which basically estimate the attractiveness of an investment opportunity. As a result, the IAMAI claimed that, for many startups, the authorities have calculated fair market value to be as low as INR 1 or even INR 0.
To qualify as startups, these companies need to be recognised by the government as startups, which essentially means that they must not be more than seven years old (previously five years) and must have an annual turnover that does not exceed $3.9 Mn (INR 25 Cr).
The association further stated that, while the digital sector is not averse to paying taxes, taxation should be on actualised gains and not notional gains. Similar demands were put forward recently by several Indian startups in an online petition addressed to PM Narendra Modi, Union Finance Minister Arun Jaitley, Union Minister of Commerce and Industry Suresh Prabhu, among others.
Tax On ESOPs To Be Levied Only On Realisation
Another issue that has been brought to light by the IAMAI is taxation on ESOPs. It said, “Typically, most ESOPs have a vesting period (during which the employee should continue to be in the employment of the company) and after completion of the vesting period, the employee may exercise his option to acquire shares by paying an exercise price.”
Under present provisions, at the time of such exercise of options and grant of shares, the difference between the ‘FMV’ of the shares and the exercise price paid is taxed in the hands of the employee and the employer is subject to withholding tax obligations on the same.
Elaborating on the problem, the industry body stated, “Currently, employers either (a) withhold from the monetary payments made to the employees (b) ask the employees to furnish a cheque for the required amount or in worst case scenario (c) bear the tax cost themselves.”
To counter this issue, the IAMAI has suggested taxation of stock issued under an ESOP scheme to be purely on a notional basis. According to the association, ESOPs are an efficient way to remunerate and incentivise employees to join startups and share the risk with the founders. To that end, it has urged the government to levy tax on shares only upon realisation.
Multiple Registration and Filing Under GST
Like all service sectors, the digital sector is also plagued by the challenge of state-wise multiple registrations and filing burdens. Shedding light on this problem, the IAMAI said, “What makes matters worse for the digital sector is the fact that most Indian companies are startups, who simply do not have the bandwidth to undertake such exercises.”
Consequently, the association urged the authorities to take note of this factor and allow single registration for all digital services, similar to what has been proposed for banking and financial services.
Anomaly In GST Rates
Under the Goods and Services Tax (GST), while education and health are tax-free, all digital services are taxed at 18%. Even telecom services like Internet access are taxed at 18%. In the Union Budget 2018, the IAMAI hopes to see GST rates for digital services lowered, so that it be at par with offline counterparts of such services.
Doing so, according to the industry body, will help facilitate digital inclusion by making such services available in semi-urban as well as rural areas.
TCS and Uneven Playing Field For Ecommerce
The final issue touched upon by the IAMAI in its budget expectations is the tax collected at source (TCS) that is currently imposed on ecommerce platforms operating in the country. Under the rules of GST, online marketplaces are made to pay taxes on behalf of sellers.
Speaking on the matter, the association’s spokesperson stated, “The fact that ecommerce facilitates inter-state transaction means that these platforms have to bear the additional burden of multiple registrations and filing on behalf of the sellers as well.”
The additional problem with TCS is that small-scale sellers, with annual revenues lower than the taxable threshold, are required to register under GSTN and will have 1% of their revenues deducted as tax for every transaction conducted online.
The industry body added, “This alone is a big disincentive for small-scale sellers to conduct businesses online. This runs contrary to the vision of $1 Tn digital economy that envisages ecommerce to reach a market size of $150 Bn by 2024.”
With that in mind, the IAMAI urged the Indian government to resolve this problem and take steps to create a level playing field for both offline and online players.
To be presented by Finance Minister Arun Jaitley on February 1, the Union Budget of India for the fiscal year 2018-19 is going to be the last full-fledged budget announced under the current term of the PM Modi-led government and the Finance Minister would be presenting only vote-on-account next year.