This article is part of the special coverage of the upcoming Union Budget 2018 from the lens of Indian startup ecosystem. In this pre-budget series, we’ll shed light on major expectations of the startup industry from Budget 2018 for various industries across all the key areas including taxation. To read all the stories of this special coverage of Budget 2018, click here.
Taxation has remained one of the most important parts of any of the budget. It basically consists of revenue projections and provisions for the coming financial year to finance budgeted expenditure.
The implementation of GST in 2017, which unified and simplified the indirect tax structure in India, was a game changer. However, the GST council is still juggling through right slab rate for multiple items in order to balance the revenue neutrality need and a rational rate of tax.
While the entire startup ecosystem community welcomed and embraced GST, it has been fervently protesting against the tax terrorism caused by Income tax officials owing to the remains of angel tax terror.
Before we move ahead with what startup ecosystem is expecting from Budget 2018, let’s first have a quick look at the major tax announcements made in the union budget presented last year which had a direct impact on startups.
Tax Reforms For Startups: Recap 2017
- Union Finance Minister, Arun Jaitley, in his attempt to reduce the tax burden on the middle class, decreased the personal income tax rate from 10% to 5% for the INR 2.5 Lakh to INR 5 Lakh ($3925 to $4710) income slab. The move was expected to have a direct bearing on retail or ecommerce market in terms of demand boost.
- With regard to the corporate tax structure, for Micro, Small and Medium Enterprises (MSMEs) with annual turnover less than Rs 50 Crore ($.78 Mn), the tax rate was reduced to 25%.
- Though the Minimum Alternate Tax (MAT) was retained, the Finance Minister reiterated his promise to gradually reduce the overall incidence of the corporate tax rate to 25% while taking away various other tax concessions and benefits.
- A simple one-page form was introduced for filing tax returns for individuals having taxable income up to INR 5 Lakh ($7850). He also announced that taxpayers who do not file their returns on time will be obliged to pay a penalty of INR10,000 ($157) from the assessment year 2018-19. Also, the time period for revising tax returns was reduced from 24 months to 12 months.
- In order to avail tax benefits, the holding period for immovable property to be considered as “long-term” was reduced from three years to two years. This ensured that immovable property held beyond two years were to be taxed at a reduced rate of 20% under short-term capital gain tax. Further, the proceeds of the aforesaid sale were given several tax exemptions in case of reinvestments.
- While giving a tax relief to the National Pension System (NPS) subscribers, the budget exempted tax incidence on partial withdrawals made by NPS subscribers up to a limit of 25% of their contribution to the corpus before retirement in case of emergency.
- The budget provisioned to empower the Income Tax Officials to reopen tax cases for up to 10 years in case search operations revealed undisclosed income and assets worth over Rs.50 Lakh ($78,500). Earlier this limit was put upto six years.
Expectations From Union Budget 2018
In lieu of general election scheduled for 2019 and the last full-fledged budget of the Modi government, the startup ecosystem and the market, in general, is broadly expecting a people-friendly Budget 2018 in terms of taxation.
The finance minister must have been in an unenviable position of having to meet multiple expectations from diverse stakeholders while drafting provisions for the taxation, particularly the booming Indian startup segment.
For instance, Gaurav Hinduja, Cofounder of Capital Float hopes that in the Budget 2018-19, the government will continue to push digitisation of financial services and encourage consumers to use digital platforms for transactions.
According to him, initiatives such as Aadhaar and UPI provide a good opportunity for banks, insurers, and fintech players to expand India’s efforts towards financial inclusion.
“Another area of focus should be reducing the cost of capital for the MSMEs by improving lenders access to low-cost funding sources such as MUDRA & SIDBI and relaxing securitization norms” he added.
The overall expectation from Budget 2018 is also around lowering of income tax rates for businesses and professionals. “This will encourage them to wider taxation coverage similar to the drive for increasing coverage in indirect taxes,” added Manish Chaudhari, Co-Founder and CRO, CoinTribe.
Abhinav Midha, Co-founder, Shopholix shared the similar views. He believes that with demonetisation and GST already implemented and their affect monitored, expecting this one to be a budget which encourages big spending. Taxation is something which really needs to be revised. Direct taxes to go down, a Major reform on the ease of doing business is required & easy access should be given to credit capital.
“Also from a digital perspective expect more incentives on digital payments and won’t be surprised if we also see some direct tax benefits for Startups,” he added.
The GST Conundrum
According to Manish, with Demonetisation and GST, the government has given a great boost to digital transactions and availability of financial records for small business which is likely to provide a big boost in the coming years.
“This agenda can be enhanced by encouraging the small businesses with tax benefits for conducting digital transactions as this will build a strong foundation for sustainable Small Businesses,” he added.
Ranjit Punja, CEO and Co-Founder, Creditmantri.com views align with that of Manish. “As a fintech service which has data and technology in its core, the GST did not impact us directly; but this unified tax with and the recent systemic changes would bring about a much-needed digital push and increased accountability. We hope in the year ahead that the Digital India initiatives along with the GST which functions entirely online would bring about a shift in mindset and increased digital adoption.”
Further, Puneet Gupta, Co-Founder & COO, icanstay.com indicates that as per the Government new tax slabs now, Hotel rooms of INR 7500 & above will have to submit a luxury tax of 28%. It means that for 24-hour hotel stay, one will pay minimum INR. 2,100 as GST only. “We believe that 28% GST is high for a single night stay. It should be decreased to 12%,” he added.
Not only this, the socio-retail engagement platform Netree has demanded rationalisation of GST from the ensuing Union Budget 2018. Desi Valli, founder and CEO, Netree, said, “Rationalisation of GST should be done with just one to two plainer slabs along with simplification on account of filing of returns. Also, the audit cost for retailers with maximum ceiling and filing returns need to be further simplified. Too many slabs create compliance burden for small and medium retailers. As we need to deal with all the stakeholders in the retail value chain, simplification of the procedure will make the compliance easier and error-free.”
Robin Raina – Chairman, President and CEO at Ebix is positive on the growth aspects of GST. As he stated,
“Today, the basic electronic blocks for digital transactions to take off are in place – UPI, eKYC and Aadhaar – and they are all talking to each other. The introduction of the GST will go a long way in bringing the so-called `black economy’ into mainstream GDP. Citizens should now realize paying taxes has long-term advantages over unaccountable and untaxed wealth.”
He further believes that while the government has already taken right measures by not charging MDR for low sum card payments, additional incentives are required in form of tax benefits over large sum payments (over INR 50,000). “This will encourage people to embrace the digital medium more avidly. Payments in key sectors of education and travel and tourism should also be necessarily digitized. This will resolve a lot of problems associated with unaccounted dealings like donations which are quite rampant in the education sector,” he said.
With all pros and cons, GST in India is still in its early-growth stage and filling the three-stage form has remained a cumbersome task for SMEs including startups owing to their limited human resources. While reviewing the GST over 42 handicraft items, recently, Arun Jaitley has indicated that the three-stage might soon get replaced by the one-stage, a welcome move for startups if occur.
The Bitcoin Confusion
Even after likening Bitcoin with Ponzi schemes, the central government hasn’t officially announced Bitcoin trading as a crime. The fact of the matter is still over 2 Mn Indians are involved in Bitcoin trading. Since the central government has already refused to recognise Bitcoin or other cryptocurrencies either as an asset or currencies, there is still no clarity over the tax rate on Bitcoin trading.
Clueless about under which GST slab Bitcoin falls, cryptocurrency exchanges in India have reportedly approached the Advance Authority of Ruling seeking clarification over the applicability of tax rates. On the current scenario, Hesham Rehman, Founder and CEO of Bitxoxo had averred,
“For currencies operation, there is, in fact, no tax; for services industry, it is, however, 12%. We are currently charging 0.1% fee on the transaction for invoicing purposes.”
The question that remains whether the government addresses Bitcoin first and the tax over same, later or otherwise! Afterall how can the government collect legal tax from something, it proclaims, not legal?
Angel Tax: A Burning Issue For The Indian Startup Ecosystem
Though the provisions for ‘Angel Tax’ were enacted by the finance act 2012, the heat of it has been recently faced by the startups after the Income Tax Department in 2017 alone sent notices to around 200 entities for raising funds over and above of assessed fair market value. Blatant imposition of angel tax remains a bone of contention between the government and the startup ecosystem.
As Mayank Bhangadia, CEO and CoFounder, Roposo states,
“Taxing startups at early stages of investments has put a limitation to their performance and morale. Startups are a very risky proposition wherein only less than 1% actually manage to become successful.”
He believes that Angel funding is the very first resource, the very first encouragement for a startup, and the tax levied on the same acts like a major deterrent to the growth of many novel ideas. With the Budget 2018, early-stage investors should definitely be protected against archaic policy measures like the angel tax – which should be completely done away with.
“Also, the government should help startups in reducing their cost in the early years rather than offering tax holidays for the first three years because most startups don’t make profits in their early years. For example, lowering income tax slabs for startup employees should immensely help startups reduce their cost. This year, we look forward to some significant tax exemptions, that would give a great boost to all existing and upcoming Indian startups,” he added.
According to a survey by social media community platform LocalCirles around 39% of the startups admitted that they received one or more income tax notices in the year 2017.
The startup ecosystem under the leadership of former Infosys CFO and ace investor, Mohandas Pai, has already openly sought the intervention of Prime Minister Narendra Modi against the arbitrary assessment of the fair market value of startups by Income Tax Department.
Also, the startups have come together to launch an online petition against angel tax. According to POSist co-founder and CEO Ashish Tulsian, who has been a vocal critic of the angel tax for quite some time now, the newly-launched online petition is probably a desperate attempt by startups to get the attention of the government.
“There is no explanation behind this law. Every IT officer in every state is acting on his discretion and terming some part of the investment, or even in some cases, the entire investment as taxable without even looking at a valuation or checking if the money came from legit sources,” he shared his criticism in an earlier interaction with Inc42.
The angel tax issue has been hitting the credentials of the government as a promoter of free entrepreneurship spirit in India. It is expected that the FM would come clear on angel tax issue in the Budget 2018 and hunt down the tax terrorism launched by Income tax officials to ensure the full-fledged growth of Indian startup ecosystem.
While the centre has already given due concession to startups as far as Angel Tax is concerned, the fact of the matter is that out of 20K startups currently functional in the country, only some 6,600 startups have been recognised by the centre and rest of the startups will still be haunted by the IT department.
At the same time, the Angel Tax is not the dilemma of only startups but angel investors and other SMEs as well. Hence, merely extending some concession will not address the core issue.
An Equal Voice For Easy Exit Policy, Rationalised Tax Structure And More
The startup community has been demanding an ‘Easy Exit Policy” along with soft tax treatment for revenue strained startups. Though the government notified a few rules to ease out the startup exit procedure, the international comparison exemplifies the fact that much is still left to be done.
For example, Mauritius allows capital gain tax exemption to VC funds on exits, India does not. Further, unlike in India where a startup even with no revenue has to file audited accounts and submit returns every year which incurs significant costs, startups in Singapore are exempted from these cumbersome requirements under the “Exempt Pvt Ltd” category.
Also, Singapore offers zero capital gains tax upon exits and the corporate tax in the island nation has an upper ceiling of 17% whereas, in India, it is pegged at flat 33 %. The high taxation rate is also a major reason behind the fact that many Indian startups are shifting their bases to countries like Mauritius and Singapore.
The government is expected to formulate a startup-oriented easy exit policy, rationalise the tax structure, and provide competitive financial incentives in order to develop a healthy and globally competitive startup ecosystem in India.
Transaction Tax is another issue to look for. The market has divided options on the future of transaction tax. The Federation of Indian Chamber of Commerce and Industries (FICCI) in its pre-budget memorandum for 2017-18 stated that the industry body was principally against the imposition of any transaction tax.
Since Security Transaction Tax (STT) and Commodity Transaction Tax (CTT) both act as a deterrent to retail investment, FICCI demanded the abolition of both STT and CTT.
However, contrary to the FICCI expectations, a section of tax experts is not expecting any such abolition as too many changes in the tax structure may give way to extensive volatility in actual revenue realisations.
Aniketh Jain, CEO & Co-Founder of Solutions Infini Pvt. Ltd. summarises this well. As he states, “Budget 2018 is going to be significantly crucial as they happen to post the year of notable reforms like Demonetization, GST implementation and insolvency & bankruptcy policy. Budget 2018 also marks significant impact on the way our ecosystem functions. Bringing in policies that foster growth in employment, direct tax reforms, creating more clarity on the way bitcoin operates and its significance on Indian economy can be familiarized for smoother functions.”
Besides the exit policy, the government of the day also needs to address the concerns of serial entrepreneurs. As startups getting bankrupt is common phenomena today, sending tax notices for startups which have already gone bankrupt seems to be Oliver’s 1984 taxation policy, and the government must address this at the earliest.
Conclusively, it can be said that market is currently betting a pro-medium class budget in terms of taxation but overall, the Modi government should continue to glide the path of rationalization and simplification of direct as well indirect tax structure in India.
However, it would be utterly naive to expect a complete overhaul in the taxation system in one go as it may not only produce a knee-jerk reaction from the market but also jeopardise hard earned stable macroeconomic position.
[The article is written by Gaurav Agrawal, Suprita Anupam, and Meha Agarwal.]
In the coming parts of the pre-budget series, we will be providing a detailed analysis of expectations from Union Budget 2018 accompanied with commentaries and diverse views of multiple stakeholders including views from the leading startups of India from different sectors. To read more articles on this series click here.