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Will FM Sitharaman’s Union Budget 2022 Make Room For Indian Startup Demands?

Will FM Sitharaman’s Union Budget 2022 Make Room For Indian Startup Demands?

The fact that startups raised $42 Bn in calendar 2021 not only underlines the significance of the ecosystem but also tells why startups deserve a greater focus this year than before

Within the fintech sector, payment services and apps have been grappling with the issue of zero merchant discount rate (MDR) with UPI and Rupay payments

EV players want FAME and production-linked incentives (PLI) to be more adaptable to allow smoother disbursements and cover more types of EVs such as electric bicycles

As finance minister Nirmala Sitharaman is readying another budget in the midst of Covid-19 pandemic, startups are optimistic that fintech, edtech, healthtech, electric mobility and EVs, crypto and other segments will see a bigger focus from the government after a “lacklustre” last couple of Union Budget announcements. 

The startup world is hopeful that the budget will have provisions for faster refund of income tax. While liberal tax incentives for R&D tops the wish-list, it is also expected that the budget will have provisions to facilitate creating an ecosystem for innovation. 

Entrepreneurs also expressed the hope that the Union Budget will launch new projects to take digital initiatives to the next level by focusing more on new technologies such as cloud, artificial intelligence, internet of things, etc.

Why Startups Deserve A Greater Focus In Union Budget 2022?

The fact that Indian startups raised $42 Bn in calendar 2021 not only underlines the significance of the ecosystem but also tells why startups deserve a greater focus in Union Budget than in earlier years.

Indian Startup Economy: A Snapshot

Entrepreneurs have no doubt that with further easing of compliance norms and granting of tax incentives startups can generate large-scale employment opportunities. Startups coming up in tier-II and tier-III cities require government encouragement, too. The ecosystem is turning more women into entrepreneurs and it is yet another morale-boosting factor. 

While tax incentives and stimulus for R&D are the demands from across sectors within the startup universe, every segment is faced with its own challenges. For example, the issues concerning the fintech companies vary from the challenges edtech companies are facing.

Zero MDR, Rupay Woes For Fintech Startups

Highlighting the significance of fintech, a recent report by Primus Partners said India has the highest fintech adoption rate globally of 87%, higher than the global average rate of 64%. The Indian fintech sector was valued at $50 Bn-$60 Bn in FY20 and is estimated to touch $ 150 Bn in 2025, it added. A large part of the fintech growth is attributable to unified payments interface (UPI). 

However, payment services and apps have been grappling with the issue of zero merchant discount rate (MDR) with UPI and Rupay payments. Besides this, the overarching issues in the industry are around compliance burden for early-stage and smaller startups.

Fintech companies and agencies expressed the hope that the Union Budget 2022 will address the issue favourably after dancing around it last year with the INR 1,500 Cr allocation to boost digital payments.

The Payments Council of India (PCI), the largest industry body for the digital payments ecosystem, said the industry expects a loss of INR 5,500 Cr from UPI and Rupay MDR being zero. As of December 2021, over 72 Bn UPI transactions valuing $1.7 Tn have been recorded to date. 

Fintech demands

“There is still a huge gap to cover so that everyone in the payments value chain gets their credit. With zero MDR, the government has taken away the ability of these payment service providers (PSPs) to invest in and maintain the financial infrastructure they have built,” it said.

Fintech startups have now become mainstream, said Kunal Jhunjhunwala, founder and managing director of Airpay Payment Services, which works in ecommerce and retail payments. He believes fintech companies deserve a direct seat at the table, not through a proxy. 

“Currently, fintech companies have access to all government schemes via banks and other financial institutions. There is a complete loss in translation for fintech companies. Zero MDR on UPI and Rupay transactions is an example of this,” he told Inc42.

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He further said that though the government compensation scheme is fair and the National Payment Corporation of India (NPCI) is facilitating the compensation, banks do not compensate fintech companies for various reasons. 

“Similar issues arise when Mudra loans are distributed. The gatekeepers are not extending the benefits. As a result, fintech companies need a seat at the table. Perhaps, a dedicated fintech board within the Economic Affairs Department,” he added.

According to Naushad Contractor, CEO, Fable Fintech, fintech companies have been able to keep up the banking payments and infrastructure in the country and running it even through the pandemic. He added that the industry would welcome a budget consideration based on transaction tax or income tax holidays for such companies.

Navneet Gupta, founder & CEO, YPay, added that extension of the tax holiday for startups would be a great way for the government to show its commitment towards building a robust and dynamic startup environment. “The government needs to see the fintech industry as a partner in helping formalise the economy and getting banking services to those who do not have access to them,” Gupta said. 

On the compliance challenges, Fable Fintech’s Contractor called for fewer compliance requirements on part of fintech companies, especially those which are smaller in size. 

“The compliance should be size-based. Right now, a company which has a $5,000 turnover has the same compliance requirement as the one with $500 Mn or $50 Mn turnover. This pulls down the ability of a small company to really add value as it gets caught into these small things,” Gupta said.

Crypto Ecosystem Demands Major Clarifications Durings Union Budget

Cryptocurrency has been in the crosshairs of regulators and policymakers for the past year. While the official cryptocurrency bill may be tabled in Parliament during the Union Budget session, stakeholders are eager to get the much-needed clarity on taxation on cryptocurrencies. 

Today, it is not clear whether crypto assets are goods, securities or a currency. There is also ambiguity on the legality of holding and trading in crypto assets and the quantity in which such assets may be held. Although, in 2020, the Supreme Court had struck down the Reserve Bank of India’s restrictions on bank services for crypto transactions, even now some banks have been reluctant in permitting remittances.  

Cryptocurrencies are expected to be included in the ambit of ‘capital assets’ and the gain from transactions of crypto currencies is expected to be taxed as capital gains. While nothing can be firmly stated until the crypto bill is released, Indian startups are optimistic. Crypto unicorn CoinSwitch Kuber’s CBO Sharan Nair expressed hope that the Union Budget will bring in regulatory clarity and help standardise the industry, while addressing misconceptions. 

There are various concerns about the taxation of crypto, its classification, applicable tax rates, TDS/TCS and GST implications on the sale and purchase of cryptocurrencies among other issues, which we are hoping will be clarified during the budget session,” said Clear (formerly Cleartax) founder and CEO Archit Gupta.

India crypto demands

The proposed law should not only clarify on all the above issues, but also deal with rampant advertising and promotion of crypto assets as means of generating quick wealth, which is leading to a spate of scams, according to Manvinder Singh, Partner, J Sagar Associates. 

“A progressive financial regulator shall be nominated to regulate and put best practises for trading in crypto assets and promoting the use of underlying blockchain technology,” Singh added. 

One solution could be a sandbox-like environment for new crypto models, suggested Atanu Chakraborty, a former economic affairs secretary of the central government. 

“The biggest challenge to the financial system today is arbitrage that exists between regulated entities such as banks, NBFCs and unregulated fintech entities. Unless sandbox-oriented solutions are developed, this may pose a real threat to the financial system stability,” he is quoted as saying in the report of Primus Partners.

Healthtech Startups Call For More Collaborations, Infrastructure

The country has emerged wiser from the ongoing Covid-19 pandemic and healthcare is set to remain a prime focus area in the budget allocation. According to experts, healthcare would remain at the centre of new schemes and projects, after a good year for startup funding, where healthtech saw over $2.2 Bn in investments

Healthtech startups recorded jump in funding 2021

There is a need for allotment of funds in relief areas and biotech research, as well as research and innovation in healthcare service delivery, pharma manufacturing and epharmacies, clinical areas such as digital clinics and specialised diagnostics.

Given the relentless battle against the pandemic, budget expectations of the healthtech space are significant. Investment in digital health technologies such as telehealth will promote better access to healthcare, according to stakeholders. 

Similarly, there are high expectations from the National Digital Health Mission and the Health IDs and the healthtech industry is looking to hear more about how it can leverage these programs.

Boosting the healthcare infrastructure by training a greater number of doctors, nurses and paramedical personnel is the need of the hour, and technology can be a critical tool in this education. Covid has taught us the need to have trained health professionals that have the latest technologies at hand, according to Joy Chakraborty, COO, P. D. Hinduja National Hospital & Medical Research Centre.

Runam Mehta, CEO, HealthCube, which manufactures point-of-care diagnostic devices, the country’s dependence on medical device import is one of the reasons behind the lack of adequate technology development and deployment across the country. 

“We hope the government will make sufficient budgetary allocations towards development of new tools and technology and manufacturing of cutting-edge portable diagnostic, remote monitoring and telemedicine equipment,” Mehta said.  

Mehta believes there is a need for government-private collaboration in the development and usage of advanced software-based solutions in rural healthcare delivery and preventive diagnostic services. The reduction of import duty on critical components required by Indian startups is another major demand from the domestic medical device ecosystem.

What India’s Healthtech Startups Seek From The Union Budget 2022

Other startups also seek a simplification of the GST conditions for all healthcare providers. “Any organisation delivering, facilitating, or coordinating healthcare services should be provided exemption from GST even if they are not clinical establishments themselves,” said Sanjay Vinayak, founder and CEO of telemedicine startup Connect & Heal. 

Apart from this, the primary healthcare sector continues to suffer from financial challenges. There is a need to qualify primary healthcare credit as priority sector lending for banks. This is essential as the private sector needs to invest heavily into building a robust infrastructure. Another important area to focus is lower tax regime for the healthcare sector to encourage capital inflow, Vinayak added.

Edtech Ecosystem Seek Hybrid Learning Roadmap

Education is of paramount importance in the digital economy. Given the fact that edtech was the third most funded segment in 2021 with $4.7 Bn in fund infusion, initiatives that could be a boost the sector is something edtech startups are expecting. 

edtech sector funding record jump 2021

The upcoming Union Budget will hopefully allocate funds for a central digital university that could help bridge the digital divide. The budget should also look at involving edtech startups as part of educational governing bodies to bring the best learning solutions for our future generation. 

Ramping up of digital infrastructure is the top demand of the edtech sector. Because of infrastructure issues, cities in tier 3 and 4 struggle with access to online education. 

“Our teachers should be better online educators and that needs massive training infrastructure,” said Shreyasi Singh, founder & CEO, Harappa.

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A fundamental shift is also required as phygital learning is gaining wider acceptance. Language barriers in technical and higher education programmes and the job market are other challenges which need to be addressed. With online and hybrid learning taking over, the pandemic changed the way education was perceived and opened a myriad of opportunities and innovations. This also brought into the limelight the huge inequality in terms of access of resources and quality of learning. 

The budget typically earmarks the allocation for government institutions, autonomous and semi-autonomous institutions for all student grades and the same should be extended to online learning, Harappa’s Singh added.

Prateek Bhargava, founder and CEO of career counselling startup Mindler added that the Union Budget 2022 needs to have a massive focus on robust and improved digital infrastructure to plug the divide. 

What India’s Edtech Startups Demand From The Union Budget 2022

“While the government has put a lot of emphasis and come up with various initiatives to help students and stakeholders, ensuring adoption will require a lot of focus on making these solutions accessible,” Bhargava said. 

Founders such as Bhargava also expect the government to also reduce the GST on edtech solutions which will make these solutions more accessible to students and parents in difficult times. The government should cut GST on online learning and materials for a fair and equal system for offline and online education providers, Infinity Learn’s CEO Ujjwal Singh said. 

“We expect the government to recognise edtech as an industry, allowing it to engage in decentralising learning at all levels, and reconsider the taxation of ESOPs,” said Singh. 

With NEP 2020 in its implementation phase, the government should also put a lot of emphasis on ensuring scientific career guidance in schools and institutions so that students and parents can understand the emerging landscape and leverage the various routes and pathways being introduced by the government. 

The Big Questions For EV Industry

Electric vehicles are the future and while government policies have already played a role in ramping up adoption, more is needed. From a manufacturing point of view, the electric vehicle (EV) segment has complained about the under-utilisation of funds allocated under the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME-II). 

EV players want FAME and production-linked incentives (PLI) to be more adaptable to allow smoother disbursements to help the industry invest in EV infrastructure. Ankit Kumar, CEO Gozero Mobility, said the electric bicycle industry should also be considered for inclusion into the FAME subsidy schemes. The government should consider incentivising the consumers as well. 

What India’s EV Ecosystem Wants

Akash Gupta, cofounder and CEO, Zypp Electric, said India is undergoing a massive electric mobility revolution, but a greater push has to come in various businesses that connect to the EV industry. In particular, GST reduction and tax benefits would play a crucial role in making EVs accessible to everyone. 

“We are optimistic that the government will announce new initiatives to encourage local EV manufacturing, facilitate easy finance, and create an innovative EV ecosystem,” he said, adding that the government should also reduce GST on EV purchases and rentals from 5% to 2%. 

Mohit Sharma, founder, Oye! Rickshaw, said the last two years have been favourable for EV proliferation with initiatives such as FAME 1 and FAME 2. The next steps should focus on policy support for a faster creation of an EV specific ecosystem and on creating demand for EVs in commercial as well as the passenger vehicle category. 

Adding about the tax-driven incentives for EVs, Sumit Chhazed, cofounder of auto financing startup OTO Capital, said tax deduction on loans of up to INR 1.5 Lakh for EVs should be continued for the long-term.

 “Formulation of guidelines and policies for aggregators and last-mile logistics for easier adoption of EVs can help boost the adoption. Subsidies and incentives should also be implemented to promote charging infrastructure for EV,” Chhazed said. 

Union Budget 2021 was a “lacklustre” affair for stakeholders in the startup ecosystem as it failed to address any of the pressing issues. Entrepreneurs as well investors were of the view that the one-year tax holiday made no difference for startups. With only a few days left before the finance minister presents the Union Budget 2022 on February 1, startups across sectors are hopeful that the government finally listens to the industry demands. After the funding boom of the past year, a positive Budget will catalyse the tech and startup ecosystem further. 

With inputs from Nikhil Subramaniam. 

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