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\u2019s digital sector expects to be addressed in this year\u2019s budget.\r\n\r\nAs per the IAMAI\u2019s official statement, these issues are currently the biggest impediments to the growth of the Indian startup ecosystem and by extension, the digital sector.\r\n\r\nFounded in 2004, the IAMAI is a not-for-profit industry body registered under the Societies Act, 1986. The organisation\u2019s 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.\r\n\r\nHeadquartered in Mumbai, with additional offices in Delhi, Bengaluru and Kolkata, the association boasts a member base of over 300 Indian and MNC companies.\r\n\r\nFollowing are some of the key expectations for the upcoming Union Budget as put forward by the IAMAI:\r\nResolution Of Angel Tax Fiasco\r\nFor 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.\r\n\r\nThe industry body stated, \u201cAngel tax has resulted in numerous startups facing Income Notice claiming a lion\u2019s share of the investments they raise as tax liabilities.\u201d\r\n\r\nThis 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.\r\n\r\nOne 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\u2019s valuation is based on a valuation certificate issued by a valued recognised by the Government of India.\r\n\r\nAt present, most valuers in the country rely on conventional methods of valuation that apply to mature enterprises with regular cash flows.\r\n\r\nA spokesperson for the IAMAI explained, \u201cValuation 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.\u201d\r\n\r\nIn 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.\r\n\r\nTo 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).\r\n\r\nThe 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\u00a0online petition addressed to PM Narendra Modi, Union Finance Minister Arun Jaitley, Union Minister of Commerce and Industry Suresh Prabhu, among others.\r\nTax On ESOPs To Be Levied Only On Realisation\r\nAnother issue that has been brought to light by the IAMAI is taxation on ESOPs. It said, \u201cTypically, 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.\u201d\r\n\r\nUnder present provisions, at the time of such exercise of options and grant of shares, the difference between the \u2018FMV\u2019 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.\r\n\r\nElaborating on the problem, the industry body stated, \u201cCurrently, 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.\u201d\r\n\r\nTo 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.\r\nMultiple Registration and Filing Under GST\r\nLike 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, \u201cWhat 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.\u201d\r\n\r\nConsequently, 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.\r\nAnomaly In GST Rates\r\nUnder 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.\r\n\r\nDoing so, according to the industry body, will help facilitate digital inclusion by making such services available in semi-urban as well as rural areas.\r\nTCS and Uneven Playing Field For Ecommerce\r\nThe 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.\r\n\r\nSpeaking on the matter, the association\u2019s spokesperson stated, \u201cThe 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.\u201d\r\n\r\nThe 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.\r\n\r\nThe industry body added, \u201cThis 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\u00a0market size of $150 Bn by 2024.\u201d\r\n\r\nWith 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.\r\n\r\nTo 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.