'Sync between the taxation and payment': Budget 2019

By Subrat Parida

India now stands at rank 77 among the 199 countries surveyed by World Bank for the ease of doing business index. It can be said that the incumbent government’s focus on creating a startup ecosystem has had a major role to play in this ranking improvement. The market sentiments have been high since the same stable government returned to power and with Nirmala Sitharaman about to present her first union budget, the expectations are going through the roof considering how closely she has involved with the startup community to understand the expectations.

However, the current focus to establish 50,000 new startups by 2024 will require a little more than that amongst which, sync between the taxation and payment systems is going to be the most important thing followed by certain tax benefits and a few additional avenues for financing.

Goods and Services Tax (GST)

When we talk about the sync between the payments and taxation, one needs to understand that the fund situation is very different when it comes to startups or MSMEs as against what it is for big corporates. Hence, the 45- to 60-day payment window bracket isn’t something well conducive for the former to grow. This problem gets further aggravated when the invoice is generated, and GST needs to be paid/filed. A better alternative can be if the GST payment is made at the time of payment realization instead of invoice generation. Such a step would allow startups and MSMEs to better manage their finances and in a more sustainable manner. Some relaxation in the current GST slabs for the startups would indeed be a welcome change.

Angel Tax

Next in line comes the Angel Tax or the tax one needs to pay every time investment comes in. As against what the policy dictates, investments aren’t income, they are more of a means to sustain for most startups and MSMEs. Moreover, the difference in the way the Income-tax department and the Startups calculate their market value results in the latter paying hefty amounts, much to the tune of 30% which means that the Angel Tax wipes away a major part of the investment, significantly hurting the growth prospects.

Peer-to-peer lending

Finally, some tax relaxation on P2P lending can be something one can look at. It might be too soon to expect such radical reform, but I feel that by the time the Finance Ministry is ready to present its next budget, they should have had done some groundwork to enable such a relaxation. Such a step would allow even people who aren’t exactly angel investors to lend to the startups without worrying about the taxes that they might have to pay. Such a seamless fund exchange would open more avenues for the startups to target funding from.

Investments into technology

There are several other things as well such as tax on ESOPs, on investments made from capital gains, on technology import etc. which can be relaxed to make the entire business ecosystem more conducive for the startups, however, the same can be focused upon at a later stage. The GST reforms have been coming up regularly. To fulfill the dream of Made in India, I am confident that sooner or later the Government will bring in multiple positive changes for the startups and MSMEs. As someone who has been working closely in the space of artificial intelligence, I also feel that the Government needs to be extra aware of what all this technology can offer and hence plan and budget accordingly. Engaging with AI startups in terms of collaborations or even providing a financial ecosystem for their sustenance can yield significant results for several Government initiatives such as for energy conservation, school drop-out analytics, documentation automation etc. as well as boost the avenues for foreign investments too. The Government does realise the potential that AI holds and has promised significant developments but a lot more in terms of investing resources, easing out policies and of course relaxing the taxation norms or even creating relevance and performance specific financial incentives are the things that the budget can look at.

To conclude, I would like to mention that NITI Aayog is looking at a $957 bn addition to India’s GDP by 2035 and has proposed a Rs 7500 crore budget for the first three years. As such, the proposed budget should be about 10 times more if the targets have to be achieved within the timeframe.

The author is CEO and Founder of Racetrack.ai.