View: Simplifying and rationalising the tax regime

As we come to terms with the insurmountable impact of the COVID-19 pandemic, we have seen how it has reshaped the world economically, socially, geographically and even politically. From learning how to work remotely, adapting to a digital way of life etc., people of India are being pushed to change their habits making the e-commerce eco-system an integral part of an individual’s life. With increased internet and smartphone usage in the urban and rural landscape, growth in the e-commerce space has been exponential. The year 2021 has been a watershed year for the Indian startup ecosystem, both in terms of funding and monetisation through IPOs and acquisitions by strategic players. KPMG’ International’s ‘Venture Pulse report’ clearly indicates India seeing a record finance volume of approx. $33 million in 2021.

The entire e-commerce industry had a lot of expectations from the budget because of the vital part they are playing in supporting the whole economy in terms of employment, foreign direct investment etc. Some of the critical asks of the industry were: (a) reduction in overall compliance burden on account of a wide ambit of TDS and TCS provisions; (b) provisions defining the wide ambit of equalisation levy for e-commerce operators; (c) deferment of point of taxation of stock options for employees of new-age companies; (d) allowing carry forward of business losses for an unlimited period in line with unabsorbed depreciation available to others and on change of control; (e) clarity in the income tax law about the listing of Indian companies on overseas bourses.

There have been multiple references to the startups and e-commerce ecosystem in the budget 2022. Some of the critical areas/references where we believe that the startup ecosystem could have new opportunities are:

The use of drones for crop assessment, crop-dusting for insecticide control, etc. ‘drone shakti’ through varied applications and the provision of Drone-As-A-Service (DrAAS).

Setting up a fund to finance startups for agriculture and rural enterprises for the farm produce value chain.

Setting and promotion of digital universities.

Setting up Digital Banking Unit’s in 75 districts and government stress on digital payments will aid online and fintech businesses in such regions.

Encouragement on the adoption of digital payments.

Policy being finalised to promote electric vehicle adoption through the framework on battery swapping, charging infrastructure, battery use as service etc.

PLI scheme for 5G equipment manufacturers and adoption of 5G in India. at an accelerated pace

Investment by the government in the above areas could create a crop of new startups/entrepreneurs and provide expansion opportunities for existing ones to use the latest technology for increasing productivity and efficiencies in their business models.

On top of the startup ecosystem's above opportunities, the government has also decided to set up an expert committee to reduce the overall tax and regulatory burden on VCs and PEs. VC/PEs have played a vital role in developing the entire startup ecosystem. This will increase the confidence of the community to look at India and its opportunities more favourably.

While all the above announcements are music to ears of the startup ecosystem, on the tax front, the only amendments of substance about this ecosystem are:

The tax holiday has been extended to businesses newly set up start-up by one more year, i.e. March 31, 2023, as against March 31, 2022.

The budget has introduced the regime for taxation for Virtual Digital Assets (VDA). The income from the transfer of VDA will now be taxable at the base rate of 30 per cent with no deduction for any expenditure or allowance, or any loss shall be allowed while computing income on the transfer of VDA except for the cost of acquisition. VDA has been defined as any information or code or a number of tokens generated through cryptographic means, etc.

To lower the tax burden on investors, the existing surcharge on long term capital gains earned by high-net-worth individual investors has been reduced from 37 percent to 15 percent. Therefore, the effective capital gain tax on long term capital assets will reduce from approx. 27.4 percent to 23 percent.

The startup ecosystem still requires a lot of handholding from the government on the tax and regulatory front. India is currently the third-largest ecosystem and is moving towards producing almost 100 unicorns by the end of 2023. Simplifying and rationalising the tax regime for this ecosystem will attract more entrepreneurial activities and create opportunities for more employment. While the budget has recognised the role of this ecosystem, some of the asks of the companies in this space need to be addressed.