BUDGET 2020 – Interpreting the Fine-print for FinTech India & Its Stakeholders

The incumbent Finance Minister Nirmala Sitharaman announced in her address of the Union Budget 2020 on February 1 (2020) the ambitious plan to transform India into a $5-trillion economy by 2024. The primary focus is inclined towards reinvigorating investments and consumption demand to achieve this target – restoration of common man’s confidence and also that of market entities is the key. The FinTech industry was expecting from the budget a revision of (personal) tax slabs to smoothen financial burden on the middle-income groups (while even reduced GST was voiced as an expectation coupled with appropriate tax incentives plus easing access to credit) –, so as to boost spending, thereby enhance instant loan and credit demand and supply dynamics.

The concerns were reasonably dealt with in the Union Budget 2020 pronouncement as the government introduced new personal income tax slabs and rates set to elevate disposable incomes and consumer spending. As also for the startups, the abolition of Dividend Distribution Tax (DDT) is poised to spur investments; further, the postponement of tax payment on ESOPs is a welcome move as is also an increase in the turnover limit to Rs. 100 Cr for accessing tax benefits. But, that’s not all; to boost business activities in India, the corporate tax is now set at 22% (amongst the lowest in the world).

However, per the Economic Times BFSI’s conversation with Venture Catalysts’ Anuj Golecha, the FinTech industry doesn’t stand much to gain from the Union Budget 2020 apart from getting NBFCs into the system of TReDS (Trade Receivables Discounting System – a liquidity boosting mechanism that FinTechs can utilise). Mr. Golecha clarifies that the ESOP relief isn’t made accessible to FinTechs, since the thin details of the budget document mention that only such startups are eligible for the ESOP benefits (and the tax relief that are extended for 10 years and the Rs. 100 crore turnover limits) which are recognised by the Inter-Ministerial Board (IMB) and which also qualify u/s 80-IAC of the Income-Tax Act, 1961, i.e., mere 221 startups in India. This figure for income tax exemption seeking entities was 94 out of 15,798 government-registered startups, as of February 7, 2019, as reported by Indian Express. This means that neither then (27,000 startups – as of 2019), nor now (30,000 startups – as of 2020), are all the startups registered with the DPIIT (Department for Promotion of Industry and Internal Trade) made eligible for claiming ESOP benefits of a 5-year (proposed) deferment of tax payments by startup employees.

Another development worth mentioning is that the zero-MDR (Merchant Discount Rate) is now getting implemented in UPI and RuPay (following the promise made in the Union Budget 2019). MDR is essentially the amount that the merchants pay to banks for accessing the infrastructure that facilitates digital payments. While FinTech startups offering merchant payment services can rejoice, the Payments Council of India (PCI) has a deviating opinion on this development. The PCI Chairman Vishwas Patel states that the zero-MDR move is poised to limit innovation and investment – capable of rendering the business model unviable. He also opines that if the government is aiming to boost payment digitisation, then it should instead be done via a controlled and lower MDR coupled with added tax benefits to merchants. Lastly, he conveys that if MDR isn’t going to be charged to merchants, it’s the government who should bear the cost, reports Economic Times.

However, with even the government anticipating India’s digital economy to contribute $1 trillion to the goal of achieving the $5 trillion economy target, it’s motivating to note that UPI transactions have registered over a billion transactions and the domestic RuPay card has garnered a positive response (of acceptance) in a number of Asian and Middle East countries. With this, if the government can assist in increasing liquidity, inculcating transparency and easing the burden of compliance on the FinTech sector, the future will have promising prospects for the FinTech, its stakeholders, and the economy of India.