The fintech sector has come into sharp focus, at a time when wealth creation is the need of the hour.

Tax benefits digital lending What the fintech sector expects from Budget 2020
Money Budget 2020 Friday, January 31, 2020 - 17:03

The much-awaited Union Budget will be presented by Finance Minister Nirmala Sitharaman on February 1, amid a slowing economy and dwindling growth, with many industries demanding reform so that the tide can turn. 

The fintech sector has come into sharp focus, at a time when wealth creation is the need of the hour — a space which online lenders can fill. 

Anand Kumar Bajaj, the founder and CEO of hyperlocal fintech network builder of PayNearby, says that India is a still largely cash-based economy, as more than 45% of the country’s bank accounts have no transactions and only 13% Indian adults borrow through formal channels. 

“The creation of a regulatory, social, commercial and infrastructure framework that will help in creation of the last mile access of financial and other primary services is thus one of the country’s primary needs,” he says. 

“A key area where we are expecting reforms is the GST that is levied on services aimed at financial inclusion. GST of 18% on products that have wafer thin margins creates huge burden on the system and needs intervention to make the proposition attractive for incumbents and new players. Also, changing the definition of startups to increase the threshold turnover is necessary as financial services include products that swell the turnover, but due to wafer-thin margins, our PBT (profit before tax) ratios are way lower than normal industries,” he adds. 

In addition to this, he said that TDS must be removed on last level agents who ensure last-mile access and also for budgetary allocations to help companies build digital payment platforms.  

“Considering efforts, risks, costs and talent required in this industry, a budgetary allocation in some proportion to the costs of these firms would help build confidence for more minds to continue working in this space,” he added. 

Gaurav Chopra, the CEO of IndiaLends and President of the Digital Lending Association of India said that at a time when consumption demand is not growing fast enough, investment is tapering and exports are falling, startups are hoping for tax relief to push the digital economy. In addition, he says that the process of TDS and repayments must be simplified in the online lending space.

“One of the biggest concerns of the digital lending space at present is the need for SMEs to pay TDS on their interest payments. This makes the repayment process complicated for SMEs to manage, thereby discouraging them from seeking business loans. Therefore, the digital lending space expects the government to simplify or eliminate the need for SMEs to pay TDS in the upcoming Budget,” he says. 

Other demands include reducing the compliance burden by way of supportive regulatory changes, enhancing ease of business and centralised eKYC for smooth onboarding. He also said that a strong body is needed to regulate the NBFC sector to boost confidence.

Additionally, one of the major asks of the industry is tax relief. 

“Tax benefits should be offered to the Fintech startups in the form of exemptions and private investments in the sector should be shielded from unfriendly tax burdens. Fintech companies are expecting incentives for startups and an overall reduction in the corporate tax which didn't come through the last time,” Gaurav added.

This was also echoed by Harshil Mathur, the CEO and co-founder of Razorpay. 

“I think this budget should primarily focus on increasing consumer spending, this is our biggest challenge. And if this continues to remain so low, it can create a negative outlook on the ecosystem. The reduction of taxes and incentivisation of consumer spending through GST and personal taxes could help put the economy back on track,” he said.

He further added that tax relief on ESOPs and charging tax on the liquidation of shares allotted under ESOP, instead of charging the employees on exercising their ESOPs will be helpful. In addition, he said direct incentives to business to accept digital payments will also help. 

Kunal Shah, the founder and CEO of CRED says that the government should create frameworks to encourage credit literacy and ensure consistency around government policies. 

“Our ambition is to be a $5-trillion economy, while the reality is that less than 90% of our population makes less than Rs 12,000 ($170). The bridge between reality and ambition comprises three pillars: enablement of consumption to drive demand, investment to create wealth, and healthy financial habits to manage wealth. Investing in expansion of credit literacy will result in smarter investments with better benefits among individuals, thus contributing towards the healthy economic development of the country,” he said.

According to Aurko Bhattacharya, co-founder of payment solutions provider ePayLater, financial inclusion remains a critical concern, which digitisation can address. “The government should introduce budgetary concessions for digital transactions and thereby reduce dependency on cash. The digital lending industry has been playing a very important role in accelerating financial inclusion, helping India transition from a cash economy to a digital economy. Thus, digital lending needs to be given a boost,” he said. 

“Tax benefits are needed for regulated entities involved in digital lending. We expect the government to usher in a new set of reforms in the upcoming budget and hope for higher tax relief, and further clarity on Aadhaar based eKYC. At the same time, a push on security standards for various platforms offering financial services would be necessary for people to gain confidence in dealing with digital currency. The introduction of RBI sandbox comes across as a positive development made in this sphere, and the Fintech industry expects more such policies and reforms this year,” he added. 

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