By Russell Gaitonde and Fojan Furniturewala
Union Budget: The Fintech sector has served as a catalyst for the transformation and growth of the Indian financial services industry. Currently, India, which is among the world’s fastest growing fintech markets, has around 6,600 Fintech startups with consumers becoming more financially literate, tech savvy, and comfortable with buying financial products through apps and on-line portals. The sector is justly seen as an important player to support the Indian government’s vision of financial inclusion and digital India, and a bridge to reach the US$ 5 trillion economy target by 2025. With the Union Budget 2023-24 just around the corner, the timing couldn’t be better for the government to introduce policy measures and tax measures to boost the Indian Fintech sector.
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From a policy front, the biggest ask of the Fintech sector is to provide a clear, transparent, and liberal regulatory framework to keep up with the pace of innovation in the sector. This includes:
(a) Neo-banks: Absent from physical presence, Neo-banks are allowed to offer limited financial services through online platforms, but only in collaboration with a regulated entity (Banks, NBFCs, etc.). The current partnership model poses various operational challenges for their growth. Further, RBI
(b) Lending platforms: RBI’s recent guidelines on digital lending have mandated Fintechs to augment their business models, to ensure that loan disbursal and repayments are routed only through the bank accounts of a regulated entity (i.e., Bank or NBFC). Fintechs with NBFCs in their group, ensured compliance with these guidelines, but small unregulated Fintech groups have been impacted the most. This is likely to prompt consolidation of various small fintech players who can apply to the RBI to seek NBFC licenses. The RBI is currently reluctant to grant NBFC license to Fintechs due to issues surrounding their ownership and governance structures. The industry hopes that RBI will adopt a consultative approach to address the licensing requirements of such Fintechs.
(c) Retail credit: Various start-ups in the Fintech space and NBFCs, use technology to check the credit worthiness of small businesses and provide loans. The government should consider setting up a platform to connect traditional retailers and start-ups to check the credit worthiness and design suitable loan products.
(d) Securitization: RBI’s recent amendment to not allow lenders to securitize short-term loans requires a relook, with the Fintechs being the most hit by this amendment. The restriction will increase the borrowing cost of Fintech companies, as a majority of loan portfolio of lending Fintech’s comprises of short-term loans (less than 365 days).
Along with conducive regulation, the government must consider granting tax incentives to boost the Fintech sector. This includes the following measures:
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(a) To boost spend on digitalization and promote innovation, the government must allow expenditure linked weighted tax deductions for money spent on research and innovations (such as Machine learning, Artificial intelligence, etc.), digital infrastructure, etc., and additional tax depreciation on investment in new fixed assets.
(b) To attract and retain talent, allow deferment in payment of tax on ESOPs be extended to employees of all start-ups registered with the Department for Promotion of Industry and Internal Trade (DPIIT), which is currently restricted to eligible start-ups only.
(c) To promote domestic investment in Fintechs, long-term capital gains on sale of shares of unlisted company to a resident investor can be brought on par with the base tax rate applicable to nonresident investors (i.e., 10%).
(d) Simplify the withholding tax regime applicable to receipts of Fintechs, by having a uniform withholding tax rate of 2% restricted to the income element of receipts earned by Fintechs; this will help free-up the working capital of Fintechs.
(e) Rationalise the GST regime: Provide clarity on whether payment aggregators qualify as an acquirer bank for GST exemption, reduction in GST rate from 18% to 5% on POS devices, simplified GST compliances, etc.
(f) Relaxation in levy of digital tax, referred to as equalization levy, on financial services related ecommerce operators will provide a much-needed relief i.e., payment aggregators owing to RBI’s new auto-debit rules, foreign cryptocurrency exchanges, NFT marketplaces, etc.
The ball is now in the government’s court to support the Fintech sector with requisite policy relaxations and tax sops.
The author is a Partner with Deloitte India and Fojan Furniturewala is a Director with Deloitte India. Views expressed are personal.