WFH benefits and other Budget expectations of IT and startup sectors

With the 2022-23 budget nearing and the third wave of the pandemic in full force, the industry is hoping FM Nirmala Sitharaman will provide support for growth

The past two years have seen a huge shift in the way business is done and how we work. The one thing that the pandemic got to the fore was use and acceptance of technology as a crucial need for business. While there will not be any big bang announcements for the IT services or the startup sector, some of the demands that the industry is asking include relaxation to the SEZ rules as majority employees continue to work from home, changes to the taxation on ESOPs and other changes.

With the 2022-23 budget nearing and the third wave of the pandemic in full force, industry and several companies are hoping that FM Nirmala Sitharaman will provide support for growth.

The National Association of Software and Service Companies (Nasscom), the industry body representing the $194 billion IT services industry, is hoping the budget will provide clarifications regarding section 10AA. “The budget hopefully clarifies that the place of providing the service shall be the unit in the special economic zone (SEZ), even when a worker of the SEZ unit has carried the work remotely,” said the recommendations from Nasscom.

The industry body, in its wish-list, also hoped the budget would expand the scope of utilisation of SEZ reinvestment to include expenses incurred on leasing of computers/ laptops, using cloud infrastructure, buying software and investment in building, infrastructure, workstation etc.

“There is a huge demand-supply gap in the Artificial Intelligence and Big Data Analytics space for roles such as Machine Learning engineers and data scientists. We urge the government to announce tax incentives for companies to encourage training and skilling / reskilling of employees to help India grow its business footprint in new, emerging areas,” said Keshav R Murugesh,group CEO, WNS.

He added: “To boost confidence among investors and corporates, another very significant demand is to extend long-term tax relaxations for Special Economic Zones (SEZs), instead of extending quarter to quarter exemptions. This will attract greater interest in the government’s long-term vision of promoting sustained growth for the sector.”

Startups

The finance minister had last year extended the eligibility for claiming tax holiday for start-ups by one more year–till 31 March, 2022, to incentivise funding of the start-ups.

According to the current procedure, after getting recognised as a startup by the industry department–Department for Promotion of Industry and Internal Trade (DPIIT)-- it has to apply for tax exemption. Post getting clearance for the tax exemption, the startup can avail tax holiday for three consecutive financial years out of its first ten years since its incorporation.

Ankit Kedia, founder and lead investor, Capital A said that the income-tax holiday for government recognised start-ups which is typically for three years should be further extended to five years.

“Some of the founders of upcoming startups need more than three years to get their products or services right. Business revenue starts  to come only after three or four years. Some upcoming start-ups require more than 3 years to get their business right Would be great if the government extended the income tax holiday to five years. That will give start-ups leeway in cycle from ideation to revenue, profit and thereby saving taxes,” Kedia said.

One of the top demands of the startup sector is to defer tax liability on employee stock option plans (ESOP). There is also a need to extend the ESOP tax treatment announced by the finance minister to more companies, including unregistered startups. Right now, it applies to only DPIIT-recognised startups.

ESOP is a significant component of compensation for startup employees. In the Budget 2020, the finance minister had announced easing of the tax burden by deferring the payment by five year or till the employee leaves the company or when they sell their shares. This was done to alleviate the cash flow problem for employees that help ESOPs for the long-term.

“The definition of 'eligible start-ups' should not be restricted to only those startups registered with the DPIIT or listed under 80-IAC and IMB, but to unlisted companies as well. Alternatively, the relaxation can be extended to unregistered startups having a turnover below a certain threshold. The Government should look at relaxing the definition for the purposes of ESOP taxation as this will boost ownership by employees in the companies and allow unregistered startups to hire talent and consequently provide a boost to the economy,” according to think tank India Tech.

Anjali Bansal, founder Avaana Capital said, “We expect continued support for the start-up ecosystem in the form of higher outlay under the Start-Up India Seed Fund, for providing institutional support and boosting start-up growth. We also expect significant measures to promote the ease of doing business in India, including regulatory support for debt structures that are more suitable to the requirements of start-ups; rationalisation of GST mechanism for start-ups, who often end up paying GST at high rates under reverse charge mechanism; increased speed of IP and trademark approval; and reduced cost and complexity of regulations and compliance.

Fintech

The one sector that really grew both in value and volume is the fintech segment, which has been a huge growth due to pandemic induced changes in the way people transact as well as the ease of payment due to UPI. The industry is hoping that the FM will support tax relaxations that enable innovation, eas-of-doing-business and reduce compliance cost.

Harshil Mathur, CEO & Co-founder, Razorpay said: “We’ve seen a substantial spike in the adoption of digital payments in the last year. I’m hoping that in the upcoming budget, the Government will think of alternatives to the Zero MDR policy, as that will help promote e-payments and drive significant digital adoption amongst businesses.”

With the pandemic likely to leave long-lasting scars on our society and economies, Mathur hoped that the budget will look to increase contribution to the FFS funds for startups. “Hassle-free loan disbursements, automation of tax and compliance, paper-less approvals, and incentives to adopt digital banking practices will also be welcome changes that can support the growth of MSMEs,” he added.

The Payments Council of India (PCI) has requested the Ministry of Finance for a roll back of the Zero MDR regime for UPI and RuPay debit or to incentivize the industry with an amount of Rs 4,000 crore to bridge this gap. Vishwas Patel, Chairman, PCI and Director, Infibeam Avenues, says , “We request the government to consider a roll back of the Zero MDR, with a view to broaden and significantly grow the merchant acceptance base particularly in the MSME space and also to facilitate the deployment of payments infrastructure by non-bank players who have been the biggest deployers of capital in this area for the past few years”

"In response to the economic hardship created by Covid-19, several liquidity measures to support the MSMEs were announced. This budget must be in pursuit of better implementation of the schemes already in place. Further, the fiscal budget should announce measures to incentivize and strengthen support from SIDBI-like institutions and PSB’s towards lending to smaller NBFCs to ensure credit to SMEs at lower cost of capital,” said Alok Mittal, Co-Founder & CEO, Indifi Technologies.

Most of the fintech’s also hoped that liquidity flow to MSMEs through NBFCs and fintech are given enough impetus. “One of the focus areas could be providing tax rebates to the MSME sector, one of the most impacted by Covid-19, especially in terms of cash flow. Encouraging banks to lend more to NBFCs could also help increase cash flow towards the MSME sector as NBFCs further lend to MSMEs. Finally, bringing in stronger policies to deal with wilful defaulters and address the rising NPAs in the MSME sector could help compliment the other initiatives,” said Priynak Kothari, director, Arvog.

Snapshot of demands

IT Industry

• Relaxation to section 10AA benefit in case of work from home
• Increase in emoluments threshold for claiming deduction under S.80JJAA

Startups

• Defer tax liability on ESOPs for startups; extend it to all startups including those who are not recognised by DPIIT
• Standardise tax rate of resident investors on unlisted shares
• Alternative to zero MDR policy
• More funding to NBFC's