Union Budget 2023-24: Booster for Indian Fintech Sector?

By Russell Gaitonde and Fojan Furniturewala

Union Budget: The fintech sector has acted 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 savvy, tech savvy and comfortable buying financial products through apps and online portals. The sector is rightly seen as a key player in supporting the Indian government’s vision of financial inclusion and Digital India, and a bridge to achieving the goal of a US$ 5 trillion economy by 2025. With the Union Budget 2023-24 just around the corner, the timing could not be better for the government to introduce policy measures and tax measures to boost the Indian Fintech sector.

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From a political front, the biggest requirement for 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:

(one) Neo banks: Absent from physical presence, Neo-banks are allowed to offer limited financial services through online platforms, but only in partnership with a regulated entity (banks, NBFCs, etc.). The current partnership model presents various operational challenges for their growth. Further, RBI’s Digital Banking Unit (‘DBU’) guidelines allow only commercial banks with prior digital experience to set up a DBU; and thus excludes neo-banks. Aiming to solve the regulatory conundrum, NITI Aayog recently came out with a report on digital banks, to provide a roadmap for the licensing regime for neo-banks in India. The Indian government should implement these recommendations for a defined regulatory regime for new banks in India as it can boost Indian economy and increase financial inclusion.

(b) Lending platforms: RBI’s recent digital lending guidelines have mandated Fintechs to expand their business models, to ensure that disbursement and repayment of loans are routed only through the bank accounts of a regulated entity (ie Bank or NBFC). Fintechs with NBFCs in their group ensured compliance with these guidelines, but small unregulated Fintech groups have been most affected. This is likely to lead to consolidation of various small fintech players who may approach the RBI to seek NBFC licences. The RBI is currently reluctant to grant NBFC license to Fintechs due to issues surrounding their ownership and governance structures. The industry hopes that the RBI will adopt an advisory approach to meet the licensing requirements of such Fintechs.

(c) Retailer Credit: Various startups in the Fintech space and NBFCs are using technology to check the creditworthiness of small businesses and provide loans. The government should consider establishing a platform to connect traditional retailers and start-ups to check creditworthiness and design appropriate loan products.

(d) Securitization: RBI’s recent change to not allow lenders to securitize short-term loans requires a re-examination, with Fintechs being the most affected by this change. The restriction will increase the borrowing costs of Fintech companies, as the majority of the loan portfolio of Fintech lending consists of short-term loans (less than 365 days).

Along with favorable regulation, the government must consider providing tax incentives to boost the Fintech sector. This includes the following measures:

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(a) To increase spending on digitization and promote innovation, the government must allow expenditure-related weighted tax credits for money spent on research and innovations (such as machine learning, artificial intelligence, etc.), digital infrastructure, etc., and additional tax write-offs on investment in new fixed assets.

(b) In order to attract and retain talent, extend the deferral of payment of tax on ESOPs to employees of all start-ups registered with the Department for Promotion of Industry and Internal Trade (DPIIT), which is currently limited to eligible start-ups just.

(c) To promote domestic investment in Fintechs, long-term capital gains on sale of shares in unlisted company to a resident investor may be brought in line with the basic tax rate applicable to foreign investors (ie 10%).

(d) Simplify the withholding tax regime applicable to receipts from Fintechs, by having a uniform withholding tax rate of 2% limited to the income element of receipts earned by Fintechs; this will help free up the working capital of Fintechs.

(e) Rationalize the GST regime: Clarify whether payment aggregators qualify as an acquiring bank for GST exemption, reduction in GST rate from 18% to 5% on POS devices, simplified GST compliance etc.

(f) Relaxation in levy of digital tax, referred to as equalization tax, on financial services related e-commerce operators will provide much needed relief i.e. payment aggregators due 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 necessary policy relaxations and tax breaks.

The author is a partner with Deloitte India and Fojan Furniturewala is a director of Deloitte India. Views expressed are personal.