India announces measures to push startup, digital payments ecosystem

India startup digital payments
The Minister of State for Commerce & Industry (Independent Charge), Smt. Nirmala Sitharaman addressing a press conference, in New Delhi on October 14, 2016. Image by Ministry of Commerce & Industry (GODL-India), GODL-India,

India is looking to provide a much-needed push to its startup and digital services ecosystem with a slew of measures proposed by the country’s Finance Minister Nirmala Sitharaman on Monday during her annual budget speech. 

The new steps come at a time when the South Asian nation’s economy is expected to contract by around 8% in the ongoing financial year due to the pandemic. 

The minister said that India had earmarked Rs 1500 crore or $205.3 million to incentivize the adoption of digital payments. “There has been a manifold increase in digital payments in the recent past. To give a further boost to digital transactions, I earmark Rs 1500 crore for a proposed scheme that will provide financial incentive to promote digital modes of payment,” she said during her speech.

However, the earmarked fund is being seen as “reparation” for the waiver of merchant discount rates (MDR) on UPI and RuPay in the previous budget, as per various media reports.

All key players in the digital payments space had urged India to scrap MDR, which prevents firms from charging merchants for processing transactions. However, the budget speech didn’t find any mention of MDR.

The country’s central bank, Reserve Bank of India, recently launched a Rs 345 crore or $46.62 million Payments Infrastructure Development Fund to boost digital payments in rural India. Both RBI and the central government’s funds are likely to work in tandem to strengthen the country’s payment infrastructure, as per market watchers.

Google Pay, Walmart-backed PhonePe, Paytm and WhatsApp Pay are vital players in India’s UPI-based digital payments market. 

During her budget 2021-22 speech, Sitharaman also proposed extending social security benefits to gig workers and other platform workers. She said that the country would launch a website to help these workers find employment.

The website will collect relevant information on gig, building, and construction workers, among others. “This will help formulate Health, Housing, Skill, Insurance, Credit, and food schemes for migrant workers,” she said, adding that minimum wages will protect these workers.

“For the first time globally, social security benefits will extend to gig and platform workers. Minimum wages will apply to all categories of workers, and they will all be covered by the Employees State Insurance Corporation,” Sitharaman said.

Additionally, she said that women would be allowed to work in all categories and night-shifts with adequate protection. “At the same time, the compliance burden on employers will be reduced with single registration and licensing, and online returns.”

For the country’s startup ecosystem, the minister proposed some tax relief for startup employees when they sell their stakes.

“During their formative years, startups generally use the Employee Stock Option Plan (ESOP) to attract and retain highly talented employees. ESOP is a significant component of compensation for these employees. Currently, ESOPs are taxable as perquisites at the time of exercise. This leads to a cash-flow problem for the employees who do not sell the shares immediately and continue to hold the same for the long-term.

“In order to give a boost to the start-up ecosystem, I propose to ease the burden of taxation on the employees by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is earliest,” Sitharaman said during her budget speech.

To directly benefit start-ups and innovators, she also proposed to incentivize the incorporation of One Person Companies (OPCs) by allowing OPCs to grow without any restrictions on paid-up capital and turnover, allowing their conversion into any other type of company at any time, reducing the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days and also allow Non-Resident Indians (NRIs) to incorporate OPCs in India. 

After the budget speech, India allocated Rs 126 crore or $17.03 million towards the Startup India Seed Fund for financial year 2021-22. The fund will become operational on April 1, 2021, and is looking to disburse Rs 945 crore or $127.7 million over five years.

The new allocation will provide financial assistance to early-stage startups in various sectors.

India has also proposed broadening the definition of small businesses, increasing the threshold for capitalization to Rs 2 crore or $275,000, up from the existing limit of Rs 50 lakh or $68,750. The move will allow more businesses to avail benefits for small businesses by the Indian government. 

“Moreover, considering the fact that in the initial years, a startup may not have adequate profit to avail this deduction, I propose to extend the period of eligibility for claim of deduction from the existing seven years to 10 years,” the minister said.

Related article: Reserve Bank of India to look into digital lending apps for policy violations

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