Less is more for Indian fintech as budget day looms

Multiple fintech startups operating across spaces of digital payments, B2C and D2C lending, digital payroll management, and financial inclusion in India, have a common pre-budget expectation in mind.

For them, lowering of Goods and Services Tax (GST) would set the bahi khata -- Hindi for ledger -- rolling wonderfully, in the upcoming Union Budget of India for 2021–2022, presented by the current minister of finance and corporate affairs Nirmala Sitharaman.

For many, it's the “COVID budget,” considering how the last one was doled out in a lockdown-less country. There is talk of revival, and recovery which is a better choice of business climate than what was the case, across industries, in the quarters surrounding March and April of 2020.

Lowering and simplifying taxes, revising zero merchant discount rate (MDR), enhanced regulation of crypto assets, and comprehensive digitization of payments infrastructure in the country stand out as key themes identified by TechCircle, in the pre-budget expectation line of commentaries from fintech startup entrepreneurs. 

Currently, India has over 2,147 active fintech companies with over 500 digital lending players, Eduvanz co-founder and CEO Varun Chopra told TechCircle. “It is projected that the credit demand from consumers and MSMEs would be more than $1 trillion by 2023... by offering budgetary concessions such as a GST waiver for digital transactions for education will ensure more participation in learning and skilling for the youth of India.” 

Excerpts from other fintech players are as follows:

Lowering taxes

“Provisioning lower tax brackets for lending startups based on higher volumes of digital transactions and policy initiatives for technology advancements, the aim should be to reinforce stability and momentum to the digital lending industry,” Sashank Rishyasringa, co-founder and managing director of Capital Float said.

"This (reduction in GST for financial services) will create a strong foundation for the entire ecosystem and benefit consumers by lowering the overall cost of such transactions. Eventually, the initiative would further accelerate the penetration of financial services and products,” Seshadri Kulkarni, CEO of DigitSecure said.

“The earnings of the underbanked population are hit with taxes levied on basic money transfers. The government should consider providing some GST relief on smaller transactions conducted on the banking correspondents (BC) network. A special provision on GST and TDS for the BC model will help create visibility for this business,” Dilip Modi, founder of Spice Money said.

“The fintech industry expects a lower GST slab on banking, financial and remittances services as it will directly impact the unbanked and underbanked sector as well the banking correspondents in these areas by reducing the charges on these services. But this is very unlikely to happen as this will directly impact the GST revenue government earns from the banking sector,”  Amit Nigam, executive director and COO of BANKIT said.

“We feel that these agents and BCs facilitate the financial inclusion process and thus, act as a helping hand to the government in making India digital… Another change that we look forward to, that can help towards the same cause, is subsidies on devices like mATM, MPOS, etc. to help entrepreneurs can be encouraged to come forward for the cause,” BANKIT’s Nigam added.

“The commission rates for BC services are very low to make it a profitable business. Additionally, BCs, by default, come under the 27% GST and 5% TDS on cash withdrawal even after the tax act having enabling provisions. This makes it difficult for them to stay afloat,” Anand Kumar Bajaj, founder, managing director and CEO of PayNearby said.

“The PoS terminal is financially, infrastructurally, and operationally far more affordable and far less demanding than an ATM… tax breaks in GST for merchants providing digital payments and tax benefits for companies helping build digital infrastructure for friction-free digital on boarding, too will catalyse the financial inclusion movement envisioned by the government… Budgetary concessions such as a GST waiver for digital transactions along with incentivization, especially in semi-urban and rural India will further augment cashless payments,” Mandar Agashe, founder, managing director and vice chairman of Sarvatra Technologies said.

On the viability of BC services, Eko co-founder Abhinav Sinha said, “A retailer selling FMCG products makes around 8%, on selling a telecommunications service he gets 5% but to offer financial services, the commission is as low as 0.30% - this is not a viable proposition. Even the high value transaction of financial services doesn’t make it relevant in most cases with costs of local banks, cash deposit charges, etc.”

“Timely input tax submission acts as a backbone of an efficient GST system, which is only possible if all loops and the chain carry out timely compliance. Government can also look at simplifying the GST laws so that it reduces compliance costs for MSMEs,” Rupesh Kumar Mishra, co-founder, PagarBook said.

Cryptocurrency and blockchain technology

“Crypto-currencies witnessed high growth and adoption in 2020 and crypto venture funds raised billions of dollars in 2020. There are numerous Indian startups which want to leverage crypto and blockchain, however unclear and uncertain regulations around cryptocurrency have impacted their growth. Clear laws are required to enable these startups to bring investments from these global funds into India,” Ankur Bansal, co-founder and director of venture capital firm BlackSoil said.

“We hope that the Government comes up with greater regulatory clarity on cryptocurrencies in India and there is employment of blockchain technology for government records. We are also eying provisions and amendments in IT and GST laws for clarity on applicability of taxes. Also, there should be recognition of specific acts as offences liable to penalties so that users and platforms have a better understanding about their rights and duties,” Sathvik Vishwanath, CEO, Unocoin said.

“While there may be a delay in bringing in smart and sensible regulations for the sector, recognising crypto as a tradable commodity will be a significant relief. Further, to tackle money laundering and other funding concerns, the government should consider a formal direction to exchanges to follow the virtual assets guidelines of Financial Action Task Force (FATF). Additionally, considering the ambiguity among investors pertaining to the tax applicability for the income earned from crypto trading, we expect the upcoming budget to bring in amendments in the income tax and GST laws thereby offering more clarity to investors, traders, and crypto organizations,” Sumit Gupta, CEO and co-founder, CoinDCX said.

“Considering the current health of the banking sector, we expect the government to welcome the model that the new-age businesses are introducing like blockchain-based banking and cryptocurrency,” Kumar Gaurav, founder and CEO of Cashaa said.

Incentivising digital transformation and MSMEs

“We hope that fiscal policies encourage both Private and Public Sector banks, FIs and fintechs to adopt modern technology to replace legacy technologies so they can provide modern, mobile first, secure and state-of-the art digital products and services to customers,” Murali Nair, president of banking at Zeta said.

“Today a lot of these processes (B2B process flows from purchase order to payments and reconciliation) are manual. Hence in-efficient both from a cost and time perspective, e-invoicing is a great first step by the Government of India… The next step is to enable tracking payments. If payment data becomes available, AI can help track key metrics, such as Days Payments Outstanding (DPO) and Days Sales Outstanding (DSO) across receivables and payables and start providing actionable insights for companies and the economy as a whole. This will also help address the key issue for MSMEs– getting paid on time, besides enabling digital lending through cash flow, payment, and invoice data,” Narayan Ramamoorthy, chief revenue officer at Global PayEX said.

“The economy is currently in a rebuild mode, and hence, sectoral incentives that allow MSMEs to recover, play a pivotal role. Although different sectors have been hit differently, large sectors like transportation, logistics and hospitality come under the worst-hit category. As a result, there needs to be an initiative to provide them with support and recovery measures. Secondly, the wholesale lending market needs to be refuelled, especially with a focus on BBB and A-rated NBFCs. It will be a step in the right direction and help the overall economy recuperate faster in the coming months,” Alok Mittal, founder and CEO of Indifi Technologies said.

“It would be desirable to have increased loan limits for unsecured loans, thereby helping small businesses have better access to credit and working capital. Hassle-free loan disbursements, automation of tax and compliance, paper-less approvals, and incentives to adopt digital banking practices will be critical changes to look for,” Harshil Mathur, co-founder and CEO of Razorpay said.

Zero MDR

“I’m hoping that in the upcoming budget, the Government will think of alternatives to the Zero MDR policy, one of the alternatives could be providing tax incentives for MSMEs towards accepting digital payments, as that will help promote e-payments and drive significant digital adoption amongst businesses,” Mathur added.

Merchant discount rate (MDR) is a fee charged to merchants by banks to process payments made by customers using credit or debit cards. Recently, the Payments Council of India (PCI) too sought a reversal of the zero MDR clause for RuPay debit cards and UPI, ahead of the annual budget.