Ahead of Budget 2023, IndiaTech.org, a start-up industry body, wrote to the government on December 8 in two separate submissions, seeking changes in some of the norms under the direct and indirect taxes currently applicable on startups across sectors. The body also suggested rethinking some of these rules and restructuring these taxes.
MakeMyTrip, Nykaa, Ola, Policybazaar, Dream11, BharatMatrimony, CoinSwitch, WazirX, Zomato, Meesho, and PharmEasy, to name a few, are among the prominent startups that are IndiaTech.org members.
Rameesh Kailasam, CEO of IndiaTech.org, told Moneycontrol, “The government can come up with guidelines for indirect taxes in sometime but the issues highlighted with the direct taxes need to addressed at the earliest during the budget.”
Indirect Taxes:
Travel and other e-commerce businesses
Currently, both State GST and Central GST officials can conduct separate investigations on the same issue for the same entity, causing unnecessary hardship for businesses. To address this, the GST Council Secretariat issued guidelines that separated taxpayers based on their turnover between the Central and state governments in order to ensure a single interface with GST authorities.
However, this was not followed, and businesses continue to receive multiple notices/summons from the two entities.
“The government should make suitable amendments in law along with revised guidelines to ensure that there is single interface for all assessees basis turnover or any other basis and it should be followed by all GST authorities in letter and spirit,” the industry group said in its recommendations.
Then, whether or not a business has a physical presence in a taxable territory that is a state or a union territory but sells online, he must pay taxes and have a person appointed on the location, according to section 9(5) of the CGST Act, 2017. This adds to the burden of having additional officials in these locations. The body recommended “relaxation for additional office space even in the absence of physical presence in that taxable territory.”
For online travel ticket booking, websites currently charge an additional GST for non-air-conditioned “stage carriages” tickets, whereas offline, this is not the case. Consequently, bus operators could easily charge less offline, creating discrimination against the e-commerce operator and inconveniencing the customer.
“The notification no. 16/ 2021 issued by CBIC creates a discrimination based on the mode of booking even when the underlying service remains the same and can appear unreasonable, discriminatory and may likely be violative of Article 14 of the Constitution, and hence should be repealed,” IndiaTech.org suggested.
Similarly, businesses that book marriage halls, venues, or wedding mandaps are currently charged 18% in GST, which is significantly higher and has a negative impact on startups in this space, as the partners involved with the startups do not want to work with high GST affecting their margins.
The industry body suggested that the 18% GST slab be reduced to 5% for greater ease of doing business and transparency.
IndiaTech.org also requested a special incentive for e-commerce businesses to establish warehouses and infrastructure in Tier-2 and Tier-3 identified locations. They are currently charged 18% GST, and the body suggested that this be reduced to 5% GST.
Virtual Digital Assets (VDAs)
IndiaTech.org wants similar benefits to other asset classes for virtual digital assets (VDAs) such as crypto tokens for setting off and carrying forward losses incurred for a period of eight assessment years under the head of ‘Capital Gain' of Section 74 of the Income-tax Act, 1961.
These practices also compel traders and investors of Indian crypto exchanges to move to international exchanges in order to avoid paying these taxes.
“To ensure that customers/users are not forced out of KYC-enabled Indian trading platforms to international exchanges, which would result in a loss of tax revenue to the exchequer, and also go against the government’s objective of tracking and tracing VDA transactions,” the body said.
“To ensure India remains competitive and in a leadership position in the global digital assets and Web3 ecosystem, which is the new and emerging technology frontier and one that India should assume leadership of,” it added.
Direct Taxes :
One of the major issues for the startup sector in terms of direct taxes is that listed and unlisted shareholding in startups are currently taxed differently. Short-term capital gains on unlisted shares are taxed at 40% (~43.7% with surcharges) versus 15% if the company is listed. Furthermore, the holding period for unlisted shares is 24 months versus 12 months for listed shares in order to qualify for long-term treatment.
Once they qualify as long-term, both listed and unlisted capital gains are subject to a 10 percent tax.
“While it is understandable that the longer Hold Period is designed to encourage more long-term activity, but this treatment (and the tax rate itself) may well be impeding the activities that it is meant to encourage. Hence a lower percentage of maybe 15 to 20% maybe prescribed instead of 40%,” the industry body said.
Travel and other e-commerce businesses
E-commerce companies are currently charged 1% Tax Deducted at Source (TDS) on gross sales of goods and services. This is in addition to the 1% tax already imposed on e-commerce participants under CGST rules.
IndiaTech.org recommended that these taxation provisions be amended and made “applicable only in cases of ‘GST un-registered e-commerce participant' selling goods and/or providing services through e-commerce operator.”
Gaming start-ups
The industry body also highlighted the need of financial incentives and a uniform tax framework to encourage and grow Indian Animation, Visual Effects, Gaming, and Comics (AVGC) startups.
The body recommended taxation-related incentives for the gaming sector, such as tax breaks, tax holidays, etc., for indigenous AVGC startups, in order to boost production of Indian intellectual property, research and development, and investment inflows.
Virtual Digital Assets (VDAs) and Web 3 sector
VDAs such as crypto tokens and non-fungible tokens (NFTs) are subject to a 1% TDS on all transactions exceeding Rs. 10,000. As a result, many Indian investors have moved to foreign exchanges to avoid paying these taxes. In this regard, IndiaTech.org made two recommendations:
“There needs to be a clarification on whether such TDS applies to foreign exchanges u/s 194S and if not, they need to be included as well as this has created a level playing field issue for those domiciled in India and those who are not,” it said.
“Since the primary intention was to track and trace we recommend that the rate of TDS be deducted from 1% to 0.01% through an amendment to Section 194S,” the body added.
In addition, the industry body demanded clarification requiring Permanent Establishment (PE) specifically including foreign exchanges to have a registered office in India and bringing other buyers under the TDS mandate.
IndiaTech.org also demands that crypto exchanges and brokers follow a standard set of rules and have a legal mandate to conduct due diligence, including KYC and keeping detailed records of transactions conducted on their platforms. While they are currently conducting these compliances voluntarily, there is no legal framework in place. This will aid in the prevention of money laundering.
Mobility and EVs
For the electric vehicle (EV) segment, the industry body suggested reinstating the 200% weighted tax deduction regime for automotive R&D expenses.
“In order to boost R&D expenses by industry, until 2019-20, the government used to offer weighted tax deductions to companies up to 200% of their certified R&D spends (later reduced to 150%). Since R&D is strategic to future development and innovation, it is important that the government reinstates the 200% regime once again to spur higher spending on R&D by industry and incentivize innovations for the future,” it stated.
Given that the Indian government has set an ambitious target for EVs by 2030. To achieve these goals, the government should also encourage the conversion of existing ICE vehicles to EVs, according to the industry body.
“EV retrofitting is an affordable solution as it will save the manufacturing process. Incentives could take the form of GST cuts and subsidy grants comparable to FAME II on retro-fitment kits, waiver of registration charges for retro-fitted vehicles, and provision of relevant financing options,” it said.
Limited financing options, high interest rates and short loan tenures have been some of the hindrances in the uptake of EVs. To push ease of financing of EVs, the sector should be brought under the umbrella of the RBI’s priority sector lending (PSL) guidelines, the body said.
Source: Money Control
https://www.moneycontrol.com/news/business/startup/budget-2023-startup-industry-body-writes-to-government-seeks-changes-in-direct-and-indirect-taxes-9676681.html
