The Union Budget 2022 will be hailed as the Digital India Budget, with the government devoted to a digital route forward, with Indian startups serving as primary delivery vehicles. The Honourable Finance Minister identified the role that Indian startups played during the pandemic and how they will accelerate India’s ambition over the next 25 years. The word “digital” was mentioned 35 times in the budget speech.
The budget’s main meaningful reform is legitimizing private cryptocurrencies as an asset class for investment. The government has recognized the broad adoption of crypto as an investment class by Indians and seeks to collect their fair share of all those gains by building a framework of crypto taxation, no matter nor pernicious.
With a flat 30 percent tax rate, no way to offset crypto gains against other losses, no way to set off crypto losses against income, and no deductions this is among the most oppressive taxing regimes for any asset class. However, it underlines the status of cryptocurrencies as an asset class and lays the path for regulation of this newly emerging sector. Moreover, it provides a foundation for Web3 companies to remain in India rather than relocating their headquarters to a region that supports crypto applications. Outside of the 2018 ban, India’s Web3 innovation has been set back by years due to a lack of regulation on crypto.
The following were the key highlights for startups in India:
- Allowing businesses incorporated between April 1, 2016, and March 31, 2023 (as opposed to 2022) to be considered eligible for tax incentives. Fund of Funds mechanism for agritech, deep-tech, pharma, and climate action innovation. The surcharge on long-term capital gains would be fixed at 15 percent, down from 37 percent previously.
- Long Term Capital Gains on unlisted securities are payable at 2.4X the rate of Long Term Capital Gains on listed securities. This budget’s parity was highly awaited. The 2022 Budget introduced parity in the applicable surcharges, however, the fact that the tax rate on unlisted securities remains twice that of listed securities is a major, unmet demand.
- The guidelines for a foreign direct listing have been usually expected to be presented in this budget since the 2020 Atmanirbhar package highlighted the desire to allow for one. For almost two years, there has been a lack of clarity, which has caused uncertainty on startup boards in terms of considering listing opportunities.
- A startup must be recognized as eligible by the IMB (Inter-Ministerial Board) in order to get Income Tax benefits. Around 450 of India’s 62,000 DPIIT registered startups are IMB certified. The reform of this approach was a commonly requested request in order to expand the Income Tax benefits of being a startup.
- Other highlights: The digital rupee will be issued by the RBI beginning in 2022-23, leveraging blockchain and other technologies. This will have a meaningful impact on the economy. 5G spectrum auction to be held in 2022 for private operators to roll out 5G telecom services in the fiscal year 2022-23.
The Union Budget 2022 highlights the government’s commitment to Indian startups and should be appreciated for fostering innovation in setting the standard for India’s next 25 years.