Budget 2025: Consumer internet startups bat for simplified tax norms, reduced compliance burden

Consumer internet firms bat for tax reforms, reduced compliance burdens in union budget 2025

India's consumer internet startups expect the Union Budget 2025 to introduce policies that simplify taxation and regulations, ease compliance burdens, and strengthen the digital infrastructure.

Seeking tax rationalisation, the industry has called for policies that bring down compliance hurdles and improve access to working capital for budding startups.

“For startups in their growth phase, access to working capital is vital. Yet, traditional financial institutions often hesitate to provide credit at attractive rates, given the typical early-stage losses as startups invest in technology and processes to achieve product-market fit,” quick commerce major Zepto’s chief financial officer (CFO) Ramesh Bafna said.

To improve liquidity, startups are expecting reforms in input tax credits (ITC), which remain locked until profitability is achieved. Industry stakeholders say that this ties up funds that can fuel growth.

Startups are also calling for specific reforms such as permitting the use of input tax credits for Reverse Charge Mechanism (RCM) payments to reduce cash outflow burdens and allowing IGST and CGST credits to be utilised across group companies to free up cash flow for larger ecosystems.

Consumer internet startups are also hoping for the government to rationalise taxation on employee stock ownership plans (ESOPs). Current ESOP taxation subjects employees to tax liabilities at the time of exercise, often before any liquidity event, and while selling stocks in the form of capital gains tax.

“To alleviate this burden, we recommend Implementing minimal STT-equivalent taxes during stock exercise, and collaborating with demat providers and brokers to create tech-enabled solutions for tax liens and withholding mechanisms,” Bafna said.

To incentivise tax compliance, industry players have also proposed assigning CIBIL credit points for timely and significant tax payments, along with demerits for tax penalties. They say the measure will “encourage a culture of accountability while rewarding responsible taxpayers".

Easing compliance burdens

While the Budget 2024 reduced the tax deduction at source (TDS) rate on various levies for e-commerce operators and got rid of the contentious angel tax, industry stakeholders are hoping for further rationalisation of tax norms, especially for small businesses.

“The Union Budget 2024 introduced significant measures like reduced TDS rates, laying a strong foundation for SMEs and the e-commerce sector. As we look ahead to the Union Budget 2025, we hope for further reforms that simplify taxes and regulations, ease compliance, and strengthen digital infrastructure,” e-commerce marketplace Meesho’s CFO Dhiresh Bansal said.

Bansal called for relaxing the requirement for a physical place of business (PPOB) in every state by enabling a virtual place of business. This will greatly enhance the ease of doing business for online sellers, he said.

“Additionally, facilitating the paperless movement of goods for B2C shipments will streamline operations and support the growth of small businesses in India, fostering innovation and inclusive growth in India's digital economy,” he added.

The industry has also called for reduced compliance burdens for micro, small and medium enterprises (MSMEs) to reduce costs for small-scale startups.

“In order to boost start-up ecosystem, offering a tax holiday or subsidised tax structure to newly formed MSMEs and startups will be quite helpful. MSMEs that invest in technology, e-platforms or other tech tools should be given tax breaks in order to improve the digital transformation at a better speed,” said Dinesh Gulati, COO of business-to-business (B2B) e-commerce marketplace IndiaMART.

Transparency in lending practices and collateral-free loans can also help in providing the much-needed credit relief and financial support, he added.

Industry insiders are also hoping for specific initiatives such as streamlining principal place of business (PPOB) and additional place of business (APOB) registrations across India and introducing an accreditation programme for large corporations to enable single-click registrations for regulatory approvals like GST APOB, FSSAI, and drug safety compliance.