Budget 2022 | What does it mean for startups, digital ecosystem

Finance Minister Nirmala Sitaraman.

Investors and entrepreneurs were pleasantly surprised by what the Union Budget that was presented in the Lok Sabha on  February 1 had in store for them. From a much-awaited cut in long-term capital gains (LTCG) tax on unlisted shares to levying a tax on crypto gains, a sign of legitimising the asset class, there was a lot to unpack.

“I think it's a great Budget in terms of the infra & the capital goods push—so every startup that is serving these industries will get a leg up,” said Yagnesh Sanghrajka, CFO at 100x VC, an early-stage investor.

“The taxation of digital assets was anyway expected. A lot of positive announcements for health-tech, edtech, and EV startups. The whole digital push will benefit startups overall.”

Moneycontrol unpacks the announcements made by Finance Minister Nirmala Sitharaman and what they mean for individual stakeholders and the startup community at large.

The long-term capital gains (LTCG) tax will bite a little less for startup investors, with the surcharge cut down from 37 percent to 15 percent.

Tech investors felt they were getting the shorter end of the stick, as they invest in riskier companies and also pay higher taxes on incomes from their success.

The tax rate remained at 20 percent but the surcharge, applicable on income of over Rs 2 crore, has been cut. The net LTCG rate falls from 28.5 percent to 23.9 percent.

Follow our LIVE blog for the latest updates of Union Budget 2022

A battery swapping policy will be introduced to set up charging stations at scale along with formulation of interoperable standards.

This will help mitigate one of the biggest hindrances to adoption of electric vehicles in India—range and charging anxiety.

Startups like Accel-backed Bounce are likely to benefit from this measure.

After endless debate and speculation on the legality of cryptocurrency, the government finally voiced its view, albeit indirectly, saying that digital assets will be taxed at 30 percent, along with 1 percent tax deducted at source.

It is a flat rate, not yet broken down into short or long-term capital gains. But the crypto industry welcomed the move, considering it an indication that the government will regulate crypto and not ban it.

“As a VC fund manager, I was sitting on the fence for the crypto segment, largely because of the indecisiveness on the subject by the government. However, the honourable FM has all given a clear message that cyrpto trading will now be legalised in India—crypto is here to stay and the government is here to support,” said Anirudh Damani, managing partner at Artha Venture Fund.

Finance Minister Nirmala Sitharaman said the Reserve Bank of India (RBI) will launch a central bank digital currency (CBDC) in 2022-23, marking the first official statement from the government on the launch of the much-awaited digital currency.

A central bank digital currency is the legal tender issued by a central bank. It is the same as a fiat currency but the form is different and is exchangeable one-to-one with the government-issued money.

In other words, CBDC is the same as the legal currency we use. Just that it's in a digital form.

An Animation, Visual Effects, Gaming, and Comics (AVGC) promotion task force will be set up to build domestic capacity to serve domestic markets and global demand.

The move is expected to address one of the key challenges of hiring talent for gaming firms.

Several startup founders had been saying that there was no pre-trained talent pool since the game development industry was still relatively new in the country.

So far, startups incorporated between April 1, 2016 and March 31, 2021 were eligible for a 100 percent tax rebate.

The finance minister extended the eligibility by a year to March 31, 2023. Startups can now avail 100 percent tax rebate for a period of three years in a total time frame of 10 years of operations.

Financial support for the payments ecosystem will continue in FY23 to encourage further adoption of digital payments. This hints at the continuation of the Zero MDR regime for UPI and RuPay debit card transactions.

No charges will be levied on merchants for accepting payments through these transactions. The government had announced a Rs 1,300-crore scheme in December 2021 to incentivise digital payment ecosystem players and banks for payments up to Rs 2,000 that were executed in FY22.

As per the FM’s announcement, this scheme is expected to be extended to FY23 as well.​

Sitharaman announced an open platform for national digital health ecosystem. It will provide unique digital IDs, meant to promote universal access to health facilities.

DESH stack for skilling for job seekers

A DESH stack e-portal will be launched to empower citizens to skill, reskill or upskill through online training.

It will also provide API-based trusted skill credentials, payment and discovery layers to find relevant jobs and entrepreneurial opportunities.

The upskilling market is taking off in a big way in India, with a slew of startups focusing on this space.

The government will form an expert panel to encourage venture capital and private equity investments, following a record breaking 2021 for PE/VC investments.

The government, through the panel, will examine "appropriate measures" to scale up investments, indicating more policies that could help investors who are pouring foreign capital into Indian companies.

However, some investors noted a crucial miss—lack of clarity on foreign direct listing for Indian startups, which has been expected for some time now.