Budget 2023: What's in it for tech and startups?

Industry experts said the extension of relief for Li-ion cells and removal of customs duty will bring down the cost of EV batteries, thereby aiding EV adoption

Finance Minister Nirmala Sitharaman's focus on 'technology' has been commonplace in Union Budgets and this year was no different.

In the Budget 2023-24 on February 1, Sitharaman announced a slew of measures for the technology sector, ranging from giving impetus to the agritech sector to incentivising manufacturing in India in a push to make the country a manufacturing hub.

However, the government turned a blind eye to a few key demands of startups, venture capital firms, and private equity firms, leaving little to cheer about for the country's startup ecosystem which is currently the world's third-largest.

Moneycontrol takes a look at the hits and misses of Budget 2023 for startups and tech:

The government will be building a digital public infrastructure for the agriculture sector, which will work as an open-source digital public good that will support growth for agritech industry and startups, the FM said.

To further boost startups sprouting out of rural areas, Sitharaman also said the government will launch an agriculture accelerator fund for young entrepreneurs.

The Electric Vehicle industry got a shot in the arm as the finance minister while presenting the Budget 2023 said that the customs duty exemption is also extended to the import of capital goods and machinery required for the manufacturing of lithium-ion cells for batteries used in EVs.

Industry experts said the extension of relief for Li-ion cells and removal of customs duty will bring down the cost of EV batteries, thereby aiding EV adoption.

However, certain EV stakeholders were also looking for an extension of the FAME scheme by the government, which did not find a mention.

The government has carved out a distinction between online skill-based games and other games such as lottery, puzzles, and crossword puzzles through new clauses introduced in the Finance Bill on February 1, thereby providing much-needed clarity to the nascent industry in terms of taxation over winnings on online gaming platforms.

The finance bill has introduced two new sections - Section 194BA that pertains to TDS (tax deducted at source) on net winnings from online games and section 115BBJ related to computation of tax on winnings from online games.

In a press briefing, Revenue Secretary Sanjay Malhotra said the taxation will now be on net winnings from online games at a rate of 30 percent since people typically play a series of games over a period of time.

The Bill has removed the minimum threshold of Rs 10,000 for TDS while also allowing it to be calculated either at the end of the financial year or at the time of user withdrawal, with effect from July 1, 2023. Prior to this, gaming companies were required to deduct TDS at the rate of 0.1 percent for winnings each time of over Rs 10,000 while gross winnings from online gaming were taxed at a flat rate of 30 percent.

The revenue secretary noted that the TDS change came after it was noticed that a few online gaming companies were keeping the winning amount lower than the Rs 10,000 threshold.

For artificial intelligence, Sitharaman proposed setting up of three centres of excellence for artificial intelligence (AI) to research and develop applications in India.

This is in line with the country’s IT industry pushing for and expecting AI-related advancement to take over technology trends in 2023.

Sitharaman said that this move would help realise the vision of ‘Make AI in India, Make AI work for India.’ Some of the key focus areas to develop AI-based solutions will be agriculture, health and sustainable cities.

The government proposed the expansion of the government digital certificate depository DigiLocker services for the fintech sector.

"Documentation availability will be the focus for the DigiLocker expansion for the fintech sector, The fintech sector has been facilitated by digital services, PM Jan Dhan Yojana, India Stack, and UPI,” the Finance Minister said.

The fintech industry cheered the move as many players said that the steps taken to simplify KYC will in turn simplify digital spending and investment processes.

The Union Budget 2023-24 showed that the government’s financial support for the digital payments sector is expected to jump more than two-fold to Rs 2,137 crore in the current fiscal, compared to Rs 1,044 crore spent in FY22.

However, the government’s budgetary allocation for this item has remained stagnant at Rs 1,500 crore for the next financial year (FY24), for the third consecutive year.

The money allocated under digital payments is generally disbursed to banks as a subsidy for promoting unified payments interface (UPI) transactions. This subsidy is given by the government as banks are not allowed to charge users any transaction fees on UPI.

The government will be training lakhs of youngsters in the next three years in subjects such as drones, artificial intelligence, coding, and other soft skills under the Pradhan Mantri Kausal Vikas Yojana 4.0, which will give an impetus to the drone industry.

Sitharaman said, "Pradhan Mantri Kausal Vikas Yojana 4.0 will be launched to skill lakhs of youth within the next 3 years. On job training, industry partnership and alignment of courses with needs of industry will be emphasised."

The drone industry has been demanding help with regard to drone pilot training and developing other associated skills.

"It is great to see drones finding a mention in regard to skill development in the recently announced budget. As the drone industry scales up, availability of skilled personnel will be a very important challenge to be solved," Smit Shah, president of Drone Federation of India told Moneycontrol.

The government has increased the budget estimate for the Ministry of Electronics and Information Technology to Rs 16, 549.04 crore from Rs 11,719.95 crore revised estimate of 2022-23, translating to a 40 percent increase.

The actual allocation for the period of 2021-22 stood at Rs 8,118.65 crore, making this year's budget estimate nearly double of what it was two years back.

Majority of the Rs 16,549.04 crore budget estimate, around Rs 12,440 crore, has been reserved for schemes and projects under the ministry such as Digital India Programme, Modified Programme for Development of Semiconductors and Display Manufacturing Ecosystem in India and so on.

What is notable is that the Digital India Programme has been given a reduced budget estimate for this year when compared to the 2022-23 revised estimate. While in 2022-23, the revised estimate for Digital India stood at Rs 7,603 crore for Budget 2023-24, the estimate was lowered to Rs 4,795 crore.

The government has extended by a year the date of incorporation for startups to qualify for tax benefits, accepting a key demand of the industry. The Budget also proposes to extend the period for startups to carry forward losses by three years.

Only those startups incorporated before April 1, 2023, were eligible to get tax benefits. Now the date has been extended to April 1, 2024. The minister said startups would be allowed to carry forward losses under section 79 to 10 years from current seven years. Until now, eligible startups were allowed to carry forward and set off losses if a such loss has been incurred for seven years beginning from the year in which the company was incorporated.

The government yet again turned a deaf year to a long-standing demand from PE/VC circles to cut the long-term capital gains (LTCG) tax on unlisted shares and bring it at par with that of the listed ones. Had the government accepted the demand, it would have given a fillip to local currency-denominated funding in the country.

Moreover, the government also did not accept the demand from startups to  widen the basket of startup employees that can avail the tax deferment facility on ESOPs (employee stock option plans), a move that would have helped new-age companies attract and retain talent.

Importantly, the announcements on tax sops and the extension the period for startups to carry forward losses by three years will only benefit startups holding Inter-Ministerial Board (IMB) certificates. According to NASSCOM, there are 645 IMB-certified startups in the country, less than 0.8 percent of the over 82,000 DPIIT (Department for Promotion for Industry and Internal Trade)-recognised startups.