Union Budget 2025: Startups Seek Tax Relief, Regulatory Reforms To Fuel Growth And Digital Transformation

India's consumer internet startups are anticipating that the Union Budget 2025 will introduce policies aimed at simplifying taxation and regulations, easing compliance burdens, and strengthening digital infrastructure.

The industry is seeking tax rationalisation and policies that would reduce compliance obstacles while improving access to working capital for emerging startups.

"For startups in their growth phase, access to working capital is essential. However, traditional financial institutions are often reluctant to provide credit at favourable rates due to the typical early-stage losses as startups invest in technology and processes to find product-market fit," said Ramesh Bafna, Chief Financial Officer (CFO) of quick commerce major Zepto.

According to a Money Control report, to enhance liquidity, startups are expecting reforms in input tax credits (ITC), which are currently locked until profitability is reached. Industry stakeholders argue that this restriction ties up funds that could be used to fuel growth.

Startups are also advocating for specific reforms, such as allowing input tax credits for Reverse Charge Mechanism (RCM) payments to reduce cash outflows and permitting IGST and CGST credits to be used across group companies, thereby freeing up cash flow for larger ecosystems.

Additionally, consumer internet startups are hoping the government will address the taxation of employee stock ownership plans (ESOPs). Presently, ESOP taxation subjects employees to tax liabilities when they exercise their options, often before any liquidity event occurs, and also when selling stocks as capital gains tax.

"To ease this burden, we recommend implementing minimal STT-equivalent taxes during stock exercises and collaborating with demat providers and brokers to create tech-enabled solutions for tax liens and withholding mechanisms," Bafna said.

To encourage tax compliance, industry players have also proposed awarding CIBIL credit points for timely and significant tax payments, along with penalties for tax evasion. They believe this approach will "promote a culture of accountability while rewarding responsible taxpayers."

Easing compliance burdens

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

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

Bansal suggested relaxing the requirement for a physical place of business (PPOB) in each state by enabling a virtual place of business. He believes this would greatly enhance the ease of doing business for online sellers.

"Moreover, 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 lower costs for small-scale startups.

"To boost the startup ecosystem, offering a tax holiday or subsidised tax structure to newly formed MSMEs and startups would be extremely beneficial. MSMEs that invest in technology, e-platforms, or other tech tools should be given tax incentives to speed up digital transformation," said Dinesh Gulati, COO of business-to-business (B2B) e-commerce platform IndiaMART.

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

Industry insiders are also hopeful 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.