India’s budget boosts startup, e-commerce ecosystem; silent on digital assets

India’s finance minister, Nirmala Sitharaman, has abolished the ‘angel tax’ to bolster entrepreneurial spirit and support innovation. However, she remained silent on requests from the digital asset industry to lower taxation as she presented the Budget 2024-2025 in Parliament on July 23.

This is India’s first budget after Prime Minister Narendra Modi won a rare third consecutive term during this year’s national elections. The Union Budget is an annual financial statement outlining planned government spending and expected revenue for a specific year.

“I have a few proposals to promote investment and foster employment. First of all, to bolster the Indian start-up ecosystem, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” Sitharaman said in her speech.

The angel tax treats investments received by startups from external investors as ‘income from other sources’ and levies a 30% taxation on them. Often short of funds, startups tend to lose money as angel tax requires them to share a significant part of the investment towards paying taxes.

Technology startups in India have grown significantly to about 31,000 in 2023 from around 2,000 in 2014. According to NASSCOM, a trade association of India’s IT industry, the sector witnessed the creation of about 1000 new tech startups in 2023.

The Modi-led government plans to boost employment, upskilling the work force, startups, and small businesses in the current financial year that ends in March 2025, after unemployment emerged as a key voter concern despite India’s strong economic growth. According to the Centre for Monitoring Indian Economy (CMIE), an independent think tank, India’s unemployment rate stood at 9.2% in June 2024, a sharp increase from 7% in May 2024.

“India’s startup ecosystem received a big boost in today’s budget as the angel tax is abolished for all classes of investors. This move will be a gamechanger for startups planning to raise funds for their expansion as it will give startups more surplus funds to invest in product innovation and technology development to implement their long-term vision for the industry,” Shivam Thakral, chief executive of BuyUcoin, one of India’s digital asset exchanges, said in an email.

“The move will encourage a lot of innovators to start their entrepreneurial journey and VCs [venture capital] will find it more convenient to invest in early-stage startups. With deep-tech, blockchain and emerging technologies in focus. VCs will be keen to bet on innovative technologies to facilitate the transition from Web2 to Web3,” Thakral added.

According to Raj Kapoor, founder of India Blockchain Alliance, the abolition of the angel tax is being perceived as a “major fillip,” especially for technology startups, as they would no longer need to look for options outside Indian shores.

“This will also have a significant impact on the future development of India’s startup ecosystem, as well as its ability to attract both foreign and domestic investments,” Kapoor told CoinGeek.

“Abolishing the angel tax for all classes of investors will work towards bolstering the Indian startup ecosystem. We look forward to more Web3 startups setting base in India, given India’s immense Web3 talent and potential,” Dilip Chenoy, Chairperson of Bharat Web3 Association, an industry body formed to promote and grow the local Web3 industry, told CoinGeek in an email.

Collectively, Indian Web3 startups have secured funding exceeding $2.5 billion, reflecting the landscape’s robust growth and investment potential, Sumit Gupta, co-founder of CoinDCX, India’s first digital asset unicorn, said in an email.

“In 2023, Indian Web3 projects secured approximately $270 million in funding. These figures indicate investors’ interest in the region’s early-stage Web3 innovation. As Web3 becomes more mainstream, investment in Web3 startups is expected to increase. The abolition of the angel tax will definitely benefit Indian founders, especially those leading early-stage Web3 companies in India,” Gupta added.

E-commerce incentives

To enable micro, small and medium enterprises (MSMEs) and traditional artisans to sell their products in international markets, Sitharaman said that India will set up e-commerce export hubs in a public-private-partnership (PPP) model. These hubs, under a seamless regulatory and logistic framework, will facilitate trade and export-related services under one roof.

Tax deducted at source, or TDS, on e-commerce operators will also be reduced from one to 0.1%.

“Turning to the services sector, I propose development of DPI [digital public infrastructure] applications at population scale for productivity gains, business opportunities, and innovation by the private sector,” Sitharaman said in her speech. These are planned in sectors including e-commerce.

The Indian e-commerce industry is expected to cross $350 billion by 2030, India’s Economic Survey 2023-24 said on July 22. India’s e-commerce market has gained significant momentum during the past few years owing to technological advancements and evolving new-age business models coupled with government initiatives, including the Digital India program and Unified Payments Interface (UPI). However, data privacy issues and increasing online fraud have turned out to be the most significant hurdle in the growth of e-commerce in India.

No comments on digital assets

India imposes a 30% flat tax on all digital asset income from April 2022 and a 1% tax deducted at source (TDS) from July 2022 on all digital asset trades above 10,000 Indian rupees (US$120). The country also does not allow digital asset traders to offset losses against gains. In 2023, India implemented a penalty equal to TDS for non-deduction with an interest of 15% yearly for late payment, and even a jail term of up to six months.

India will likely witness a loss of $1.2 trillion in trade volume on domestic exchanges over the coming years, a Esya Centre, an Indian policy think tank, claimed. The study also points out that due to the imposition of harsh tax measures, as much as $3.85 billion has moved to overseas digital asset trading exchanges as traders lookto evade punishing taxes in India.

As a result, the Web3 industry has been requesting the government establish a level playing field for virtual digital assets (VDAs). The requests include reducing TDS from 1% to 0.01%, allowing offsetting and carrying forward losses, and treating income from VDAs at par with other capital assets.

“We were hoping for some relaxation to the taxation framework on VDAs in this budget, but the absence of any announcement is not particularly disheartening, given the government’s overall negative stance towards the sector. We have submitted data-backed quantitative analyses regarding the flight of users’ trading and transactions, as well as the potential increase in government revenue should the taxation structure be revised,” Chenoy said.

“We will continue to push for rationalization of the taxation framework. We are hopeful that the government will consider our requests and that we will see changes in the future,” Chenoy added.

While the fastest-growing major economy is looking to regulate the digital assets space, Sitharaman said in March that ‘cryptocurrencies’ cannot be a legal currency in India; they are simply assets for trading and speculation.

“The delay in reducing the TDS will hamper the industry growth prospects as digital assets will not have a level playing field with other asset classes like stocks, gold, and real estate,” Thakral said.

“The high tax on gains from VDAs still stands at 30%, which is relatively very high, and the users are not allowed to offset losses, like stocks [in the traditional financial market]. This move will prove to be detrimental for the Web3 industry as it deprives the industry of a level playing field,” Thakral added.

WazirX influence

According to Kapoor, Sitharaman’s silence on digital assets “is possibly last minute due to the WazirX scam, [and] is not on expected lines. We need to speak on the regulatory aspects and not look the other way. We expected a stance on crypto, but that seems to be a story for a later day.”

WazirX, one of India’s largest digital asset exchanges, halted trading and even announced a reward of $23 million to help recover the $234 million it lost in a cyber attack.

“We have increased the White Hat Recovery reward to 10%, i.e., up to $23 million. We invite white hat hackers, blockchain forensics experts, and cybersecurity professionals from around the world to join this critical mission and protect the integrity of the crypto ecosystem,” the digital asset exchange said on X.

On July 18, WazirX said it lost the amount from one of its multisig wallets, which was operated utilizing Liminal’s digital asset custody and wallet infrastructure from February 2023.

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