Fintechs Look Towards Budget 2024-25 for Regulatory Clarity and Uniform KYC Rules
In the fast-evolving sector of financial technology (fintech), companies are keenly awaiting the announcements in the Union Budget for the fiscal year 2024-2025, with hopes pinned on policies that would foster a growth-conducive environment and address critical regulatory concerns.
A pressing request from the fintech community is for an amendment in tax policies, specifically, a reduction in the Tax Deduction at Source (TDS) rate applicable to startups. This change is sought to alleviate financial pressures and encourage the thriving of new ventures in the financial sector.
Another critical aspect that fintechs are advocating for is regulatory clarity and certainty. The landscape of financial regulation in India, adjudicated by the Reserve Bank of India (RBI), often sees fintechs navigating through grey areas due to the lack of specific guidelines for innovative products. This ambiguity has resulted in several startups having to remodel their business strategies after achieving scale, especially in the wake of new RBI guidelines.
It is understood that the RBI adopts a wait-and-watch approach, preferring to introduce specific regulations only when a business impacts a considerable segment of the population or consumer base. This policy stance, while cautious, has inadvertently hampered the growth of multiple fintech initiatives that fell into regulatory grey zones after scaling their operations.
Despite playing a pivotal role in advancing the government’s financial inclusion agenda, fintechs, unlike their manufacturing counterparts who benefit under the Make in India initiative, receive no subsidies or incentives. This discrepancy is particularly noticeable in the services domain, where fintechs operate, contributing significantly to bringing new consumers into the financial ecosystem.
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Enhancing subsidies for digital payments through the Unified Payments Interface (UPI) is another major request by payment companies. The government’s existing Payments Infrastructure Development Fund (PIDF) aims to extend the reach of digital payments to smaller cities and towns, but with the absence of a merchant discount rate (MDR) on UPI payments, many stakeholders in the UPI ecosystem operate at a loss. To mitigate this, the payment sector is advocating for an increase in government subsidies, from the current provision of around ₹2,000 crore to a much-needed ₹12,000 crore.
The fintech sector is also keen on receiving support for research and development (R&D) through incentives such as weighted tax deductions and subsidies for employee costs in R&D departments. Such measures would not only bolster innovation within startups but also generate additional employment opportunities within the sector.
Fostering a harmonious regulatory environment, fintechs are urging the government to establish a uniform framework for Know Your Customer (KYC) procedures across all financial services. This uniformity would prevent sudden regulatory changes and confusion regarding KYC requirements for various financial products, thereby ensuring a smoother operation for both fintechs and their customers.
As the budget announcement draws near, the finteliect community remains hopeful that their calls for more supportive regulations, financial incentives, and simplified tax regimes will be heeded. Such changes are crucial for not only sustaining the growth of fintechs but also for reinforcing the broader goal of financial inclusion and digital empowerment across India.
