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Updated: What Does Budget 2013 Hold For Digital Businesses?

In his budget speech yesterday, Finance Minister Mr.P.Chidambaram had proposed several significant changes that will affect the digital media industry in the country. While the minister didn’t mention any direct proposal for the digital sector, several proposals in the budget will have a significant effect on the digital media industry.

Here’s a consolidated sector wise impact of this year’s budget on the digital media industry: (Thanks to Pallav Narang from Arkay&Arkay for contributing to this article)

Investments & Funding

FDI & FII Re-classification: In order to remove the ambiguity that prevails on what is Foreign Direct Investment (FDI) and what is Foreign Institutional Investment (FII), the Finance Minister has now re-classified FII and FDI.  According to the new classification, if an investor has a stake of 10% or less in a company, it will be treated as FII and, if an investor has a stake of more than 10%, it will be treated as FDI. A committee will be setup to work out other details.

Impact: Presently, the rules and compliance that govern FIIs and investments by such FIIs are different from those governing FDI inflows into domestic companies. This appears to be a clearly well-thought move.

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Simplified Procedure For Foreign Investors: SEBI will simplify the procedures and prescribe uniform registration and other norms for entry of foreign portfolio investors. SEBI will also converge the different KYC (Know Your Customer) norms and adopt a risk-based approach to KYC to make it easier for foreign investors like central banks, sovereign wealth funds, university funds and pension funds among others, to invest in India.

Impact: In the very beginning of his speech, the Finance Minister stated that FDI, FII and ECB (External Commercial Borrowing) are the only means to finance the Current Account Deficit of India.  Therefore, we are likely to see more such proposals in the coming months to aid better FDI and FII into Indian markets. It also seems that these proposals are preparatory to the changes that will follow in the Foreign Policy next month.

Angel Investors To Be Included in Category 1 AIF:  SEBI will prescribe requirements for angel investor pools by which they can be recognised as Category I AIF (Alternate Investment Funds) venture capital funds.

Impact: This move has been proposed with respect to the ‘Startup Tax’ that was proposed in the last budget. This tax charged investors 30% income tax on the income from their investments that were above Fair Market Value. Due to several protests, this proposal was revoked to exclude registered angel investors and venture capital funds. This new move pertains to assigning them tax pass through status as is available to other registered VCs as well.

Startups Can List On SME Exchange Without IPO: Small and medium enterprises, including start-up companies, will be permitted to list on the SME exchange without being required to make an initial public offer (IPO), but the issue will be restricted to informed investors. This will be in addition to the existing SME platform in which listing can be done through an IPO and with wider investor participation.

Impact: This is great news for investors and start-ups alike, given that it will offer them a cheaper exit mode. However, there is a small catch since the regulation states that only “suitably informed investors” can invest in such enterprises. It appears that we can expect more activity with this respect to this clause soon.

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Additional Tax Surcharge: Surcharge of 10% on persons (other than companies) whose taxable income exceed Rs 1 crore to increase revenues.

Impact: This move makes LLPs and partnerships more tax inefficient as compared to companies. Since surcharge is applicable only on companies whose taxable incomes is above Rs 10 Crores, it means that other entities shall end up paying additional taxes of up to Rs 15 lakhs if their taxable incomes fall in the Rs 1 crore to Rs 10 crore bracket.


Non-Tax Benefits to MSMEs: Non-tax benefits may be made available to a MSME (Micro, Small and Medium Enterprises) unit for three years after it graduates to a higher category.

Impact: MSMEs are enterprises with up to Rs 10 crore investments in the manufacturing sector and up to Rs 5 crore investment in the services sector. These enterprises already enjoy several non-tax benefits. However, such benefits are being phased out, even if the enterprises cross the threshold by a minute percentage. This proposal will allow these enterprises to enjoy the benefits of their existing category for an extended 3 year period even after moving into a higher investment category.

SIDBI Re-financing: To enhance the re-financing capability of SIDBI (Small Industries Development Bank of India) from the current level of Rs 5,000 crore to Rs 10,000 crore per year.

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Impact: More funds will now be available with the SIDBI to provide credit to MSMEs and more companies can secure funds for their business.

Funds in Tech Incubators Get CSR Status: The Ministry of Corporate Affairs will notify that funds provided to technology incubators located within academic institutions and approved by the Ministry of Science and Technology or Ministry of MSME will qualify as CSR expenditure.

Impact:  The new Companies Bill to be passed during this budget session requires companies to spend 2% of their net profit for Corporate Social Responsibility (CSR). The proposed change in the budget will allow companies to invest in startups incubated in Technology Business Incubators inside academic institutions and show it as CSR. However, the rules for CSR spend has not been formulated yet. Will businesses be able to take equity in the enterprises nurtured by such incubators and include the cost of such equity in the CSR spends? Will they invest in startups without an equity to begin with, just for the sake of CSR? We will find out once the CSR rules are formulated.

Mobile Phones

Increase in Excise Duty: Mobile phones priced below Rs 2, 000 will continue to enjoy concessional excise duty of 1% while the excise duty for mobiles priced more than Rs 2,000 will be increased to 6% from the existing 1%

Impact: Smart phones are going to cost more for the end users. Will this increase in price really affect the sale of mobile phones with trickle down effect to others in the industry? That is something that can be seen only over time.

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Increase in Import Duty For STBs: Import duty to be raised to 10% from the existing 5% to encourage the domestic production of set-top boxes.

Impact: This move has been made in line with the recent mandate for compulsory cable TV digitization in the metros. It is likely that this mandate will be extended to other cities in the country. With increased number of set-top boxes required, it will becomes necessary to increase the domestic production of set-top boxes.


839 New FM channels in 294 cities: Government proposes to expand private FM radio services to 294 more cities. About 839 new FM radio channels will be auctioned in 2013-14 and, after the auction, all cities having a population of more than 100,000 will be covered by private FM radio services.

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Impact: No significance for digital media businesses


Core Banking Solutions & E-Payment Systems: All scheduled commercial banks and all RRBs (Regional Rural Banks) are on core banking solution (CBS) and on the electronic payment systems (NEFT and RTGS). The government is working with RBI (Reserve Bank of India) and NABARD (National Bank for Agriculture and Rural Development) to bring all other banks, including some cooperative banks, on core banking solutions and e-payment systems by 31.12.2013. Public sector banks have assured that all its branches will have an ATM in place by 31.3.2014.

Impact: More digital banking facilities are likely to be available to the customers from the end of this year. It also appears that the public sector banks are being pushed to raise their standards to be in par with the private sector banks that are more digital savvy. Remember that public sector banks were looking to deploy at least 2 million Point-of-sale (POS) debit and credit card swipe machines across merchants in smaller towns over the next two years  and had apparently shortlisted a Reliance Industries group firm, Reliance Payment Services as one among the firms shortlisted to manage and deploy these swipe machines. Around 28 public sector banks were reportedly outsourcing their swipe machines to four service providers through this initiative.

Postal Services

Post Offices To Provide Banking Services: Government has initiated an ambitious IT driven project to modernise the postal network at a cost of Rs 4,909 crore. Post offices will become part of the core banking solution and offer real time banking services and proposal to provide Rs 532 crore for the project in 2013-14.

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Impact: This proposal is in line with the mandate to increase the number of public sector banks offering digital services and real time banking.

Also Read: Budget 2013-14: Digital Business Expectations & Announcements – Live Updates

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