The History and Future of Angel Tax

“I propose a series of measures to deter the generation and use of unaccounted money. To this end, I propose:

Increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value.”

When ex-Finance Minister Pranab Mukherjee introduced angel tax in 2012, it created an uproar in the fledgeling startup and angel investor community. While the purpose of this section was to reduce money laundering by imposing the hefty tax rate of 30.9 percent, it had several inadvertent consequences.

There were several cases of money laundering by Jaganmohan Reddy that were caught by the Enforcement Directorate, who revealed that people had “paid bribes to Reddy in the form of investments at exorbitant premiums in his various companies to the tune of Rs 779.50 crores apart from making payment of Rs 57 crores to him in the guise of secondary purchase of shares and donation of Rs 7 crores to the YSR Foundation”.

To prevent such abuses of the law, the government clamped down and stated that any unjustified share premium given by a private company would be taxed as income in their hands. But to catch one culprit, they threw the book at many innocents. The relevant law known as section 56(2)(viib) of the Income Tax Act came to be known as the angel tax section. Many startups which are private companies and had issued shares at a premium to angel investors ended up facing notices from the tax authorities under this section. This premium is treated as income in their hands, classified as “income from other sources” and taxed at the maximum marginal rate of tax.

The ‘Startup India’ initiative changed all that. Under the stewardship of the Honourable Prime Minister, startups became a focus area. As per the ten points in the Action Plan, if a startup was registered post- April 1, 2016, then the angel tax was not applicable to the startups. The move had helped startups operating in that area, but a problem still existed for startups that were incorporated before 2016. In fact, in December 2017, many startups received notices and orders for the Financial Year 2013-14. A few entrepreneurs who faced income tax notice hassles launched an e-petition called Change.org in January 2018 so that the government could take some concrete action in Budget 2018.

iSPIRT has taken up the matter with MoF and DIPP on the same. We had made some representations to MoF specifically before the budget. In the budget, the Finance Minister made a statement on continued assistance to the Angel Ecosystem. Due to rigorous efforts that went into sharing of information by these startups, we have recently seen MoF making the welcome announcement.

As per the latest announcement, angel tax would not be applicable on startups which are incorporated before 2016, fulfil the criteria under Startup India Policy and have been granted angel funding up to Rs10 crores. It is believed that at least 300 startups will get a breather from angel tax. The government is also likely to establish a separate committee for the recognition of startups that meet these criteria.

In a further relief to startups, the Finance Secretary Hasmukh Adhia also announced that income tax officers would not take precipitate action and will proceed only after the first set of appeals decided in appellate cases. The exact phrase they used was “no coercive action”, which helped many startups heave a collective sigh of relief. All pending appeals by March 31, 2018, will be quickly addressed.

If you are a startup and need further guidance on angel tax, you should follow the steps below:

  1. Register at DIPP for a startup even if you were incorporated before 2016 and currently are still a startup as defined by DIPP by logging onto this site and filling up the form at https://www.startupindia.gov.in/registration.php.
  2. If you are a startup as per DIPP definition, then get your DIPP certification. All startups which may have raised funding post-April 2016 and are registered with DIPP will not have angel tax applicable to them.
  3. If you are a startup which has received income tax notices for years before 2016 and is still eligible to register as a startup, then please register yourself with DIPP. You can share the registration certificate and relevant notifications with the assessing income tax officer to get an exemption from angel tax.
  4. If you are a startup which has received income tax notices for years after 2016, then please repeat step 2 mentioned above and then appeal against the order. It is important that due process is followed so that the redressal measures taken by the tax authorities can come into effect.

These startups do not have to pay 20% of the tax order at the time of appeal as this has been a one-time exception granted till 31st March 2018 to avoid hurting the sentiments of the startup ecosystem. You can share the order with iSPIRT.

Also, pursuant to our meeting with MoF, we have been assured that the income tax officers in the various jurisdictions have been directed to exercise leniency on this till the new taxation regime for angel and venture capital investors comes into place, as announced by the Finance minister in his budget speech. The officers are aware of the hardships that startups now face and are doing their best to mitigate this within the ambit of the current law.

DIPP and MoF are also in the process of allowing a waiver to the earlier startups facing the angel tax issue, provided the investment made is under Rs 10 crores and subject to an Inter-Ministry board approving the same. This should happen in the next 5-10 days.

We will encourage all startups which have received notices and orders under Section 56 to follow the above steps to chart their way across the new announcements.  

Please forward your orders to nakul@ispirt.in enabling us to use these orders to take a strategic view to policy to help with this issue in the long term.

Start up India.

Stand up India.

This post is co-authored by Nakul Saxena and Siddarth Pai, Policy Expert Council Members, iSPIRT Foundation

iSPIRT’s Response to Justice SriKrishna committee’s White Paper on Data Protection Framework for India

Read more about the Data Protection Law here: http://pn.ispirt.in/india-in-a-digital-world co-authored by Shrikant Karwa and Sarika Mendu.
For any query, Feel free to write to us: community@ispirt.in

While Well-Intentioned, Budget 2018 Falls Short of Expectations

Starting nine years ago, Aadhaar, eKYC, UPI and the rest of India Stack laid the foundation for a formalization of the Indian MSME sector. With the introduction of Aadhaar for Business and the unlocking of GST data for lenders, we are poised to see an explosion in flow-based lending to MSMEs, ultimately having a multiplier effect on jobs and economic growth. This is great news for MSME focused digital lenders and the product startups serving them. Therefore, a significant digital dividend for the Bharat economy is finally in sight.

It is heartening to see government adopt the same digital-first approach when it comes to health and education. While this is a great start, much work remains. Laying the policy foundation alongside an India Stack inspired technology spine will ensure the rise of the Bharat focused tech-entrepreneur. We need India’s entrepreneurs to lift outcomes for patients and students not adequately served by our existing system.

On the startup and investor fronts, this budget is a missed opportunity to address the important near-term issues. We had hoped to see the resolution for Angel Tax and other such Stay-in-India Checklist issues. Slapping a Long-Term Capital Gains Tax on the previously untaxed sale of listed equities will adversely affect the List-in-India initiative. Additionally, the compliance overhang of listing will no longer be tempered by the promise of tax-free gains. The promised tax regime must incentivize and protect foundational (angel and domestic investors) as opposed to fleeting capital.

While well-intentioned, this budget falls short of our expectations. India’s complexity and diversity call for a much more responsive and action-oriented policy-making approach. Only then can we harness our entrepreneurial energy to address India’s most pressing challenges.

About iSPIRT
iSPIRT is a non-profit technology think tank that builds public goods for Indian product startup to thrive and grow. Learn more: www.ispirt.in

Sanjay Jain, Nakul Saxena, Sudhir Singh and Sanjay Khan Nagra Fellows from our policy team have issued a press release on 1st February 2018, a copy of it is here. Reach out to Sanjay Jain in case you would like to know more details.

Special thanks to our volunteers Sharad Sharma, Siddarth Pai, Tanuj Bhojwani, Sarika Mendu, Anukriti Chaudhari, Karthik KS. 

Economic Survey coverage on IT Sector and Exports

Every year we have two events in financial year end which attracts every one right from Industry, Agriculture to common man of this country. These are annual budget of Govt. of India and preceding the budget the Economic survey. The Chief economic adviser who keeps an eye on the Economy of the country round the year and advises the Govt. on right policy formulation, presents the Economic Survey year, which is both the stock of performance of the Economy as well as a guide to investigate future, especially setting the thought process for the budget.

This year’s Economic survey was very important from the perspective of having come after two consecutive events in short term, the Demonetization effect + GST. This year’s economic survey also moved ahead from “digital economy” theme. The word digital finds only a lip service in certain places in volume II.

The information technology sector has been an important sector of Indian economy for last 2 decades. This write up is a synopsis view of how Economic survey has projected the performance of this sector vis-à-vis the rest of economy.

On overall terms, Chief Economic Advisor(CEA) is very optimistic and has projected a 7+% growth in GDP in next one-year time frame. He has rightly quoted the positive indicators from International rating agencies of Moody’s upgrade of India’s ranking and a jump in world banks ranking on Ease of doing business.

The “Software” and IT is covered under “services” as the balance of payment accounting accounts “Software” under services and non-factor services balance. This accounting entry in current account balance has consistently performed for years for India. The following chart is self-explanatory on this.

Almost every Government record uses the terminology IT-BPM to aggregate both IT services and ITeS exports. Software forms part of IT exports and it is difficult to estimate the Software product exports in this category as it includes mix of various reporting.

In India there are two sources of data for Software exports. One from a RBI data based on remittances reported under specified codes and secondly from data and analysis reported by NASSCOM, STPI and Jurisdictional SEZ commissioners.

The interesting difference in this year’s Economic survey is the data reported by RBI and NASSCOM is in two different directions. Usually both do not match. This year RBI reported a negative (-)0.7% in 2016-17 growth in exports, whereas NASSCOM registered a 7.6% growth in exports.

Another interesting chart from economic survey reporting from this sector is a report from world bank data base. The chart given below depicts that India, Israel and Philippines as top players in ICT exports to the world. It is common knowledge that Israel’s exports are based on their competitive advantage in Software products, India in IT Services and Philippines in BPO. Israel a small country export levels using product as a base are higher than India’s in IT services. It goes without saying that India needs to shift its strategy in the sector and give emphasis to products in its ICT portfolio.

FDI inception in the sector can not be estimated separately from given data. However, FDI in overall services sector (of top 10 service sector) had a share of 65.8%. in April-October 2017-18.

The survey also reported a robust growth of services sector to 16.2% in April-September 2017 owning to major sectors like travel and Software.

Software services share was 45.2% of overall services exports in 2016-17. (The software however in report means complete IT sector).

GST in Economic Survey

On fiscal policy side, GST is a new entrant in the system. GST also treats every thing that is intangible in IT as service be it is a IT Service or a Software product. As per CEA there is a 50% increase in registration of tax payers after GST introduction. This is a healthy sign for the economy and for digital transformation of economy.

With indirect tax on Software having risen from 15% to 18% there will be a larger gross value addition in Domestic market by the Software sector. Plus, increased digital adoption is expected to boost the overall domestic trade in this sector.

GST system also effects how exports are done. On export front discounting the initial difficulties exporters had, GST is expected to ease the compliance on export front as well as complexities that affected many on Place of supply/provision of services rule.

Other general announcements on Exports

Many of the India’s states are much larger than some developed countries. However, it is for first time that a comparison or detailed data on the international exports of states has been included. Also this data shows a strong correlation between export performance of states and their standard of living and affluence.

A figure from Economic survey is reproduced below.

IT is said that there is no super star exporters in India. According to survey, top 1 percent of Indian firms account for 38 percent of exports; in all other countries, they account for a substantially greater share (72, 68, 67, and 55 percent of exports in Brazil, Germany, Mexico, and USA respectively). And this is true for the top 5 percent, 10 percent, and so on.

This analogy also helps us undertand that in IT sector also there is no superstar that is ruling the globe in international trade from India. Rather in IT the spread is much wider and open. India needs to build a Google is the dream that remains to be realised for this sector, to be a true Software power.

A chat below explains this in the survey.

Conclusion

There is a clear cut challenge on economic front for IT sectors. The share of IT exports in total Services export has also been going down for last few years. Survey says Govt. is taking several steps to boost this. However, the reality is that government has yet to take right steps in changing world scenario both to boost the exports as well as growth of domestic IT industry.

Government has failed to recognize formation of a sub-sector of SaaS products and bring up new programs and schemes for promotion of Software product as a sector with in IT. iSPIRT has been continuously working to influence the policy makers to come up with a Software Product policy which can lead to announcement of a Scheme for SaaS companies and boost morals of Indian Startup entrepreneurs to stay in India and run global business from India.

With this background now we look forward for a Budget 2018.

 

List of Startup Issues resolved Stay-in-India Checklist

iSPIRT has taken up a checklist of issues to be resolved for helping Startups stop relocating themselves abroad and stay in India, popularly called as Stay-In-India Checklist. These were taken up with Department of Industrial Policy and Promotion (DIPP) under Ministry of Commerce, Government of India. DIPP is also the administrative department for Startup India Policy.

There are a number of issues that have been resolved, till today.

A list of eight issues that have been resolved until now that directly effects the Startups on company law or their promotion and ease of doing business are given below.

1.  IPR Registration

A scheme for promoting IPR awareness has been brought out by DIPP with an objective of promoting IP awareness, conduct workshops and training to enable an innovation-driven environment. The details of the scheme are given on DIPP site like here.

2.  Conversion process of LLP into company

Conversion of an LLP into a company was allowed with an amendment to Section 366 of the Companies Act, 2013, as notified on 1 April 2014. This has further been simplified by bringing down threshold of member from 7 members to 2 members. Please refer to the amendment in section 266 of THE COMPANIES (AMENDMENT) ACT, 2017, published on 3rd January 2018. Refer the link http://www.mca.gov.in/Ministry/pdf/CAAct2017_05012018.pdf

3.  Incorporation process to be simplified

Rule 38 of Companies (Incorporation) Rules, 2014 provides for SPICe (Simplified Proforma for Incorporating Company electronically) form for incorporating a company. This is considered to be a welcome step as this simplified procedure would save the time of incorporation of a company.

The Fourth amendment rules notified on 1st October 2016 and Fifth amendment notified on 29 Dec 2016 came in to force from 1st January 2017 provides for much simpler SPICe form, now known as E-Form SPICe (Form INC-32).

SPICe now integrates into single application  – reservation of name, allotment of Directors Identification Number (DIN). It can be filled without having DIN already, by maximum three directors.

The company is allotted Permanent Account Number (PAN) and Tax Deduction Account Number (TAN) and Certificate of Incorporation (CIN) on completion of form and processing by ROC. The PAN number is printed on CIN.

For details visit MCA FAQ at http://www.mca.gov.in/MinistryV2/spice_faqs.html

4. Provisions permitting outbound or Cross-Border

MCA has notified Section 234 of the Companies Act 2013 (2013 Act) which permits cross-border mergers with effect from 13 April 2017. MCA has also notified relating amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules 2016 (Merger Rules) by inserting a new Rule 25A to be effective on and from 13 April 2017.

The provisions now permit cross-border mergers both ways.

  1. Inbound – Foreign company merging into Indian company
  2. Outbound – Indian company merge into a foreign company.

This will help the intra-group situations and also open opportunities to raise capital, diversify ownership base and achieve other strategic objectives

5.  Regulation on Insider trading on private companies

Section 195 of the Companies Act, 2013 has been omitted by way of Companies (Amendment) Act, 2017 as it was deemed that the SEBI regulations on the same are wide enough to cover such instances. Currently, there is no provision under the Companies Act, 2013 which deals with insider trading in private companies

 6. Regulations governing TDS to be rationalized

Thresholds limits for TDS deductions under various sections has been increased and also the rate of tax rationalized in some cases in the Budget 2016. We may see some more changes coming in future.

7.  Single window agency for closure of failed startups

The Insolvency and Bankruptcy Code 2016, is a single legislation clubbing together the processes for resolution or liquidation of corporate persons.

Sec 12 of the Insolvency and Bankruptcy Code, 2016 provides for closure of failed startups within 180 days, which can be extended by another 90 days.

This provision removes the hindrance of long drawn procedures and timelines when it comes to the closure of such failed startups by capping the process at 180 days.

8. External commercial borrowing guidelines to be relaxed

A startup can borrow up to US$ 3 million or equivalent per financial year under ECB framework, either in Indian rupee or any convertible foreign currency or a combination of both. In case of borrowing in INR, the non-resident lender should mobilize INR through swaps/outright sale undertaken through an AD Category-I bank in India.

We have already covered this announcement in detail on our blog at http://pn.ispirt.in/external-commercial-borrowing-norms-for-startup-ecb/

iSPIRT will be further pursuing with DIPP and other Departments and Ministries of Govt. of India on the additional items in Ease of Doing Business for starts ups and furthering its agenda of Stay in India.

Software Exports – GST makes it difficult to do business

The GST was welcomed by all as a revolutionary measure. We had covered one earlier topic, “How GST will work for software exporters”. There have been many changes in last few weeks before GST was launched in the IGST law.

Please note that “GST law” treats Software as “Service”. Hence, there may be a mention on “Software” and “Services” in mixed manner in the write-up. This write-up is just focusing on problems and issues created for exporters by the GST process. On details of process there are many blogs on internet.

After launch of GST since 1st July 2017, we came across many questions and concerns on how GST on Exports. I have been trying to write a piece on how the process works for Software exports under GST. However, the policy and process for export of “Services” was not at all clear. I have myself struggled through,  and it has taken more than 6 weeks to understand the process, raise exports invoices and multiple documentations required.

GST has turned out to be nightmare, especially for Small and medium Software exporters and will continue to do so, unless corrective measures are taken up.

Let us look into how process required to be complied, caused problems.

Exporting Software under IGST law

IGST law on one hand treats exports as “Zero-rated” supplies and on the other hand treats exports as “inter-state” trade instead of “International trade”. These two corollaries of GST law are inherently paradoxical.

Being Zero-rated there is no tax or duty on export. However, being Inter-state trade (rather than being international trade) it requires payment of IGST under IGST law.

If one delves deep in to this application of IGST on exports, it clearly comes from concern of tax policy makers on “Goods”, moving in a container and a compliance assuring good reach port of export and gets exported finally. That this does not apply to services has not been thought over by the GST law makers. (the assumption may be services will adjust in due course of time)

Hence, as per IGST law an exporter is required to either

  1. Pay IGST 18% on Software export and get it refunded

Or Export without IGST by

  1. Filing a Bond if the exports in previous year were less than rupees one crore.
  2. Filing a LUT if the exports in previous year were more than rupees one crore.

Filing a Bond requires submitting a Bank Guarantee to GST department up to 15% of the amount of duty applicable on estimated exports value in a given (say a year). The jurisdictional office of GST has a discretion to decide bank guarantee amount anywhere from Zero to 15%.

If the office approves zero % (or nil) bank Guarantee, the department asks a set of declarations and data of past year.

Anything that is based on discretion in regulation, also brings in corruption with it. Whereas there is news from many places that jurisdictional GST office are waving bank guarantee clause for Software/IT exports. There is also news that GST department is randomly asking for bank guarantees.

Problems created by IGST law

Locking of working capital

A small software exporter or a startup not having more than 1 crore of “export turnover” in past year will have to opt for either option a) Or b) from above choices i.e. either the exporter has to pay duty and get a refund or has to sign a bond with bank guarantee.

If the bank guarantee is not waved by the jurisdictional officer, the exporter will have to keep the bank guarantee replenished continuously to support regular exports.

gst-workingcapital

In either of the cases the IGST law locks the working Capital of the start-up or small exporter.

The GST law therefore goes against policy of Government of India to promote startups. It also is going to be regressive measure for large number of small IT companies, IT consultants and freelancers.

Discretion causes corruption on ground

Anything that is based on discretion in regulation, also brings in corruption with it. For those who want to file bond, the jurisdictional office of GST has a discretion to decide bank guarantee amount anywhere from Zero to 15%.

Whereas there is news from many places that jurisdictional GST office are waving bank guarantee clause for Software/IT exports. There is also news that GST department is randomly asking for bank guarantees.

GST department’s manual intervention in Exports

Exports before GST were never allowed to report or get clearance from Indirect tax departments. Now, GST department has become a gateway for every exporter of Goods and Services, thus extending mandate from domestic tariff area to international trade also.

What is cause of concern is this intervention of GST department is manual as against the principle of making entire GST system end-to-end digital. This give power in hands of indirect tax officers to monitor exports.

This perhaps is a fundamental error that Government of India have made, against it’s public stance on “Ease of doing business.”

This is a problem for all exporters including those with “export turnover” more than 1 crore and eligible to sign a LUT with GST.

It is more of less like traffic policing the exports on regular basis and heavily increased compliance.

GST has no focus on Software exports

The entire GST law has been written with physical Goods in mind but applied equally to both Goods and Services. Once again Government of India has made a classical mistake. It is an irony that a nation that is known to be power house of Software has not focus of tax authorities on “Software exports”.

The concept of Bank-Guarantee is detrimental to Startup eco-system and SMEs

Startups and SMEs require removal of regulatory barriers for them to grow. GST law has done just the opposite. It requires small exporters and Startups to furnish Bank Guarantees.

GST for supplying to SEZ

SEZs are deemed to be considered outside the customs territory of India. Hence, supplies to SEZ units by exporters in India i.e. DTA will be treated in same manner as exports to clients located outside the country.

Therefore, if a Startup or a Software product company is selling to an SEZ unit, the process will be same as that of exporting.

Conclusions and Recommendations

Government of India has seriously lost focus on “Ease of doing business” agenda, startup policy, SMEs and supporting self-employed professionals while framing GST/IGST laws.

It is recommended that

  1. Government of India should notify a clearly stated policy for Services and Software exports and not mix or generalize with remaining Goods exports.
  2. The GST department should have no or minimum (limited to Digital medium) only in regulating exports of Services and Software
  3. IGST duty and refund mechanism and also Bank-Guarantee or LUT should be done away for Services and Software export. A quarterly and annual reports is enough on digital platform, regulated digitally. In order to bring or include Services exporter under DGFT regulation, IEC can be made mandatory and used to regulate Services trade. IEC is same as PAN now, hence, IEC can be used by all size of exporters.

Build On IndiaStack – Venture Pitch Competition

Announcing ‘Venture Pitch Competition: #BuildOnIndiaStack’

Dalberg and iSPIRT invite applications from early-stage ventures that are tech-
based solutions leveraging the India Stack platform at the core of their business
model to bring financial or transactional services to the underserved in India.
Pitch to some of the leading investors and thinkers in the Indian start-up ecosystem,
including the Bharat Innovations Fund, Omidyar Network and Unitus Seed Fund.
Winners will spend an hour of 'Think Time' – a mentorship session with
technology evangelist Nandan Nilekani.

Who are we looking for?

We are open to all innovations that use the India Stack to unlock new business
models or reach previously underserved new customer segments across sectors
such as financial services, education, healthcare and others. Some core focus areas
for the competition may include digital lending and supporting activities, such as
alternative credit scoring; sector specific affordable digital finance services such as
health insurance or education loans; sector specific digital services such as skilling
and certification, property registration agreements, patient-centric healthcare
management; and SaaS platforms “as a service” that support the development of
other India Stack based innovations such as Digi-locker or e-sign providers.

 

Who is eligible?
All applicants should:
1. Meet the 3-point criteria: tech enabled, leveraging India Stack Platform and
serving the underservedBe

2. Be a part of two (minimum) to four (maximum) members team including the
founder of the companyBe early stage start-ups that have received only seed (or limited angel)

3. Be early stage start-ups that have received only seed (or limited angel)
funding, if at all

 
What is in it for you?
The investor group, comprising of Bharat Innovations Fund, Omidyar Network and
Unitus Seed Fund, is a network of investors and operators, entrepreneurs and
technologists, designers and engineers, academicians and policy makers, with the
singular mission to solve some of India’s toughest problems.

Through this event you have an opportunity to receive:

-Exclusive focus on tech innovations that leverage the India Stack platform
and have the potential to address the underservedFlexible

-Flexible, insight driven, funding of up to Rs. 8 lakhs for early stage, innovative
modelsStrategic

-Strategic business support, through their specialists to support investees in
their strategy and growthA chance to be a part of the India Stack ecosystem through partnerships,

-A chance to be a part of the India Stack ecosystem through partnerships,
pilots, workshops, conferences and network building exercises

Visit www.buildonindiastack.in and send your pitch now.

The cause of ‘SaaS’ Industry is top priority on iSPIRT’s policy radar

‘SaaS’ can drive the future of Indian IT Industry both in International trade as well as domestic front. With changing dynamics in Software sector globally, ‘SaaS’ can help India remain a Software power house. iSPIRT has been following ‘SaaS’ industry growth from this perspective. The realization that there are several policy hurdles for ‘SaaS’ industry was very early conceived at iSPIRT.

Accordingly, iSPIRT made several attempts to ease the problems of ‘SaaS’ industry. One of the belief at iSPIRT is that ‘SaaS’ is basically about ‘product’ first and then a ‘service’. With this belief iSPIRT has been continuously taking up the case of clear distinction of Software product within the larger framework of Digital economy consisting of “Digital goods” and “Digital services”.

In order to stop the exodus of Startups, which constitutes a large number of ‘SaaS’ based startups, a Stay-in-India checklist was taken up with Department of Industrial Policy and Promotion (DIPP). There have been a number of items cleared by DIPP such as Angle Tax, Fair market Value, ESOPs provisions made better, Company incorporation rules simplified, Domestic venture debt made easy, Convertible notes, FVCI norms relaxed and External Commercial borrowing (ECB) eased by RBI etc. Some of these announcements under the shadow of StartupIndia policy. However, iSPIRT has been continuously pushing policy makers to relax all these norms for all start-ups. iSPIRT covered most of these announcements in PolicyHacks blogs given here.

A major problem area for ‘SaaS’ startups is also the payment gateway systems. ‘SaaS’ industry has to resort to either relocate to a foreign geography, or open a subsidiary abroad or seek expensive international payment gateway services. On domestic front the ‘SaaS’ industry suffers from recurring billing problems. Both these issues were taken up in PolicyHacks sessions given here. iSPIRT believes Indian ‘SaaS’ companies should be able to carry of out international trade of digital goods without moving out of India seamlessly and using Indian payment Gateway systems.

The belief at iSPIRT that a futuristic industrial policy at Ministry of Electronics and IT (MeitY) is required to meet the challenge of Indian IT industry was followed up with a National Policy on Software Product (NPSP) at MeitY. Being the administrative ministry for this Industry MeitY has in past played highly catalytic role in making of IT industry that India is proud today. A similar renewed thrust is required to push the Indian Software Product Industry.

One of the main emphasis in NPSP draft being followed up at MeitY is the ‘‘SaaS’’ segment. iSPIRT team is continuously engaging with the MeitY officials to educate them and influence on the importance and the need to focus on ‘SaaS’ segment.

There is recognition in Government system for need of this strategic shift. Honourable Prime Minister’s speech at Germany (Link here see 12th Minutes segment) is the evident of this realization of need for change that can lead to companies like Google to be born out of India.

iSPIRT is striving hard in this direction to see the ‘SaaS’ as the next big leap by India.

How GST will work for software exporters

GST council has yesterday cleared all the bills required to implement the GST. Finance minister wants to kick-start from July 1 2017. This can be easily achieved is the model laws can be enacted in the current session of parliament. The GST is therefore set become a reality from the second quarter of the current financial year.

GST is going to catalyze greater IT adoption. We can see the business going digital in future and a Digital India emerging.

Apart from receiving GST as a catalyst for Software product industry growth, we also need to get prepared for adopting GST our selves. Not everyone has prepared for GST though. At iSPIRT we are starting discussion group on GST so that community can take advantage from shared learning. This blog is the first in series of this effort.

Few fundamental changes in the Goods and Service tax (GST) as it is called are

  • It is supply based and not sales based tax system
  • Being an indirect tax, it applies where the consumption happens
  • There are three statues and taxes that are part of GST i.e. SGST (state GST), CGST (Center GST) and IGST (integrated GST = SGST+CGST)
  • Both state and center will get tax on Goods and services supplied unlike earlier only Center received the service tax
  • The GST subsumes many of the indirect taxes prevalent at present

GST will significantly change the way of doing business. Also, it is bound to greatly impact the international trade regime e.g. excise duty will merge in GST and deemed exports benefits under excise laws may come to an end. The exports aspect will impact Software exporters, irrespective of whether they are operating under SEZ, STP, EOU, EPCG or outside as these export schemes. GST on Import is going to impact every one, as in globalized world with cloud penetration, everyone is bound to use goods and services imported.

In this blog we cover in brief the application of GST on the import and export of goods and services.

How it impacts Import?

Basic custom duty (BCD) is not covered under GST and it will remain same. There will be two components on each import to be paid i.e. Basic Duty + IGST.

IGST will subsume currently applicable countervailing duty (CVD) and additional duty of customs (SAD).

Integrated Goods and Services Tax (IGST) means tax levied under this Act on the supply of any goods/services in the course of inter State trade or commerce. IGST has two components SGST and CGST. A supply of goods/services in the course of Import into the territory of India shall also be deemed to be a supply of goods/services in the course of inter-state trade or commerce.

The levy of IGST will be payable for each transaction, as against the monthly payment in case of IGST payable on domestic interstate transactions.

The other difference in GST is aboput IGST computation. The IGST will be computed on transaction value of imported goods plus duties and taxes etc. charged under any statute other than the GST Law. Hence, ISGT will be applied on total landed value, basic customs duty and any other charges.

On import of services GST will be based on reverse charge method just as the Service tax is today i.e. IGST will apply on reverse charge mechanism. Hence, all Software or a SaaS bought online will be subject to reverse charge basis IGST.

But there is a input credit allowed in ISGT on imports. The service provider, trader or manufacturer of imported goods/services shall be eligible to offset IGST paid on import of goods/services against his output liability. The same does not apply to BCD as BCD is not part of GST.

Although it does not apply to Software sector, the anti-dumping duties and safeguard duties will continue to be applied as they were and have not been subsumed in the IGST.

Impact on exports

Exports under GST will be Zero rated i.e. there will not be any exports duty except on items that enjoy an export duty levy currently. Software exports will be zero rated.

The biggest impact will be on units presently enjoying exemptions on inputs like service tax in SEZ. Under GST all duties and taxes will be payable at the time of a transaction when procuring input goods/service and the exporter can get refund for these after exporting. Exemptions will be replaced by refunds after exports.

This will put lot of burden on arranging working capital for the inputs. This burden will be higher for manufacturing firms than services firms.

On pursuance of commerce ministry, in a recent announcement, the finance ministry has agreed to relax the refund pains. The finance ministry has agreed to refund 90% of the duties paid by exporters within a period of seven days under the Goods and Services Tax (GST) regime. If duty refunds could not be made within seven days, then government will pay interest to exporters. However, it is yet to be decided how much interest will be paid to exporters in such a scenario, as per announcement. (Source: livemint news item)

The remaining 10% refund will be made after verification by tax authorities.

This is a bit of relief to exporters. Compliance process will change from presently exemption based compliance to a refund claim filing in time.  The crux here is to use digital technology to automate many of these issues in GSTN.

Whereas these announcements have been made, the details will depend upon how rules are notified.

GST will undoubtedly make the efficient in long run. However, the next one year will be full of challenges and adjustments by Ministry of finance to oversee a smooth rollout.

Should you have further questions on GST, please write to sudhir@inspirt.in

 

 

 

Place of Effective Management (POEM) of a business

Finance minister had announced during budget 2016 that place of effective management (POEM) will determine if a company is resident in India or not. Accordingly, this was notified in Finance ACT 2016 as under.

Finance Bill

The details of what will determine the place of business rules was not decided in the Finance Act 2016. The POEM provisions was supposed to become effective from April 2017. The detailed guidelines of what rules and conditions will determine the POEM has been issued by CBDT on 24 January 2017.

Ever since the announcement in 2016 there were many apprehensions on POEM, especially in SaaS companies.

In order to clear this apprehension a PolicyHacks session of iSPIRT was conducted.

The video discussion on POEM attended by Girish Rowjee, Founder CEO of Greytrip; Mrigank, Mrigank Tripathi,  Founder CEO of Qustn Technologies; Sanjay Khan Nagra, of Khaitan and Co.; Avinash Raghava and Sudhir Singh, iSPIRT  is given below.

What does the above POEM ruling incorporate in finance bill imply?

In simple terms the place of effective management in above act means a place where key management or commercial decisions that are necessary for the conduct of the business of an entity are made, in substance. This implies Indian resident status on a company will apply even when the entity is incorporated outside India, if the place of effective management is proven to be in India.

The guidelines issued on 24th January 2017 by CBDT will be used to determine if a business of non-Indian entity or a subsidiary of Indian entity will fall under the place of business rules or not. The Guide lines can be accessed here.

POEM is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction.

Why this regulation has been brought in?

POEM require Indian firms with overseas subsidiaries or foreign companies in India to pay local taxes based on where the business is effectively controlled.

The main intention of this regulation is to capture the income in shell companies incorporated outside India that are held by resident Indians with a basic intention of retaining the income outside India.

The regulation is not intended to discourage valid Indian businesses to setup an entity outside India or operate in global markets.

Does it impact Software sector?

It is very common for the India Software companies to open an office in foreign geography, many times as a subsidiary of Indian company and sometimes a new entity with mixed local and Indian management. Hence, the POEM has been worrying entrepreneurs in this sector. For SaaS segment, it is very normal to have a foreign entity, either for reasons of funding or market penetration.

As mentioned above, for a valid global business the POEM will not be a hurdle. Businesses, having global operation but not retaining income in foreign companies (i.e repatriating profits to Indian company) through authorised route and after complying with other regulations, POEM will not be a a worrying factor.

There may be a very few Software Companies, who may need to be concerned, to pass the test of POEM. Any determination of the POEM will depend upon the facts and circumstances of a given case. The POEM concept is one of substance over form. If POEM is established to be in India for businesses operating outside India, they will be taxed in India.

It is not possible to generalize the impact of POEM on Software sector or illustrate few used cases. Whether a business operating outside India will get classified as POEM can only be ascertained after detailed examination.

Exemption for turnover less than 50 Crore

There is good news for startups as per the Press release accessible here, it has been decided that the POEM guidelines shall not apply to companies having turnover or gross receipts of Rs. 50 crore or less in a financial year.

This was not clear before video discussion and doubts were expressed during discussion, as this rule has not been described in the guideline circular of CBDT but has been mentioned in the press release of same date from CBDT.

Hence, we can expect that the rule of less than 50 crore income shall be embedded in income tax rules to be notified later.

Other salient features

  1. The provision would be effective from 1st April 2017 and will apply to Assessment Year 2017-18 and subsequent assessment years.
  2. The Assessing Officer (AO) shall, before initiating any proceedings for holding a company incorporated outside India, on the basis of its POEM, as being resident in India, seek prior approval of the Principal Commissioner or the Commissioner, as the case may be.
  3. Further, in case the AO proposes to hold a company incorporated outside India, on the basis of its POEM, as being resident in India then any such finding shall be given by the AO after seeking prior approval of the collegium of three members consisting of the Principal Commissioners or the Commissioners, as the case may be, to be constituted by the Principal Chief Commissioner of the region concerned, in this regard. The collegium so constituted shall provide an opportunity of being heard to the company before issuing any directions in the matter.

The point 2 and 3 mentioned above will ascertain that there is no arbitrary discretion exercised by Assessing officers on ground.

The Guidelines issued can be accessed here, also provides examples that explains when an active business outside India will be treated as Indian business based on POEM. These examples do not explain each and every case.

Also the exemption of 50 Crore is neither given in Finance Act or in the Guidelines but mentioned in press release.

CBDT may therefore issue further circulars to clarify these positions.

A budget for “Digital Economy” sake

Looking deeper in to the budget 2017.

[An immediate official iSPIRT response to the budget was issued as a Press release on 1st FEB 2017. It is placed in media section. You can access it here.]

Budget can’t be construed as main stream policy making exercise. Yet, the policy analysts and experts, track it with utmost seriousness, to understand Government’s thought process in economic policy. Similarly, industry looks in to budget for the sectoral emphasis, allocations that will influence the demand/ supply, reforms and special provisions in the sector. A reminiscent of this in recent period of history is 2012-13 budget speech of then finance minister Pranab Mukherjee, when analysts were counting how many times he used “inclusive growth” as a phrase.

This budget speech was unique in many sense and very tactical. The proposed GST regime, the rigours of demonization and skepticism of coming state elections have all effected this budget. The usual rigmarole by media of comparing prices of commodities and consumer goods from cigarettes, electronics to automobiles is missing.  GST being in pipeline, the indirect tax section, which was usually the largest section of finance bill is almost missing. Hence, allocation of resources and the direct taxes had all the share of FM’s mind in budget. The new item on the block is “Digital economy”.

We have been seeking attention of Government on:

  • increasing domestic demand,
  • promote innovation (Startups)
  • ease of doing business and
  • level playing field for Indian companies.

These four parameters impact our “product nation” focus. Let us briefly analyse how these have been taken care in the budget.

Influencing Domestic Demand function

The usual model of a demand stimulating economic policy has been based on consumption led demand relying mainly on sops and taxes for several years with doses of investment driven demand and growth from time to time.

Increased efficiency, transparency, formalization of economy and investment driven growth are four major thoughts embedded in this budget. The former three are additional determinants of demand function of emerging new economies and a means to achieving developmental agenda. Relying mainly on investment driven demand and growth is very need of the time of low sentiments.

A big measure towards increased efficiency is the change from plan and non-plan classification of expenditure. “This will give us a holistic view of allocations for sectors and ministries. This would facilitate optimal allocation of resources”, said the FM in speech.

The agriculture and rural sector of India cannot be ignored by any Govt. Hence, increased focus in budget on these two important sectors is about inclusive growth, and also in “Digital economy” perspective an attempt to avoid a digital divide.

Both continual emphasis on infrastructure investment and targeting doubling farmer income will provide an investment driven demand push and a consumption driven demand function at higher level.

What is most heartening on domestic demand side for ICT sector is the huge recognition of the “Digital Economy” in the budget. For past some years iSPIRT has been pursuing the “Digital economy” agenda at various forums. There was cautious optimism, but not full acceptability. Thanks to demonetization, “Digital” is now a mainstream concept.

Devoting a full section in his speech on “Digital economy” and dealing with it in ‘direct tax’ provisions speaks a volumes of the mind share this has taken at top in the present Govt. The finance minister stated in his speech, “Promotion of a digital economy is an integral part of Government’s strategy.”

Further, the finance minister said, “Government will consider and work with various stakeholders for early implementation of the interim recommendations of the Committee of Chief Ministers on digital transactions.” This is especially important for iSPIRT as Nandan Nilekani and Sharad Sharma of iSPIRT are special invitees on this committee.

The demand conditions for ICT  sector can best be boosted by increased adoption of the ICT by masses and the businesses, especially the SME businesses. This throws open a number of opportunities for many new startups to emerge and contribute to the development of an ecosystem, friendly to “Software product”.

Following are the notable announcements in the budget on “Digital economy” Steps:

  1. Stepped up the allocation for BharatNet Project to Rs. 10,000 crores in 2017-18.
  2. Targeting high speed broadband connectivity on optical fibre in more than 1,50,000 gram panchayats, with wi-fi hot spots and access to digital services
  3. A “DigiGaon” initiative will be launched to provide tele-medicine, education and skills through digital technology
  4. No transaction above 3 lakh should be permitted in cash.
  5. Limit the cash expenditure allowable as deduction, both for revenue as well as capital expenditure, to Rs. 10,000. Similarly, the limit of cash donation which can be received by a charitable trust is being reduced from Rs. 10,000 to Rs. 2000.
  6. All indirect tax/ duty exempted on miniaturised POS card reader for m-POS, micro ATM standards version 1.5.1, Finger Print Readers/Scanners and Iris Scanners. Also components for manufacture of such devices exempted.
  7. Increased digital transactions will enable small and micro enterprises to access formal credit. Government will encourage SIDBI to refinance credit institutions which provide unsecured loans, at reasonable interest rates, to borrowers based on their transaction history.
  8. To make MSME corporate tax with annual turnover up to 50 crores will be 25%
  9. Presumptive income tax for SME tax payers whose turnover is up to 2 crores reduced from 8% to 6%.
  10. BHIM app with cashback and referral schemes
  11. exemption of service charge on railway bookings,
  12. Aadhaar based smartcards for Senior citizens
  13. Create a Payments Regulatory Board in the Reserve Bank of India by replacing the existing Board for Regulation and Supervision of Payment and Settlement Systems.

Also Government has on mid the ‘indigenous’ in ICT sector. This is reflected by the proposal on metro rail policy for upcoming metro infrastructure across the country. The budget statement reads, “A new Metro Rail Policy will be announced with focus on innovative models of implementation and financing, as well as standardisation and indigenisation of hardware and software.”

Further in related electronic sector, the budget has exponentially increased the allocation for incentive schemes like M-SIPS and Electronic Development Fund (EDF) to 745 crores in 2017-18. The draft National Policy on Software Product already intends to have a synergy with the EDF in PPP model.

This is not enough on “Digital economy” if the Government itself does not implement the “Digital” in its own functions in pervasive manner. The thought process of the Government seems to be aligned in this direction also.

The Finance Minister has said in his speech, ”we are trying to bring in maximum use of Information Technology to remove human contact with assesses as well as to plug tax avoidance.” 

Innovation and Startups

Both innovation and Startups still occupy the thought process at top leadership level. There are signals and clear provisions indicating this.

The income tax exemption window slider for Startups, approved under DIPP, has been increased for 3 years in five years to 3 years in 7 years.

Another new measure is promoting innovation right at secondary education level and in backward areas. “An Innovation Fund for Secondary Education will be created to encourage local innovation for ensuring universal access, gender parity and quality improvement. This will include ICT enabled learning transformation. The focus will be on 3479 educationally backward blocks”, mentions the Finance minister, in budget speech.

Ease of doing business

Ease of doing business is an important topic in PART-B of the content list of budget document. Hence, its importance in thinking process of Government.

iSPIRT has pursued a Stay-in-India-checklist with the Department of Policy and Promotion (DIPP) with an intent to remove various frictions faced by industry in funding, company formation, corporate regulation and taxation issues. A number of steps have been taken up by Government in past one year to sort out these issues.

Announcements like abolition of FIPB, rationalization of taxation (on FPIs, convertible instruments, long term capital gains, etc), lower rate of taxation of 25% for companies with revenue of less than 50 crores, rationalization of labour laws, carry forward of MAT for 15 years, etc. are all in line with the philosophy of iSPIRT’s Stay-in-India checklist.

Among key issues from the Stay-in-India checklist which were expected to be addressed in the budget but have been missed out are angel tax and tax parity between listed and unlisted securities etc.

Level Playing Field

There many ‘level-playing field’ issues that iSPIRT has been taking up with the ministry of finance. Most in taxation domain. None of these issues have been addressed in this budget also e.g. TDS on sale of software, service tax on B2C sales of domestic products.

We hope the proposed National Policy on Software product will crystallize ground for taking up specific ‘Software product’ industry issues with Government in future.

Conclusion

Overall the budget is very encouraging. The main take away for iSPIRT is “Digital economy” recognition. We have to further leverage this in our policy initiatives with different departments in Government and most importantly with MeitY to realize the dream of “Product Nation”.

RBI allows convertible notes for Startups from foreign sources

As part of policy hacks, we covered the issue of Convertible notes being recognized by Ministry of Company affairs (MCA) in our earlier blog here.

For benefit of users to start, the convertible note has been explained below.

What is a convertible note?

Convertible notes are debt instruments that converts in to equity, at a later date. The lender initially gives a loan with an understanding that he can convert these in to equity. In most cases, this later date is the date of next valuation of the company. If there is no next round of valuation, the company should return the debt back to lender in a fixed time interval.

Convertible notes are quite popular in startup ecosystems like Silicon Valley in USA.

Earlier Ministry of corporate affairs has announced acceptance of the convertible note as a concept for startups through a circular no. G.S.R. 639(E) New Delhi, dated 29th June, 2016.

The announcement by RBI is a development further to the above given MCA circular.

How does new RBI provision help startups?

Foreign investors were allowed, foreign direct investment (FDI) by way of equity and other instruments that were at par with equity e.g. compulsorily convertible preference shares/debentures. Convertibles notes were not allowed till now.

Reserve Bank of India (RBI) notification of 10 January 2017 has amended the Foreign Exchange (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, to allow ‘Startups’ to issue convertible notes to foreign investors.

This opens new avenues for ‘Startups’ to raise funding.

iSPIRT volunteer Sanjay Khan Nagra, covers the RBI announcement on Convertible Notes here in the video below.

The complete circular is given here  on RBI website.

Other provisions in the new RBI notification explained

Convertible note has been defined in the notification

‘Convertible note’ means an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.

Who can invest and how much?

A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered / incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian startup company for an amount of twenty-five lakh rupees or more in a single tranche.

NRIs may acquire convertible notes on non-repatriation basis in accordance with Schedule 4 of the Principal Regulations.

What is a Startup?

For the purpose of this Regulation, a ‘startup company’ means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification number G.S.R. 180(E) dated February 17, 2016 issued by the Department of Industrial Policy and Promotion (DIPP) , Ministry of Commerce and Industry.

Govt. approval required for some sectors?

A startup company engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with approval of the Government.

Inwards remittance of amount?

A startup company issuing convertible notes to a person resident outside India shall receive the amount of consideration by inward remittance through banking channels or by debit to the NRE / FCNR (B) / Escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time to time.

Provided that an escrow account for the above purpose shall be closed immediately after the requirements are completed or within a period of six months, whichever is earlier. However, in no case continuance of such escrow account shall be permitted beyond a period of six months.

Convertible notes are transferable

A person resident outside India may acquire or transfer, by way of sale, convertible notes, from or to, a person resident in or outside India, provided the transfer takes place in accordance with the pricing guidelines as prescribed by RBI. Prior approval from the Government shall be obtained for such transfers in case the startup company is engaged in a sector which requires Government approval.

Compliance and reporting

The startup company issuing convertible notes shall be required to furnish reports as prescribed by Reserve Bank.

BHIM (Android/*99#) & AadhaarPay

bhim-aadhaarpay

This afternoon the Prime Minister unveiled BHIM – an Android app from NPCI with an equivalent USSD-based *99# service.

Additionally, recently one of the banks launched AadhaarPay – a capability that allows merchants to collect payments from consumers with their Aadhaar# and fingerprint.

There has been a bit of confusion about the role of Aadhaar in BHIM – so this blog clarifies.

BHIM/SmartPhone – the Android and soon iOS app – is a UPI app – no different from PhonePe or any other bank applications. It has been developed by NPCI and is a common application across all banks. As with ALL UPI apps, BHIM has NO connection to Aadhaar – the customer is authenticated by his issuing bank using his Mobile# and MPIN and nothing else. Of course this app conforms to all the security-standards of any UPI application and has gone through the rigorous certification process.

*99# is merely a USSD front-end to the same capabilities. It does exactly what BHIM does but can be accessed on all phones – SmartPhones and Feature-Phones.

Aadhaar itself has NO direct role to play in BHIM – whether on Android or USSD/*99#.

So what is AadhaarPay?

AadhaarPay – leverages the Aadhaar-linked bank accounts to allow payments to a retailer. The payer need not provide anything more than an Aadhaar number and their biometric to the payee. The retailer receiving a payment needs to have a SmartPhone with an Aadhaar-approved secure Biometric Sensor and a certified AadhaarPay application. In this case the security-standards for customer data and biometric must comply both with UPI’s transaction level security and Aadhaar’s biometric security. In the case of AadhaarPay – ONLY Authentication is performed by Aadhaar/UIDAI – the transaction details are never sent to Aadhaar. Think of it as Authentication is done by Aadhaar and Authorization by NPCI/Banks.

One instance of AadhaarPay was released last week by IDFCBank and over time one may see a common AadhaarPay app that at the front-end uses Aadhaar for authentication and the BHIM/UPI back-end for authorization for users who don’t have a mobile phone.

National Pride Moment

The UPI platform, BHIM, *99# and AadhaarPay are great state-of-the-art platforms and applications that are a boon to all Indians. 2016 has been a great year in Payments progress worldwide – and India is leading the way!

With BHIM, *99# and AadhaarPay, the entire 1Billion plus population is now covered with a state-of-the-art real-time payments system. Those who have Smartphones will get the rich-app experience, those who have feature phones will use the USSD interface and the rest will merely need Aadhaar# and their fingerprint/IRIS biometric for to make payments.

3-Cheers to NPCI and the government for blazing such a fabulous trail! The new Twitter handle @NPCI_BHIM is a great way to stay informed about future developments regarding BHIM!

Guest Post by Sanjay Swamy, Entrepreneur & Early-Stage VC! IndiaStack Evangelist

I wish all readers a happy end of 2016 and an awesome year in 2017 – Payments geeks will indeed have a lot of fun working on UPI and the new world of interoperable, secure and universal payments!

 

What to expect from draft National Policy on Software Products?

Ministry of electronics and information technology (MeitY) has released the draft of National Policy of Software Product (NPSP) for public consultation.

Click here to see the announcement and how to respond to the consultation process.

Click here to see the draft pdf document.

This blog aims to explain where the draft NPSP policy statement stands at present and what to expect further.. The blog also answers many questions arising out in the minds of stakeholders in Software product industry as well as IT industry in general.

This may help Software product industry stake holders in responding to MeitY on this consultation process, which ends on 9th December 2016.

How does NPSP help India?

The first Software policy came up in 1986. It resulted into Software Technology Park (STP) scheme in 1991. Even after 25 years the old Software policy (1.0) of 1986 still prevails, with focus on IT services.

But, past few years have seen serious decline in growth, owing to rapid transformation in technology and Software industry, globally. India’s IT sector is strong enough to face changing technology challenges. India’s national competitive advantage has taken a shift towards innovative stage and ‘product’. Please see another blog on this subject here.

To address globally relevant strategic paradigm shifts, a Software 2.0 policy is needed with ‘product’ as focal to it.

This consultation process will lead this Software 2.0 policy. It will help in India in capitalizing on the existing matured IT industry and build a phase 2 of Industry in form of product based Industry. There are 3 advantages that NPSP announcement brings us.

Firstly, with NPSP announcement, India will give recognition to Software product industry.

Secondly, schemes and programs emergence from NPSP that will catalyze Software product industry eco-system.

Thirdly, Software product industry will have legitimate governance structure in Government of India that help solve problems and provide level playing field.

The draft policy does not have any actionable but only intent statements?

Yes, presently the draft is only a macro policy statement with a vision, mission to be achieved and ten strategic areas to be addressed. Let us understand different aspects of it.

There were two challenges to framing if this draft policy. One most people in Government system link the Industry policies framing directly to a package of fiscal incentives that help in direct market intervention. On the other hand, IT industry having matured, there is less appetite at ministry of finance to easily carve out a fiscal incentive program.

Two, iSPIRT believed that innovation and product based industry needs multi-layered action plan that can help promote the eco-system central to product industry. Adding any fiscal package right in beginning, to the policy statement would have put the efforts in jeopardy.

Hence, most areas that need to be acted upon are summed up in 10 Strategies in the draft. This macro policy announcement helps in getting policy rolled out in two stages.

First, set strategic intents and recognize a product industry.

Second, Action plans (schemes, programs, incentives and institutional setups) can follow on need basis and in phased manner after the policy is finally launched. Policy can be leveraged through multiple threads focused on defined actionable. It could be a) immediate action item list; b) ecosystem building programs; c) segment specific packages and lastly d) incentive schemes.  For example, SaaS based product segment needs an early support in form of a booster package that solves their multiple problems.

This is a right flexible approach adopted by MeitY. This is how it happened in Software 1.0 policy as well.

Let us achieve stage one and then proceed to stage two.

Are there stages envisaged further to announcement?

At iSPIRT, we believe, after the promulgation of NPSP the very first action that is required to be taken by MeitY is a new institutional setup (instead of relying on old or existing vehicles).

Hence, a ‘National Software Product Mission’ (NSPM) should be setup urgently, as nucleus of activity to cater to emerging Software product industry. NSPM can operate under an inter-ministry board, thus drawing legitimacy to understand and solve problems of this emerging industry, across Government departments, at a single point.

NSPM should become a forum for intellectuals and industry practitioners for issues of technology, boosting R&D, international competitive dynamics, steps and actions needed to handle challenges that industry face in a continually evolving dynamic world etc.

Let us welcome the NPSP with open mind and right expectation

Some point in NPSP may not be rightly synching with every segment of Industry. However, one must also note that, the Government’s stake in an industry policy is also multi fold which also including the generation of employment and income.

In view of above, it is in favour of Software product industry to welcome this step 1 of formulating a viable National Policy on Software products. An early approval of NPSP is in the interest of Software product industry of India as well as country to look at a bright future.

A positive welcoming feedback will help MeitY in early approval.

We sincerely hope NPSP will soon be approved and help in building a “Software product nation”.

If you still have any questions you can write to sudhir@ispirt.in or nakul@ispirt.in

External Commercial Borrowing norms for Startup (ECB)

What is ECB?

External commercial borrowings(ECB) imply borrowing (debt) from a foreign (non-resident) lender. ECB is an attractive financing route as it generally offers access to finance with low rate of interest available from overseas low interest markets.

ECBs have been in use by many corporations, PSUS and especially by MNCs setting up operations in India. Who can raise an ECB, from where and under what conditions, rate, maturity period etc. are all governed by Reserve Bank of India (RBI) in India.  Startups till now did not have access to the ECB route of funding.

RBI announcement on ECB for Startups

Announcement was made by the Reserve Bank in the Fourth Bi-monthly Monetary Policy Statement for the year 2016-17 released on October 04, 2016, for permitting Startup enterprises to access loans under ECB framework.

Sanjay Khan Nagra, iSPIRT volunteer talks about this announcement in the video embedded. Below.

As such RBI circular is self-explanatory attached here. However, for ready reference, some salient features of the RBI announcement are covered in the text given below.

What are the key announcements?

What is a Startups as per circular?

The above circular covers Startups as defined by the Official Gazette of Government of India dated February 18, 2016 (i.e. Startup Policy of DIPP) given here.

How much can a startup borrow and in what currency?

A startup can borrow up to US$ 3 million or equivalent per financial year either in Indian rupee or any convertible foreign currency or a combination of both. In case of borrowing in INR, the non-resident lender, should mobilise INR through swaps/outright sale undertaken through an AD Category-I bank in India.

What is minimum maturity period?

Minimum average maturity period will be 3 years.

For what end-use can startups use ECB?

Usually there are end-use direction for an ECB. However, for startups under the above said circular of RBI, ECB can be used for any expenditure in connection with the business of the Startup.

What is all-in-cost of ECB?

There are no limits. The RBI circular says, this shall be mutually agreed between the borrower and the lender

In what forms can one receive the lending?

It can be in the form of loans or non-convertible, optionally convertible or partially convertible preference shares and the minimum average maturity period will be 3 years.

Can this be converted in to equity?

Yes, conversion into equity is freely permitted, subject to Regulations applicable for foreign investment in Startups.

Who can lend?

Previously, ECB regime inter alia set out various conditions for Indian companies raising loan from external borrowings including conditions relating to (i) eligible borrowers (ii) eligible lenders (iii) permitted end uses etc.

After this circular, the lender / investor shall be a resident of a country who is either a member of Financial Action Task Force (FATF) or a member of a FATF-Style Regional Bodies; and shall not be from a country identified in the public statement of the FATF. (Please see RBI Circular for detail)

However, overseas branches and subsidiaries of Indian banks and overseas wholly-owned subsidiary or joint venture of an Indian company will not be considered as recognized lenders.

What are security norms?

Foreign lenders or Investors are allowed to request security for any collateral in the nature of movable, immovable, intangible assets (including patents, IP rights etc.) but shall comply with foreign direct investment norms applicable for foreign lenders holding such securities.

Issuance of corporate or personal guarantee is allowed. Guarantee issued by non-resident(s) is allowed only if such parties qualify as lender under paragraph 2(c) above. Exclusion: Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, all India Financial Institutions and NBFCs is not permitted.

For more details you are requested to refer the RBI circular here.