Budget 2024 – Empowering Startups and MSMEs, and Doubling Down on DPIs and R&D

This 2024 Budget coming post-election has aroused the most curiosity since the budget of 2014. It is for two reasons that this 2024 Budget is significant as we work towards a Product Nation: Reason 1 is for this budget’s Innovation and related public spending on private innovation and Reason 2 is for the next-generation reforms to create a simpler regulatory environment. It is heartening to note that both items are priority areas.

The continuity of the interim budget announcement of 1 lakh crore for private R&D funding is encouraging enough for the startup ecosystem. Under the Vishvamitra initiative, iSPIRT has been pursuing funding at scale for private sector-led R&D and its commercialization. The announcements of funding research in highly sensitive strategic areas such as Small Modular Nuclear Reactors and setting up a 1000 crore venture capital fund for the Space economy have been on our list of initiatives to advocate for and it is heartening to see the Government address R&D investments in geopolitically sensitive areas.

The Finance Minister announced, “We will set up a mechanism for spurring private sector-driven research and innovation at commercial scale with a financing pool of 1 lakh crore.” What and how this mechanism will be set up will be critical for enabling R&D in the country to achieve Viksit Bharat 2047.

Among iSPIRT’s top initiatives is the Stay-in-India checklist, and the request to remove the “Angel Tax” for all classes of investors. The removal of angel tax is the biggest highlight of this budget for the startup ecosystem. The announcement comes after decades of struggle and persuasion. Finally the government has recognised the role of startups in generating employment and has acted in a positive direction.

There is a huge amount of work pending to reform Ease-of-Doing Business (EoDB) if India is to achieve the set objective of Viksit Bharat 2047. The Finance Minister stating an intent to “formulate an Economic Policy Framework” to set the “scope of the next generation of reforms for facilitating employment opportunities and sustaining high growth” perhaps speaks about the government’s thinking on it.

The government’s intention to involve states in ease of doing business (EoDB) efforts is also a very welcome step. We hope the next moves are swift and the government seriously attempts to at least be in the top 10 EoDB destinations globally. This is much needed for MSMEs, Startups, and even to attract FDI in GCCs. The economic survey tabled yesterday also aligns with this thought process.

“We have successfully used technology for improving productivity and bridging inequality in our economy during the past 10 years” said the budget speech. Public investment in Digital Public Infrastructure (DPI) coupled with innovations by the private sector has been a well-accepted norm now. The Government is serious about using the DPI approach in multiple areas, from agriculture to education, etc. The increased penetration of DPI will eventually help digitalization and penetration of software products in the economy.

The budget recognising MSME credit as one big area requiring attention has also called for several actions in this direction. One important step is involving PSU Banks to build their in-house capability to assess MSMEs for credit using an MSME’s digital footprint, instead of relying on external assessment. This will encourage banks to develop cash flow based lending on lines of another initiative of iSPIRT – the Open Credit Enablement Network (OCEN) that focuses on information based collateral lending rather than asset based collateral lending which in turn could help in developing a new credit assessment model that evaluates the digital footprints of MSMEs in the economy.

01/02/202401/02/2024

Interim Budget 2024 – DPI’s the new factor of productivity

This being an interim budget, much was not expected as far as new announcements and taxation changes. However, for iSPIRT and the Product ecosystem of the country, it is heartening to know that some of our initiatives and thoughts as a ‘think-tank’ have become central to thinking of Government at the leadership level. The following are important to note

The Finance Minister mentioned that “DPI (digital public infrastructure), a new factor of production in the 21st century, is instrumental in the formalization of the economy”. She also mentioned the G-20 successes. ISPIRT pioneered the concept of DPI and played a vital role in rolling out many DPIs and covering the DPI advocacy as a knowledge partner to the Digital Economy Working Group.

The second announcement that can hugely impact product nation-building is the funding of Research. FM announced that, “A corpus of rupees one lakh crore will be established with a fifty-year interest-free loan. The corpus will provide long-term financing or refinancing with long tenors and low or nil interest rates. This will encourage the private sector to scale up research and innovation significantly in sunrise domains.” Also, the thought of generating employment and empowering youth was central to this announcement. We hope that post-election a robust mechanism can be developed to implement this and capitalize on nation-building. This announcement is also important from iSPIRT’s thought process where a continuous push under its “Vishwamitra” initiative is being out on funding R&D in multiple ways at scale.

Also notable is, a new scheme for deep-tech technologies for defence aiming at expediting ‘Aatma-nirbharta’ is on the anvil.

Although nothing new has been announced, Start-ups are central to the Government’s thinking for economic development.

Overall it is a futuristic thinking budget speech with an emphasis on deep-tech, research funding, Capital inflows and startups along with capex and infrastructure.

Though there was a mention of ‘Reform, Perform, and Transform’ as a guiding principle, the budget did not touch upon any specific reform or intent on Ease of Doing business. We wish this becomes an important agenda item along with funding research for our businesses to succeed in global competition.

01/02/202301/02/2023

iSPIRT’s response to Union Budget 2023

Budget 2023 – Digital Public Infrastructure (DPI) the ‘Mantra’ for New India

iSPIRT Foundation, a technology think-and-do tank, believes that India’s hard problems can be solved only by leveraging public technology for private innovation. iSPIRT as a think tank pioneered the Digital Public infrastructure (DPIs)

India is at the cusp of what could be the most exciting quarter century of its post-independence existence, referred to as ‘Amrit Kaal’ by the Economic Survey yesterday and today in the Budget speech. The Economic Survey also mentioned that GDP could be boosted by 1% by Digital Public Infrastructure (DPIs), where India is stealing a March on the world for sure.

The second testimony to the important contribution of DPIs to the economy comes in the budget speech today when the finance minister stated, “India’s rising global profile is because of several accomplishments: unique world class digital public infrastructure, e.g., Aadhaar, Co-Win and UPI” in the forefront.

Development of DPIs, Stay-in-India Checklist (for Ease of Doing business of Startups), and a ‘jugalbandi’ between public technology and private innovation, through techno-legal regulations, are central to iSPIRT’s work in an attempt to build Product Nation.

The union budget 2023, brings in cheer to see attempts on the following:

Digital Public Infrastructure: The resolve to deepen the DPI and the belief in their role in economic growth. India Stack to build the DPIs has become central to the thought process. Taking the queue ahead the budget 2023 announced the development of DPI for Agriculture, which will be an open source, OpenAPI digital public good, to build inclusive farmer-centric solutions, credit & insurance, farm inputs market intelligence. An Agriculture Accelerator Fund has been announced to promote Agritech start-ups.

Vigyan Infrastructure: efforts to boost R&D, though limited to some sectors right now. Notable among these are – It encourages private sector R&D teams for encouraging collaborative research and innovation in select ICMR labs in the PPP model
One hundred labs for developing applications using 5G services will be set up in engineering institutions.
Center of Excellence for AI for “Make AI in India and Make AI work for India

MSMEs funding & growth is part of the budget thought process, which may lead to the use of another DPI called Open Credit Enablement Networks (OCEN) for enabling MSME funding.

The importance of Ease of doing business is reflected in some announcements like using PAN as a Common digital identifier and entity DigiLocker for MSMEs.

Wanting to keep the startup revolution going is reflected in the intent to use Startups to build technology in multiple sectors and also use the policy for a new India.

However, beneath all the euphoria, some chronic issues remained to be addressed. The disappointment is on the Stay-in-India checklist (a list of Ease of doing business issues for Startups) to stop startups from slipping from India, which has not been addressed. The checklist is being continuously pursued by iSPIRT and is much needed to provide a competitive edge for India to refrain startups from leaving her jurisdiction.

Overall it’s heartening to see the vision statement in budget, “Our vision for the Amrit Kaal includes technology-driven and knowledge-based economy”.

About iSPIRT Foundation – We are a non-profit think-and-do tank that builds public goods for Indian product startups to thrive and grow. iSPIRT aims to do for Indian startups what DARPA or Stanford did in Silicon Valley. iSPIRT builds four types of public goods – technology building blocks (aka India stack), startup-friendly policies, market access programs like M&A Connect and Playbooks that codify scarce tacit knowledge for product entrepreneurs of India.

For more, visit www.ispirt.in.For further queries, reach out to Email: [email protected] or [email protected].

01/02/202223/05/2022

iSPIRT Foundation’s Response to Union Budget 2022

Union Budget 2022 – Imprints of using Digital public infra with Private innovation

iSPIRT Foundation, a technology think-and-do tank, believes that India’s hard problems can be solved only by leveraging public technology for private innovation through open APIs.

This “innovation architecture” is now going mainstream. The Union Budget 2022 mentions five efforts that iSPIRT has been intimately involved in:

India Stack – Promoting digital economy & fintech, technology-enabled development, energy transition, and climate action.
Health Stack – An open platform for the National Digital Health Ecosystem will be rolled out. It will consist of digital registries of health providers and health facilities, unique health identity, consent framework, and universal access to health facilities.
Digital Sky – Use of ‘Kisan Drones’ will be promoted for crop assessment, digitisation of land records, spraying of insecticides and nutrients.
Digi-Yatra & Logistics Stack – Multimodal Movement of Goods and People. The data exchange among all mode operators will be brought on the Unified Logistics Interface Platform (ULIP), designed for Application Programming Interface (API).
DESH (Digital Ecosystem for Skilling and Livelihood) Stack – This aims to empower citizens to skill, re-skill or upskill through online training. It will also provide API-based trusted skill credentials, payment and discovery layers to find relevant jobs and entrepreneurial opportunities.

This embrace of the new innovation architecture is a seminal moment for our economy and society. However, more could have been done.

Some low-hanging opportunities missed are:

A few positive announcements have been made for the funding ecosystem for Indian startups (such as capping the surcharge on long term capital gains and an expert committee to suggest measures to boost venture capital and private equity investment in startups). While these are in line with iSPIRT’s ‘Stay-in-India’ checklist effort, immediate actions on some of these (as well as other) issues in the checklist will help further.
Ease of Doing Business is mentioned in the Budget speech, but no specific actions are announced.
5G is a big opportunity. India can leverage this to become a telecom equipment provider in Radio Access Network (RAN). iSPIRT’s SARANG effort is focused on this. There should have been specific capital allocations and Design Linked Incentives (DLI) for OpenRAN as a strategic area in Mission mode.

Overall, the Budget is well-balanced and ushers in new thinking about innovation in emerging sectors that are strategic to the country.

Sharad Sharma, Co-founder & Volunteer – “In the coming years, India needs to usher in a product economy in Defence, Electronics, BioPharma, ClimateTech (including EVs), FinTech, HealthTech and Software. This Budget sets the stage for this new innings by having a focus on sunrise industries.”

Sudhir Singh, Fellow – Policy Initiatives – “Since the announcement of National Policy on Software Product (NPSP), no Budget has been able to consider making it active and announce measures, e.g. Digital Product Development fund could help bolster “Digital India” and other strategic measures could help galvanise a Software product Industry of India.”

Sanjay Khan Nagra, Member – Donor Council & Volunteer – “Some of the measures announced by the FM for startups (tax parity for unlisted and listed securities, extension of concessional tax regime for startups and manufacturing startups, setting-up a committee for encouraging VC/PE investments in startups, etc) and digital assets/blockchain ecosystem are commendable and in line with long-standing industry demands. We hope the momentum continues with the pragmatic implementation of these policy measures and further regulatory actions building on top of these measures.”

About iSPIRT Foundation – We are a non-profit think-and-do tank that builds public goods for Indian product startups to thrive and grow. iSPIRT aims to do for Indian startups what DARPA or Stanford did in Silicon Valley.

iSPIRT builds four types of public goods – technology building blocks (aka India stack), startup-friendly policies, market access programs like M&A Connect and Playbooks that codify scarce tacit knowledge for product entrepreneurs of India. For more visit: www.ispirt.in

For further queries, reach out to Sudhir Singh (+91) 96505 76567, Email us: [email protected] or [email protected]

13/10/202113/10/2021

Stay-In-India Checklist Index aiming for 5 trillion $ Economy by 2025

What is Stay-in-India Checklist?

The Stay-in-India checklist is a list of regulatory hurdles that makes it attractive for Indian startups to Domicile in foreign jurisdictions like Singapore and USA.

The checklist was prepared by iSPIRT to present the most important issues where respective Government departments or regulators could being in reform to help stop this exodus of start-ups from India.

The checklist is important to achieve the vision and mission objectives of National Policy on Software Products. In turn, it will boost the innovation-driven economy, Ease of Doing Business (EOB) in India, retain and multiply the economic value thereby contributing to the 5 trillion dollar economy goals by 2025.

The issues pertaining to various regulations on making funding of start-ups complex and unattractive, difficult or redundant compliance, ambiguity or unclear notifications etc.

iSPIRT has taken up a list of 36 issues since 2015/16. Until now out of 36 issues, some have been addressed. Some issues were resolved fully, some partially and about 17 or more issues from the original list are still unresolved.

Note: This blog is a progressive blog to maintain the evolution of the Stay-in-India Checklist and its progression as the issues get resolved by the Govt. of India.

Index of issues solved and remaining

The objective of this blog post is to provide readers in the Start-up community to keep track of issues in this checklist.

We covered many of the resolved issues on www.pn.ispirt.in and www.policyhacks.in . Ready links given below.

A list of issues pending to be solved is are given below.

1. Digital Goods and Services Confusion

Authority: MoF and MOC

Status/Explanation:

The digital economy is about “Digital Goods” and “Digital Services”. Even the physical goods are traded through “Digital services” platforms and means. Hence, it is important to get “Digital goods” defined in our legal systems as distinct from “Digital Services”.

National Policy on Software Products (NPSP) was announced in February 2019 promoting Software products with a vision to make India a Software product nation.

Software products possess all properties of “Goods” except that they are intangible. Recognition of Software products as distinct from Software services is paramount to the success of the NPSP and promotion of the Software product industry. In larger shape, this requires a clear treatment and definition of Digital (intangible) “Goods” and “Services”.

Recommendation/Suggestion:

The National Policy on Software Product (NPSP) was announced in Feb 2019 to promote the Software products. The Policy implementation has huge friction owing to the non-acceptance of Software products as separate from Services. To leverage NPSP for the success of the Software product Industry “instituting” this clarity is important.

2. Abrogate Softex forms for SW products

Authority: MoF and MOC

Status/Explanation:

Softex form is required to be filed for export of software. After the GSTN system came into existence, all exporters filed Export invoices and regular exporters filed a letter (LUT) with the Government of India. The GSTN system can be used to track remittances received against each invoice.

Software products are traded based on MRP/list price mechanism in both On-premises and SaaS models and hence does not require any valuation.

Recommendation/Suggestion:

Softex forms is a Redundant process to ascertain Foreign remittances arrivals after the GSTN system is in place. RBI systems should digitally connect EDPMS to GSTN for a homogenous tracking of export proceeds remittances just like Income tax and other systems have done it. This will give way to a homogeneous system across all goods and services.

At the least Softex forms for Software products can be abrogated to ease the business of Software product companies where there is no need of valuation and those listed on the Indian Software Product Registry (ISPR) maintained by MeitY.

3. Remove TDS on sale of Software products

Authority: MoF

Status/Explanation:

A business can buy a hardware product without a TDS but not a Software, as the purchase of a Software product from Software companies are subject to TDS at 10% of all receipts under Section 194J.

The refund of this amount only happens after filing their IT Returns in September of each year, with this delay causing hardship in terms of working capital.

In the case of SMEs and Start-ups, it is hard to receive working capital loans from banks or NBFCs. For SaaS business the transactions are online and it is not possible to map TAN numbers at the time of online transactions and tracking of TDS on all transactions.

Since all profitable businesses with more than 40 lakh turnover are filing GSTN invoices, the tracking can easily be done through the GSTN system of each invoice amount and mapped to the income tax return filed at year-end.

Recommendation/Suggestion:

No product is subject to TDS when sold by producer to channel partners or end consumer. Software Products are subject to this sale. CBDT mixes this TDS with other TDS issues hence is reluctant to remove it. Income from Software products should not be classified as Royalty income and “Software Products” should be treated as “Goods” as defined in constitutions. This again requires recognition of “software products” and a Solution to this problem.

4. Setup HSN Code for Software Products

Authority: MoF

Status/Explanation:

Software products are intangible goods and keeping and treating them with Services in SAC list will not be able to help in creating a “Software product Industry”. They have to be classified as “products”.

Presently Software is classified in HSN code based on the medium on which it is physically supplied. The intangible Software is not defined in HSN and for domestic purposes, the Software product companies use Service Accounting Code Services Accounting Code (SAC) list which is not internationally harmonized. Hence, the trade of Software products can’t be homogeneously measured.

Recommendation/Suggestion:

HSN code mechanism is only used for Physical goods. However, in order to promote “Software products,” some countries are giving treatment to “Software products” and “Digital goods” under chapter 98, 99. India should also create a provision for “software products” HSN code until a harmonious global system is developed for “Digital goods” (including Software Products).

5. Level playing in B2C Sales of SW products

Authority: MoF

Status/Explanation:

Although there are mechanisms laid to report sales in India for foreign companies (non-resident taxable person), yet a lot of business of Software products especially in apps business happen in B2C area from not so popular brands. As a result, the Indian “Software product” companies have a non-level playing field as they have to comply with the GST regime of 18%.

Recommendation/Suggestion:

Provisions should be made to relieve the B2C sales of Indian “Software products” from heavy 18% GST for the advancement of “Digital India” and especially new post-pandemic digital and Gig worker economy.

6. Favourable Tax Regime for IPR

Authority: MoF

Status/Explanation:

In the past several years, India has experienced increased capabilities of innovative, creative and capable young professionals for creation of significant and valuable IPR. At the same time, India has also seen that the ownership of such IPR usually does not reside with Indian companies or in India.

Whilst there are several ‘non-tax’ reasons for this loss of ownership in favour of other jurisdictions, tax remains one of the major reasons. As a result of the huge negative tax impact, Indian companies constantly look to hold their IPRs for worldwide use in a jurisdiction which is more favorable from a tax perspective. Some of such notable jurisdictions are: Ireland, The Netherlands, Switzerland, and Singapore.

Further, governments of certain jurisdictions are aggressively targeting Indian companies to house their IPR there. For instance, a majority of Indian software product companies prefer to set up base in Singapore given the incentives offered by the Singapore government and the aggressive marketing by the Singapore government.

It is noteworthy that in the case of technology companies, IPR is one of the most (if not the most) important assets. Accordingly, technology companies usually follow their IPRs and establish base in jurisdictions that are most favourable for IPR. Lacking this, India has seen most of its technology companies shifting base to jurisdictions such as Singapore.

Creating a favourable tax regime for intellectual property is, therefore, extremely important for retaining technology companies in India.

This is partially covered in the Budget announcement, which provides that income by way of royalty in respect of a patent developed and registered in India will be taxed at 10%.

Recommendation/Suggestion:

Further action also needs to be permitted-

Such companies should not be subject to minimum alternate tax. However, such companies should be subject to dividend distribution tax as may be applicable to all other companies;
Transfer of IPR so developed and owned, or acquired and owned should result only in capital gains and be taxable as capital gains. Such IPR should be characterised as a long term asset if held for more than 3 years as is the case for other assets;
For self-generated IPR, the holding period should start from the date an application is made under the IPR laws for its exclusive ownership, viz, copyright, trademark or patent registration.

7. Informal Guidance Mechanism & appellate authority at RBI

Authority: RBI

Status/Explanation:

This needs to be pursued. The RBI helpline announced recently does not resolve this issue, as it does not contemplate making RBI approvals/rejections public or appeal process for parties aggrieved by an RBI decision.

While public notification of RBI decisions has been announced for compounding orders, it is yet to be done for cases of approvals/rejections of applications under FEMA (on a no-names basis).

Recommendation/Suggestion:

In our discussion with authorities, it was suggested that instead of codifying laws on aspects like round tripping, it is better to have an informal guidance and appeal procedure at RBI, similar to SEBI. This needs to be pursued.

8. Filing of Form FC-TRS – post-transfer requirement

Authority: RBI

Status/Explanation:

In terms of the FDI policy, a transfer of shares of an Indian company between non-residents and residents can be taken on record by the company subject to it receiving endorsed form FC-TRS. While the filing of this form has been made online, it still takes a few days’ time for the AD banks to review and approve the form.

Thus, the transfer of shares cannot be recorded by the company (despite the purchaser remitting monies to the seller and completing all other formalities) until form FC-TRS is endorsed/approved by the AD bank. At times, this process takes months (there are substantial delays even after the filing process has been made online).

Recommendation/Suggestion:

Since FC-TRS filing is online now, there should not be an issue in making it a post-transfer requirement.

9. Collection of monies by a resident on behalf of a non-resident to be permitted

Authority: RBI

Status/Explanation:

The Foreign Exchange Management Act, 1999 (FEMA) prohibits any person to make any payment to or for the credit of any person resident outside India in any manner. As the nature of commerce has undergone major change and many services and goods are being delivered through aggregators using online or mobile media, there is a need to re-look at this provision. Essentially, in all aggregator arrangements, the aggregator acts ‘on behalf of’ the seller to collect payments and provide selling and/or ancillary services.

Recommendation/Suggestion:

Presently, only start-ups have been permitted to collect monies in India on behalf of their foreign subsidiaries. This needs to be permitted for all companies, and also on behalf of any other entity (regardless of such entity being a subsidiary).

10. Acquisition by residents of overseas companies with an existing subsidiary(ies) in India to be permitted

Authority: RBI

Status/Explanation:

Presently, there is uncertainty on the meaning of “round-tripping” in relation to such transactions.

Recommendation/Suggestion:

“Round tripping” is usually invoked when an Indian company acquires a foreign company, with an existing subsidiary in India.

It needs to be clarified whether the transfer of shares between an overseas subsidiary of an Indian company and a third party falls under any compliance/approval process under FEMA.

Also, there is a limitation on foreign investment by resident individuals in association with the ‘Indian Party’ in only operating entities. This may be done away with.

The RBI policy announcements contain only the following generic statement: “Streamlining of overseas investment operations for the start-up enterprises”. The aforesaid specific actions need to be performed.

11. ODI JVs/WOS investing back into India to be permitted where it is a genuine business requirement and bona-fide investment

Authority: RBI

Status/Explanation:

There is uncertainty with regard to “round-tripping” in such transactions.

Recommendation/Suggestion:

Such investments should be permitted (under the approval route, if need be) on commercial justification.

The following transaction may be specifically permitted:

Bona-fide acquisition of existing structures having a leg in India; or
Where the Indian investment is made for bonafide commercial reasons out of funds earned/raised overseas without Indian guarantee and is in 100% FDI automatic route sector (e.g. infrastructure).

Further, setting up an overseas structure under the ODI route to raise equity capital for investing back into India should be specified/clarified to be a bonafide and permitted overseas investment.

Since there is no bar under the extant regulations, entities which have overseas JVs / WOS which have downstream investments in India should not be subject to punitive action.

Individuals should be allowed to hold shares in foreign entities with step-down subsidiaries, subject to the investment in the foreign entity being a specific fraction (and not the whole of) of foreign funding received by step-down subsidiaries.

To permit Investments up to a specified limit (eg USD 10 million) by companies (regardless of their net worth) in overseas entities.

Again, the RBI policy announcements contain only the following generic statement: “Streamlining of overseas investment operations for the start-up enterprises”. The aforesaid specific actions need to be performed.

12. Late filing to be allowed for subsidiary formations by start-up founders

Authority: RBI

Status/Explanation:

Currently, this is not permissible.

Recommendation/Suggestion:

Lot of founders who set-up subsidiaries abroad and have not compiled with RBI, should be allowed an automatic route through late fees.

13. Restriction on FVCIs to invest in all sectors to be removed and brought in line with FDI policy

Authority: RBI

Status/Explanation:

Presently, FVCIs are permitted to invest in only certain sectors.

Recommendation/Suggestion:

In terms of RBI/2016-17/89/ A.P. (DIR Series) Circular No. 7 of 20 October 2016, FVCIs are permitted to invest only on ten sectors (viz., Biotechnology, IT related to hardware and software development, Nanotechnology, Seed research and development, Research and development of new chemical entities in pharmaceutical sector, Dairy industry, Poultry industry, Production of biofuels, Hotel-cum-convention centres with seating capacity of more than three thousand, and Infrastructure sector).

While RBI (under the above circular) has exempted start-ups from this restriction, other companies also need to be exempted from this.

14. Limit on acceptance of deposits from shareholders to be removed for private companies

Authority: MCA

Status/Explanation:

Under Section 73 of the Companies Act, private companies are allowed to accept deposits from their shareholders up to 100% of their share capital and free reserves. However, since most start-ups require constant funding during initial years, and do not have free reserves, such limits may be removed for them.

Recommendation/Suggestion:

The Companies Law Committee Report recommends removal of this limit for all start-ups. However, fine print is awaited.

15. Grant of ESOPs to promoters and independent directors for all private companies

Authority: MCA

Status/Explanation:

The provisions of the Companies Act do not permit companies to grant ESOPs to promoters or members of the promoter group or independent directors. There is no rationale for this restriction as the promoters essentially function as employees of the company. Further, through multiple rounds of fundraising, the stake held by the Promoters would have significantly diluted. Also, to get good professionals to join as independent directors, it is important to issue them ESOPs as payment in cash for compensating them is a burden on the company’s resources.

Recommendation/Suggestion:

Provisions of the Companies Act need to be amended to permit issuing of ESOPs to promoters and members of the promoter group and independent directors. Management ESOP should be permitted for unlisted companies to keep the Promoters incentivized and motivated. Likewise, the role of advisors is critical for the success of the ventures. Equity seems to be the only logical form of incentive, given the lack of liquidity.

While the MCA has permitted the issuance of ESOPs to promoters for start-ups, this needs to be permitted for other companies as well. Also, the issuance of ESOPs to independent directors needs to be permitted as well.

16. Taxation of gains from sale of ESOPs as salary or prerequisite (leading to very high tax at present)

Authority: MCA

Status/Explanation:

The ESOP regime in India is geared more towards listed entities, which have a liquid market, as opposed to start-ups. Section 17, IT Act 1961 and Rule 3, IT Rules 1962 deal with the taxation of ESOPs. First, the employee is subject to tax at the time of exercise of option – i.e. this tax is payable immediately even if the employee has not sold the share in that tax period. The magnitude of the tax is calculated on the notional gain between the acquisition price of the share (option strike price) and the fair market value (FMV) at the time of exercise. Secondly, the nature of such gains is considered as salary or perquisite. This means that the employee may be payable for ordinary income tax – 30% (excluding surcharge and education cess), calculated as per the marginal income tax rate) for the notional gains calculated above. This causes an economic outflow in the hands of the employee upon exercise, which is funded by debt or is at times even declined due to this reason. This is especially acute since the shares they hold don’t have the same rights as those offered to Investors.

Recommendation/Suggestion:

Amend Rule 3(8)(iii) of the Income Tax Rules, 1962 and as follows (insertion in bold) “In a case where, on the date of exercising of the option, the share in the company is not listed on a recognised stock exchange, the fair market value shall be such value of the share in the company as determined by a merchant banker or accountant on the specified date as per Rule 11UA(1)(c)(b), provided such fair market value shall not be less than the exercise price ”

Tax incidence should arise in the year of the sale of shares (not the year of exercise of the option). Profit made on sale of shares should be treated as capital gains (vs. the treatment as a portion of the gains as salary or perquisite).

17. Dividends from overseas subsidiaries taxed again in India

Authority: MoF

Status/Explanation:

Dividend received from overseas subsidiaries is taxed once again in India as income in the hands of the company. Also, while the rate of tax on such dividends for certain companies is 15% (as against 30%), the same exemption is not provided to limited-liability partnerships and individuals.

Recommendation/Suggestion:

Thus, tax levied on dividends from overseas subsidiaries should be discontinued, for parent companies incorporated by resident Indians in India.

18. Fair market value tax

Authority: MoF

Status/Explanation:

Any investment above the ‘fair market value’ (as may be determined by the Income Tax Authority at a future date) is treated as income for the company and is subject to income tax. This impacts angel investments at high valuation, as there is a risk of the Income Tax Authority determining such investment as above fair market value and requiring the company to pay tax on the differential.

Recommendation/Suggestion:

Start-ups have been exempted from this tax. However, the certification process to be recognized as a start-up is cumbersome and needs to be relaxed.

19. Harmonisation of tax policy for listed and unlisted equity instruments

Authority: MoF

Status/Explanation:

Listed Securities have a holding Period of 12 months for LTCG whereas for Unlisted it is 24 months Unlisted securities have a tax rate that is twice the rate of their listed counterparts, and the surcharge applies on the sale of unlisted securities while it is exempt for listed securities.

Recommendation/Suggestion:

Globally, the differentiation in tax treatment on listed and unlisted securities is not prevalent. Unlisted securities are more illiquid and riskier as compared to listed securities. They should have the same tenure of holding and the same tax rate on the same. There is a disparity in the tax rates applicable for capital gains on the sale of listed securities (12 months) vis-à-vis sale of unlisted securities (24 months). Dematted Unlisted securities of start-ups or companies that were registered as start-ups can also be subject to STT (or the new Stamp Duty regime announced in February 2019) in order to harmonise the tax treatment of both listed and unlisted securities.

Disclaimer: The discussion and ideas expressed here should not be construed as legal advice. The discussion is conducted with Industry practitioners and experts for purpose of benefiting the Industry members in the Software product, Start-up ecosystem and other related industry sectors

17/02/202118/02/2021

Mapping Policy a major Progressive reform for Digital India

Almost everything in the tangible world has a location attached. In the future Data Economy, map information is going to be one very important piece of information.

The Government of India announced a policy and new guidelines of using Mapping and relaxed the Policymaking it simple enough, aiming at unbundling the economic value across all sectors in the economy.

Click here to read the entire notification issued by the Ministry of Science and Technology, Government of India.

iSPIRT organised a panel discussion on the policy announcement to understand the policy and its importance for India. This blog post is an exciting read and listen for young innovators wanting to reimagine the economy as almost each and every thing will require mapping.

Following participants took active part in discussions.

Lalitesh Katragadda, Co-Founder of Indihood
Umakant Soni, Co-founder & CEO of ARTPARK (AI & Robotics Technology Park), AI Foundry
Mohit Gupta, Co-Founder of Zomato
Sudhir Singh, Volunteer at iSPIRT (Policy Hacks Anchor)

Recorded Video Transcript

Subsequent to introduction, Sudhir Singh (anchoring the Panel) opened the discussion asking Lalitesh Katragadda to explain important features of Policy announced.

Lalitesh explaining the policy salient features said “all the other Map’s policies that used to exist in various departments currently stand null and void, and they are replaced by this one very simple policy that has been issued, and people who embark on Mapping don’t have to worry.

He further added, “ if you are Indian company you can map anything except for a small blacklist of attributes and features that you should not map, I’m sure will be related to military and security. And, you can map using whatever technology that you want, you can use lidar, you can use high-resolution cameras, underwater, over water, anything. You cannot just create Maps you can disseminate, sell and distribute.”

“The only restriction if anything is that international mappers are restricted to a higher level of resolution for security purposes and they can also have access to high resolutions Maps created by Indian entities. This new policy is so simple that it creates freedom to map”, he said.

Mohit Gupta said, “for me the most important thing is Government taking notice”, and “coming to an understanding about the digital infrastructure required to build high-quality businesses and services across a large spectrum of different areas”.

He also expressed his happiness on the news that the Indian Space Research Organisation (ISRO), a Government organisation and MapmyIndia a private Indian company are collaborating.

Mohit Gupta informed that they tried in the past, experimenting with various different players who provide mapping services both Indian and international and understand the importance of alternative options to handle both the precision mapping and business economics.

Umakant Soni started the discussion by quoting an example of google maps and how they had increased the cost from free to 10X to 20X and made it expensive to use their service and almost single-handed dependence upon them.

He said that, “fundamental thing that was different in the mobile revolution was the use of location” and that, “the immersion of the digital world into the physical world started with the whole mobile revolution and I think Zomato and Ola kind of companies have actually really profited from that”.

According to him, If out of every ₹4 that a business earns out of its services, it is spending ₹1 on mapping, then it is tough to sustain certain kinds of business models. Hence, it is a great move to create more options, thereby reducing the price in the long-term and benefit the Indian consumer.

He gave a perspective on the amount of value mapping technology and applications can unlock. Quoting the survey he explained 90% of the value lies in intangibles and this is not possible to unlock this value without having easy reformative mapping policy, that will help India to build the 5Trillion 10 Trillion Economy.

“The challenges that we are at 3 trillion, wanting to go to 10 trillion, and we are talking about additional 7 trillion out of that 90% i.e. 6.3 trillion is going to be in the digital domain. If you’re not own the critical pieces which are going to create the intangible assets, we will not be reaching 10 trillion. We might actually get to 3.7 or 4 trillion that’s it in another 10 years” explained Umakant.

The other perspective on the value that Umakant gave was on how Google is inherently underestimating its business targets of 5 billion revenue from mapping. Quoting Baidu’s estimates from China, he explained that more than 70% of this value is lying in the future data economy, where location and mapping data will actually flow from sensors, almost everywhere in our lives. According to him, this data will augment the present Satellite imagery and physical mapping.

“You will be able to catalogue and tag every single object that you see in the physical world around you and that is the future of mapping, and this policy, actually unleashing this whole system of innovation that is now possible because this tiny little camera has got lidar, you can actually see a single object, and that’s where the computing moving onto the edge”, said Umakant.

He further added that “I mean we have not even started to comprehend what it might be”, And “that’s why it’s great news for Indian start-ups founders. What is next right after the mobile revolution, I think Maps. You know combined with AI and robotics they are going to form the next big wave of change in terms of massive business potential we have”, said Umakant.”

On the question of whether we can go International, Lalitesh answered, “when we have the best mapping technologies available and that will only happen if we start in our own backyard.”

He had further explained that according to a rough guess not more than 15% of India is mapped and we need to map everything that matters in India for development. According to him, there is a lot of work to be done, it won’t happen with just one company building it.

He further added that “democratization can only happen if the underlying layers become accessible which is both coverages has to increase quality has to increase and that can only happen with large amounts of innovation” and making it as easy as creating websites’.

‘So, I am looking forward to a world where we have you know hundreds, if not thousands of mapping innovations coming”, he added.

Mohit expressed his agreement with Lalitesh on how unmapped India was and explained the Challenge it posed to them in food delivery even to urban dwellers.

He went on to explain how they had to innovate and add a pre-recorded voice (audio instruction) message for consumer location to solve a problem of precision mapping.

He said that the “Audio instructions “we had to launch and are being used very widely, the last mile addresses and ability to get last-mile addresses accurately is very poor as a result a lot of our riders would end up calling customers for last-mile instructions.”

“Reality is that, there is a lot of ground to be covered for maps”, he added.

He also informed that they do not like over-dependence on a single player and hence has been doing a pilot almost every year with MapmyIndia. He felt that MapmyIndia has also a room to improve and become competitive to existing major services.

Sudhir posed a question on how easy it will be to use maps and if the process of using mapping information will be as stringent as existing offline maps, which sometimes require the approval of a senior official like joint secretary of Government of India, to obtain a physical map and use.

Lalitesh answered, “policy calls for all the government agencies cooperating, obviously if not of security sensitivity, which is most of the mapping data, to be made accessible to Indian company I’m hoping see changes coming”

Maps that you can depend on how to run on good quality data otherwise they will fail so so this is really enabler I don’t look at the map a product at the map enabling piece of infrastructure that every you know digital entity in India needs to have access to

Lalitesh further went on to explain how mapping can change lending, by using mapping in property and land record. According to him, it has the potential to unlock more than 4 and a half-trillion dollars of capital both for small business.

****The End****

01/02/202101/02/2021

iSPIRT’s Official Response to Union Budget 2021

Boost for HealthStack, but no gains for Industry

The Pandemic had decided much of the flow of financial planning in a country like India. The emphasis on Atma Nirbhar Bharat right at the outset in PART A of speech is on expected lines in a changed scenario post pandemic. Health being given importance forming the first pillar of six pillars was also expected based on ongoing developments.

For decades, India has underinvested (both in public and private spend) in the overall health of the population, and it took a global pandemic to dedicate a new Pillar of the budget to improving health outcomes and increase funding by 130%. It is heartening to see a substantial budget allocation of 64,000 Crore towards the Aatmanirbhar Swasth Yojana to improve primary, secondary and tertiary care. With the National Health Authority getting veteran RS Sharma (former Chairperson of TRAI and UIDAI) as its new CEO, this scheme could be implemented in a digital-first manner taking advantage of the advanced architecture of the National Digital Health Mission.

At iSPIRT we are pleased to see this development, and look forward to a year of accelerated efforts to establish key public digital infrastructure that could improve healthcare.

It was also encouraging to see Innovation and R&D mentioned as one of the pillars; this is a sign the Government is keen on supporting an innovation driven economy and the Indian products eco-system. The National Research Foundation outlay of 50,000 crores over 5 years is applicable across all sectors. Production linked incentive (PLI) schemes were announced for 13 sectors. This is a welcome move to bring in a thinking of promoting Indian Product Champions. However, the details of structure and which sectors and playgrounds the Government is attempting to promote will determine the success in the global landscape.

At iSPIRT we have been advocating development of niche playgrounds in sectors where India has a competitive advantage such as Software products in all sectors including defense, telecom etc. Whether the outlay of 1.97 lakh crores, over 5 years starting FY 2021-22 will be enough is to be tested.

The Continued emphasis on digital payment promotion with a new proposal of 1,500 crores and not losing sight of startups movement is heartening for the Software product industry. Improving norms to formation of a 1 person company will encourage innovation, entrepreneurship and startups. The Government seems to also be inclined to use technology to improve compliance via faceless assessment and a reduced limit on reopening of assessment limits, which are also efforts in a positive direction.

The biggest missed opportunity was around support to MSMEs – which are the key to driving scalable innovation. The MSME sector continues to need life support post the pandemic. While the Government slotted in a 2X budget estimate for MSMEs, it is not clear what this will go towards or that it will help the sector at scale. What remains to be addressed is critical changes that could MSMEs, ease frictions to accelerate growth.

We wanted to see more action on Ease of doing business, especially around removing bottlenecks for tech companies across sectors. In a digital economy, the small business sector is the lifeblood of future growth, and the government will need to think hard about the true means of galvanising this sector.

About iSPIRT Foundation

We are a non-profit think tank that builds public goods for Indian product startup to thrive and grow. iSPIRT aims to do for Indian startups what DARPA or Stanford did in Silicon Valley.

For further queries, reach out to Sudhir Singh, email: [email protected] Or Karthik KS, email: [email protected]

14/12/202014/12/2020

PM WANI – Empowering people with Wi-Fi Internet

Wi-Fi Access Network Interface (WANI) that was envisaged by TRAI Consultation papers has become a reality as Government approved it as PM WANI, on 9^th December 2020, for exponential proliferation of public Wi-Fi networks.

PM WANI will make it possible millions of Wi-Fi hotspots to emerge across the country, giving easy access to internet to common man. New business models will emerge, making it possible to add another layer of Internet providers with access points being provided by corner shops and stores and others.

The Detailed Document about the Scheme can be downloaded and read at (Click to open) Department of Telecom Site.

The simplicity of the scheme is recognised by the very fact that DOT automatically recognised PDOA after application in 7 days.

PM WANI explained in a snapshot

This PolicyHacks Panel discussion with Dr. RS Sharma, Ex-Chairman TRAI, Pramod Varma, iSPIRT Volunteer, gave conceptual Architecture of WANI, Siddharth Shetty, iSPIRT Volunteer, Shubendu Sharma, Founder of Wifi Dabba and Dr. Ajay Data, Founder & CEO of a Class A ISP and other technology companies.

iSPIRT has been a protagonist of the concept of WANI with Pramod Varma, Siddharth Shetty and other volunteers involved in building the concept to unbundle another layer of broadband level Internet access to masses on the go and in far-flung areas.

Dr. RS Sharma explains,”we came to a conclusion that if we can create a technology architecture for some body to market and provide access by unbundling from ISPs like UPI has done, then it will become seamless and easy to implement and Kirana shops can also provide Wi-Fi without hassle”

“And that is how we came up with the concept of PDO like PCO of Telephone booths and PDOA etc”, he added explaining how PDOA will be a layer above PDO.

The main policy issue here was reselling of the bandwidth, which was addressed and then a consultation papers was evolved and a pilot done to test the concept on ground, he mentioned while explaining how TRAI was involved.

“It is a very asset heavy architecture if a Telco alone has to do all that physical investment till the last wire in your house or each hotspot in country” and “all the fiber in BHARATNET and others that we are laying no body knows at the the end, what we have to do and it requires an ‘entrepreneurial model’ to scale to be putting millions of connection” said Pramod Varma.

In Covid year, we have seen real hardship for people who are not privileged to have broadband access and education of children abruptly stop. “We have to make Connectivity a human right”, says Pramod Varma and explains, that is why, how essentials it is to invest into infrastructure and the last mile becomes people property.

“We had the mental model that, if we can create self sustaining interesting parts of it” Said Pramod, explaining how the concept was evolved. Adding further, that a KYC done ones can give a KYC token that can be used to further to authenticate who the person is on access layer in the Model, without doing KYC again and again. “UPI will further provide the payment model, as we have already solved it”, said Pramod.

“You will have multiple providers come together to unbundle this” Said Siddharth Shetty, adding to the conversation.

Shubendu, from Wi-Fi Dabba who had been thinking this as a ‘business model’, deployed the pilot for testing the concept. Explaining his experience, he said, “we wanted to see if we draw a Internet cable from a router in our office to street side shop, how it is used by people, can people pay for it and use it and in a week we had people instead of buying eclairs asking for a Token to use Wi-Fi”.

“In 2016, we took it as a fulltime project, and this was the time when our problem started as ISPs stopped giving us connection, after knowing we were reselling bandwidth” said Shubendu.

He also explained that, “the kind of paperwork you have to maintain and additional costs you have to incur” does not make it viable for small business to apply for an ISP.

“This policy make life simpler for businesses like us” in entirety, added Shubendu.

Dr. Ajay Data, who founded a Class A ISP in Jaipur, was on panel and said, “I am ‘very positive’ about it and this can revolutionise many many things in this Country”.

He explained, how the product “Vedio Meet” they developed to solve local education problem did not work on HD quality for students in last mile and had to be downgraded to SD quality, because of bandwidth in last mile. “we need to have the internet of the ‘streaming quality’ across country, where HD streams can be delivered on any device and if we can achieve this, rest of the applications will work ” said Ajay Data.

He raised apprehensions, on how it will be regulated on ground without harassment of the PDOs by regulatory bodies, giving examples of how even licensed ISPs are harassed and ISPs are charged AGR even in on sale of Computers and routers. Similar legal issue should not be left unaddressed and should be taken care, in languages (including vernacular medium) for PDOs to be not harassed.

“May be a board (Certificate) can be out in each PDO point to ascertain that local police and enforcement does not harass them”, said Ajay Data.

RS Sharma, addressing concerns raised by Ajay Data, Said, “PM himself has tweeted about this” and leadership knows the exact importance of the policy.

He further explained that, “Retail sale of bandwidth has been made passthrough in the AGR Computation”, either the TSPs or ISP pays for the 8% AGR, retailer has nothing to pay, as it has been already paid for.

Dr. Sharma also explained further, that it can save lot of bandwidth, as content can be maintained locally at local access points and last mile user need not traverse through the upstream network for local content, which is a very useful concept for ISPs and TSPs, to decongest the upstream networks.

The PDOs will not have any problems, as the responsibility of who is accessing what by monitoring SSIDs will lie with PDOA (aggregator), not with PDO.

Shri Sharma added that, “what is important is this is implemented well” sharing the issue with Ajay that many a times polices are misused. And we all hope good intentions will prevail and country will be benefited, he had added further.

The panel discussion ended with note of thanks.

09/11/202010/11/2020

New OSP Guidelines – a major reform (Ease of Doing Business)

The new guidelines on Other Service Provider (OSP) issued by DOT on 5th November is one big step taken by Government of India under leadership of Prime Minister Modi in Ease of Doing business for IT and ITeS sector.

You can find the DOT publication here https://dot.gov.in/sites/default/files/2020_11_05%20OSP%20CS.pdf

iSPIRT Organised a Panel discussion in PolicyHacks to understand the changes that have been announced and how they impact the Industry.

The panellist included
1. Shri R.S. Sharma, Ex-Chairman TRAI
2. Rahul Matthan, Partner, Trilegal
3. Shanmugam Nagarajan, Founder and Chief People Officer, [24]7.ai
4. Chocko Valliappa, CEO, Vee Technologies
5. Sudhir Singh, Core Volunteer, iSPIRT, Policy Hacks Host

The panel discussion can be watched at below given Youtube video or you can read through the excerpts of the discussion given below in this blog.

Background

IT and ITeS companies looking for seamless cross border communication between the Indian Centers and their foreign counterparts centers use a telecom circuit service (IPLC, MPLS, Sip trunk), obtained from an Indian Telecom Service Provider (TSP). Traditionally, they were supposed to apply and get registered as OSP. The application and approval process were cumbersome and required them to submit detailed network diagrams and satisfy that authority of a legitimate use of the Circuits. The process was cumbersome, more bureaucratic than technical in nature and often subject to undue harassment by TERM cell even when use was fully legitimate.

Industry has been demanding this reform for long, as the Circuits were always subscribed through a licenses TSP in India. The Reform will give way to a new era of opening in telecom services. It is most likely to benefit IT and ITeS industry the most, boost innovation and synergistic alliance in Industry. Most importantly this will make India more attractive for FDI, as this was one major irritant in deploying most important part of the International operations i.e. International Communication.

The move will not only help large offshore IT and BPO Centers but also will empower domestic Software product companies. It will give a huge impetus to work from home and hence will be very instrumental in promotion of SaaS industry, both for their internal operations and also promote SaaS product adoption.

Some of the main highlights of this decision are.

1. No need for a Registration any more to operate as an OSP

2. Interconnection of multiple OSP centers and remote agents

3. Work From Home and Remote locations allowed

4. Centralised Infra and consolidated Traffic between Indian POP and International POP

5. Sharing of EPABX and PSTN lines by domestic and International Center

6. Distributed Architecture with main Infra at central POP and media gateways at other centers

7. CUG allowed for internal Communication

8. CDRs, access log, configurations of EPABX and routing tables to be maintained and aggregated for each media gateway for a period of one year

9. No toll bypass allowed and no telecom services to be provisioned

Excerpts of the Panel Discussions

The panel discussions started with a round of Introduction and inviting Rahul to summarise the new regulations.

Rahul Matthan started the panel discussion with a summary of the guidelines announced. He termed the new guidelines issued as Radically simplified.

Starting the introduction to new Guidelines, he said, “OSP or the Other Service Provider regulation in essence regulates Business Process Outsourcing companies and the definition of the types of entities that are regulated by this is very important. Earlier the definition used to include things like call centers, Business Process Outsourcing and other IT services, but also had very broad language at the end which included all IT enabled Services.

So, the first amendment is that it’s been restricted now to voice based business process outsourcing services.”

“The second very significant amendment that has happened is that the registration requirement has been entirely removed. Earlier you had to register with the TERM cell of DOT and that that requirement has been entirely removed,” Said Rahul.

He further mentioned that work from home (WFH) is allowed without any restriction of site or permissions and submission of network diagrams. He added. “it is work from anywhere” and “also, infrastructure sharing has been permitted there are some significant changes in the interconnectivity regulations have been permitted”.

“Bank guarantees used to run into crores for many large companies. The requirement for submitting performance bank guarantee has now been removed”, mentioned Rahul.

He also informed that the general provisions about penalty provisions with regard to inspection have been removed. “In fact, the entire chapter with regard to penalties and inspection has been removed”, mentioned Rahul.

Shri RS Sharma informed the panel how the consultation papers and discussion at TRAI on the subject progressed at TRAI. He informed that whereas the OSP regulation was very old, TRAI got a reference to start the consultation process in September 2018 and the Consultations were submitted by TRAI to DOT in 2019, which is exactly one year back.

“Essentially thought which we had was OSPs are the ones who are the customers of the TSPs telecom, they are paying money to the main service provider which is the TSP, so why should we really come in between and you know ask for all kinds of you know compliance” said Ex-TRAI chief, recalling developments.

He further informed that, next thing that was taken up is the definition, and as these are the entities which are taking resources from the telecom service providers or ISP and actually doing somebody’s work or providing services to some other entity, they should all be called application service providers (ASPs).

“Unfortunately, the OSPs also included those people who were actually providing services internally. We said any entity which provides service to itself after taking resources from the telecom service providers will not be coming within the definition of logical OSPs”, Said Shri Sharma.

He also recalled that it was recommended that everyone need not register, and only voice based OSPs need to be registered, Data based OSP need not be Registered.

The new definition given at chapter 1 point 7 states these recommendations. As said by Rahul earlier, the new guidelines limit OSP to voice-based processes only.

Shri Sharma further recalled that the TRAI recommended the removal of the requirement to submit network diagrams in OSP registration. He also further mentioned that TRAI also took a stand not to include hosted contact center service infrastructure or cloud hosted infrastructure, in OSP application scrutiny.

Shri Sharma said,” Interestingly in the last 10 years not even a single bank guarantee has been encashed.” He said bank guarantee was the most ridiculous part of the provision, as Govt. was not earning any revenue from OSP,

Similarly, he recounts the recommendations made on interconnectivity among the various OSPs, that also we said should be allowed. “I feel really satisfied”. Said shri Sharma, citing that most recommendations have been accepted.

In further discussion, Sudhir added that we were not having regulation at par with the developed world and called Rahul to give his perspective on regulatory aspects of OSP provisions.

Rahul emphasised in past Data was scarce and a licenced kind of regime was brought in with some sort of a performance guarantee to ensure compliance. Data today is not scarce and with the advent of smartphones and choices one has to make calls, the OSP regime was just giving comfort to the Inspector raj of the TERM cell.

“Country ran out of static IP Addresses”, said Rahul, when it tried to tackle the work from home during the Pandemic. Although DOT cooperated in providing relaxation, the actual need was to remove regulations relating to logical separation between Voice and Data and the need for physical EPABX.

S. Nagarajan, joined the discussion and said, “antiquated rules only hurt the industry by not letting us expand freely within the country. We are in other countries like Colombia, Philippines, Guatemala and none of these countries have these regulations”.

“So this has many benefits for us in all the dimensions, one leading to the other.. ease of doing business, geo competitiveness, location diversity, workforce diversity, talent pool expansion and increased quality of delivery through reduced attrition, (taking it back to geo competitiveness) and there by increasing our business potential for the country, creating millions more direct and indirect jobs for the nation. Thus, it is a better stimulus to the economy than just a monetary stimulus.”

Extending the panel discussions further,

Chocko Valliappa, recalled how the Government brought in Texas Instrument to Bangalore and facilitated them with a Red Carpet but in due course with such regulations the Red Carpet became Red Tape.

He mentioned that, “We employ 6000 employees between US, India and Philippines and in US for example 95% of our work is done work from home and that’s how we always operated and but in India, we are operating in just 3 cities, Bangalore Chennai and Salem and I’m sure this (the new OSP guidelines) would give us a big footprint across India and set up offices across other places.”

“In the next 35-40 years India will be capable of handling 15% of the global economy. By 2050, India will be poised to become the manufacturing hub of the world replacing China by harnessing 3D design and printing capabilities. I think India engineering talent would be sought after much more, so I think its a step in the right direction”, he further added.

Shri RS Sharma spoke further in response to a question by Rahul on whether the OSP regulation will fully go away in future. He recalled his experiences and how and why bureaucracy could not implement the ease of doing business issues easily.

Shri Sharma said, “TRAI had given two sets of recommendations, one to Ministry of Information and broadcasting another to the Department of Telecom, where we actually targeted ease of doing business.”

He also said that he has seen that the honourable Prime Minister is passionate towards ease of doing business and ease of living. He wants it, but I think we all need to come together, and we all need to sort of continuously work towards it.

“It’s a great thing which has been done actually and I was so happy, and I complimented each one of the people who are involved including the Department of Telecom”, mentioned Shri R.S Sharma at the end.

Discussion ended thanking all participants.

20/07/202006/08/2020

Need to Remove SOFTEX form and TDS on Software products immediately

Subsequent to announcement of the Software product policy there was an expectation in Software product industry that Government of India will make sweeping reforms to promote this Industry. In this regard we bring to your attention two below regulations that create hurdle in ease of doing business very specifically for Software product trade.

SOFTEX forms filing for international trade
TDS on domestic Software product sales

We have been representing through iSPIRT time and again to removal of both these provisions to no avail. Given below is a very short representation on why they are totally unrequired regulation in today’s time.

Given below is the explanation on why these two provisions should be removed. A video recording of same is embedded below.

SOFTEX form

This form was brought in place to regulate remittances received on foreign exchange on exports, especially in early times of Indian Software industry with advent of Software Technology Park Scheme. The form governs two major aspects given below, with reasoning why this form is an obsolete a redundant mechanism.

The foreign exchange remittances due against the exports invoiced has been duly received. RBI systems manage this in synch with Authorized dealers (Banks).
The valuation of exports was to be certified by STPI/SEZ.

Both these provisions can be regulated through GSTN digitally in case of Software product exports and does not require an extra interference by STPI.

GSTN system should be used by RBI to govern quantum of exports: After GST has come into place, all exports are Invoiced as “Export Invoices” and can be well regulated through GST system. All exports of a Indian company can be well regulated through GSTN and Remittances matched with banking systems. Why should there be one more redundant filing for this purpose. The regular Software exporters also file a LUT with GST online.

Products do not require valuation: There in no valuation of Software product required as these are standard products with a List price / MRP based mechanism unlike Software services where there is case to case variation. Software products are traded just like any other products /goods based on MRP or volume-based discounts.

Most Software products are downloaded or used on cloud (SaaS/PaaS mode). These procurements happen online in majority of cases.

SOFTEX form puts a very unnecessary burden on Software product companies for compliance and an extra cost both on internal Administration and fees paid to STPI.

TDS on Software

In 2012 budget a provision to deduct tax at source (TDS of 10%) was brought in, mainly to check the loss of tax income when Software was procured from foreign entities. However, this was also imposed on purchases of Software from domestic Companies.

The provision is a heavy burden specially for Small and Mid-Size Software product companies as in order to effectively deal with this provisions the Software product companies are now forced to float one more entity to avoid burdening their trading channels from TDS by end buyers.

This is totally unjustified provision as no other product is subjected to TDS.

A Software product is like any other product which is produced and sold unlimited number of times.

The TDS provisions

A huge friction of Digital India concept as it hinders trade of Software products Digitally
Does not bring any extra tax revenue to Government

This reform is highly desired and Removal of these two provisions will greatly benefit and boost the moral of Indian Software product industry and strengthen Indian Software product eco-system, which is much desired in present global economic conditions.

We sincerely request Government of India to expeditiously act on removal and reform of these provisions. Ministry of Electronics and IT should take up leadership on this and get these bottlenecks removed.

Disclaimer: The views expressed here are not in nature of legal advice but a consensus opinion in iSPIRT internally and Software product Industry at large.

18/05/202019/05/2020

COVID-19 Relief announcement for businesses that may benefit Software product MSMEs

Finance Minister, Nirmala Sitharaman announced stimulus to help economic revival in wake of COVID-19. Out of these measure a major portion was announced for businesses in MSMEs category.

Some of the important measures announced and that may directly benefit MSMEs in Software product eco-system are as given below.

Collateral free loan of Rs 3 lakh crores for MSMEs. This is expected to enable 45+ lakh MSME units to restart work and save jobs. How and who will disburse this is yet to be announced.
This is an announcement which can be used in best ways by many MSMEs. However, the ease of getting this loan will only be known once the complete process and guideline is issued.
Subordinate debt provision of Rs 20,000 crore for 2 lakh stressed MSMEs.
Rs 50,000 crore equity infusion via Mother fund-Daughter fund for MSMEs that are viable but need handholding. A fund of funds with corpus of Rs 10,000 crore will be set up that will help MSMEs to expand capacity and help them list on markets.
Global tenders will be disallowed up to Rs 200 crore for government
Statutory EPF contribution to be reduced to 10% from 12% for all organisations and their employees covered by EPFO. Government expects this to infuse Rs 6,750 crore of liquidity. This measure is temporary and will provide relief to only those who has substantial workforce in lower bracket of Salaries.
TDS rates have been slashed till March 2021 i.e. for entire financial year almost by 25%. An important rate of TDS applicable here is section 194J which is reduced from 10% to 7.5%. This will just increase the liquidity available in hand of Software product companies. A full list is given in link here at Income Tax site.
The Definition of MSMEs has been revised. This was long due and will help more units to take benefit. In present definition the distinction between manufacturing & services sector MSME has been removed. The new definition will be based on below norm.
- Micro units with investment till Rs 1 crore, turnover up to Rs 5 crore
- Small units with investment till Rs 10 crore, turnover up to Rs 50 crore
- Medium units with investment till Rs 20 crore, turnover up to Rs 100 crore

iSPIRT was pursuing with Govt. of India to provide incentives for MSMEs to buy from Indian Software product companies.

However, in present situation of high volatility and huge pressure from MSMEs which is a sector that is more important for revival, this has not been considered. iSPIRT will keep pursuing with MeitY and MSME ministry for creating a domestic market access.

06/05/201906/05/2019

A right HS Code ‘need of hour’ for NPSP Success

National Policy on Software Product provides for creating a HS Code under Strategy item 1 for “Promoting Software Products Business Ecosystem”

The tax regime will be demarcated for ‘Software Products’ from ‘Software Services’, by providing clearly defined HS Code for the “Software products (intangible goods)” delivered through any medium; physically or online using internet (to be published within three months of notification of this policy). A model HS code will be evolved that will be further sub categorized based on the type of software products, its inter-linkages with other economic sectors, including services and hardware manufacturing. Thus, software products defined by such identifiable HS code will be treated as goods manufactured in India and will be able to avail all incentives provided under Make in India Programme.

Objective of this blog

There are number of challenges to get the HSN Code issue resolved and to get a right HSN code from the Govt. of India. This blog is an attempt to understand the regimes of HSN/SAC Code use and its application to promote a Software product industry in India to implement the above said item in the NPSP 2019.

It will be good to read the following reference documents (Click below to read)

Present status of HSN and SAC Code

After launch of GST, all transactions are to mention the relevant HSN code /SAC Codes are must to be mentioned in Invoices. HSN for Goods and SAC for services.

Under GST regime, all IT Software has been treated as “Service”. Yet, there exists HSN codes and SAC codes both. HSN codes traditionally meant for physical exports through ports still exist in GST regime as there still will be Physical exports through ports.

iSPIRT has time and again represented to Government of India that the provisioning for a “Digital Goods” regime will help India embark upon a Software product wave. However, the GST regime has assumed all Software as service.

Following HS Codes or SAC codes are in use by Indian Software product companies.

For a full view of the codes relevant file links at CBIC are given above.

HS Code	Item Description
4907 00 30	Documents of title conveying the right to use Information Technology software
4911 99 10	Hard copy (printed) of computer software (PUK Card)
8523 80 20	Information technology software on Media (Packaged or Canned)

SAC code

Item Description

9973 31

Under 9973 – Licensing services for the right to use intellectual property and similar products.

Licensing services for the right to use computer software and databases.

9984 34

Under 9984 Online Content

Software downloads

Most prevalent uses are of

8523 80 20 – for packaged products and downloads
9973 31 – SaaS Software

Following Codes are specifically for use of Software Services companies

Under Category 9983 – Management consulting and management services; information technology services.

9983 13	Information technology (IT) consulting and support services
9983 14	Information technology (IT) design and development services
9983 15	Hosting and information technology (IT) infrastructure provisioning services
9983 16	IT infrastructure and network management services
9983 19	Other information technology services n. e. c

The coding mechanism covers both international trade Domestic Tariff Area (DTA) under new GST regime for invoicing.

Present coding is bottleneck for Software product trade

The above coding scheme has emerged from a traditional regime which

Classifies only physical ‘goods’ can only qualify for cross-border trade and hence under HSN and
Software sales is a ‘license to use’ in stead of a product trade.

In addition, it induces a confusion in SAC 9984, where it also lists Software downloads along with other content.

‘Software’ has not been given recognition but how Software is delivered is given an importance.
It also does not allow us to account for Software product in a clear manner, both Domestic and International Trade Statistics.
It does not allow us to ‘account’ for emerging segments of Software products due to technological change.
It is also confusing in sense packaged software downloads can be classified under 9984 also.

“Having right code system is Central to promotion Software Product Industry and related ecosystem.”

A proper classification and coverage will help us promote Indian Software product industry and account for Software product trade verses Software services bother internationally and domestically.

Adoption of Software product will be an important measure of maturity of digital economy.

What is needed to boost SPI under NPSP

The very basis of NPSP launch by Government of India is the recognition of our Competitive advantage in “Software” and hence capability to create world class products.

We have earlier presented papers to Govt. where “digital goods” verses “services” debate is in advanced stage.

Despite being a Software power house, Indian today has a digital deficit.

Recognizing the “Software products” as a new reality will boost India’s strength in “digital deficit”.

Recognize Software product and Distinguish Products from Services

The goods/products exhibit the following properties (as per internationally accepted definition):

Durability (perpetual or time bound)
Countability – traded commodity can be counted as number of pieces, number of licenses used, number of users etc.
Identifiability – identified as a standardised product
Movability and storage. Can be delivered and stored and accounted as an inventory
Ownership of the right to use
Produced/Reproduced through a process
Marketable/Tradable or can be marketed and sold using standard marked price (except when volume discounts, bid pricing and market promotion offers are applicable).

as distinguished from services that are consumed either instantly or within very short period of time or continually coinciding with the activity of provision of service.

Software product exhibit all the properties of a ‘good’ except that they are intangible. Hence, Software products is an ‘intangible’ good, with discrete symptoms.

Software product brings in high value for the Software manufacturer and is normally tied to “Intellectual Property” in its development. Traditionally all software products were installed and used on end-user computers.

However, with advent of cloud it is possible to ship same product as ‘on-premises’ product (to be installed and used by end-user on their premises) or be installed on computers/cloud resources owned by original manufacturer and used by end-user through internet.

The latter is category called “SaaS” based products.

Some Software take a expanded view and present themselves as ‘platform’ with multiple products integrated together capable of being used alone or as set of products and services and ability to serve at country or global scales.

‘Platforms’ are a reality in software world and to be a power in global game, countries having large “platforms’ will be winders. India has the capacity and capability, but has systemic bottlenecks to be removed.

Technological changed will bring in newer dimensions of trade. In 2019, India should provide direction to worls by setting new trends and nudge global community in that direction.

Software products trade can’t be delimited under ‘license’ to sale regime only.

Trade is central to success of an Industry. Treating Software as mere ‘license’ is limiting the trade under Indian tax regime as of now.

The IP and ‘Software product’ is central to original Software manufacturer (Software product company). Yet, it is a ‘product’ or intangible good.

Other ‘goods’ also have IP attached as patents and copy rights, but that never is the ‘license’ a barrier to sales.

Treating Software product as a license is creating a barrier, as then each sales of Software product is subjected to “withholding tax” regulations under direct taxes.

Treating Software product as intangible goods neither infringes the ownership of IP of Software OEM nor does it cause loss to tax. But, it lubricates the trade.

Break through from tradition leads to success

The traditional understanding of trade in tax regimes does not account for technological changes. Indian took a lead in past and has a reference point of adopting such changes to successfully create an Industry.

India created a success of IT Services industry by breaking tradition. In 1992, there was a similar problem that faced country after launch of Software Technology Park (STP) Scheme. As per customs, the exports of any goods could happen only through ports or at best from foreign post office.

To enable exports through data communication links, SOFTEX form was introduced, feeling the need of hour. This was a breakthrough from existing regulations that gave us glorious 25 years in IT.

Indian can have another glorious 25 years of being a Software power, by adopting a mechanism that can distinguish the Software products from services and recognises Software product as intangible goods.

Recommendations (for creating SW product ecosystem)

A HS code classification for following categories can be issued using the last 2 digits (first 6 Digits being defined under international system).

Following category of definition will solve the issues of raised above for creating favourable environment a Software product Industry.

(i) 8523 80 20 – IT Software on media that is not Off-the-self i.e. not covered under Product
(ii) 8523 80 21 – Software Product (Pre-packaged software downloaded or Canned Software)
(iii) 8523 80 22 – Software Product hosted by OEMs on cloud (SaaS, PaaS Model of Software) and used by end-clients using internet.

Note: Problem with 85238020 is that it can be any Software. The only requirement is it is Information Technology Software and on media.

This will give cover for all Software products in following two categories and leave (i) above for Software other than product on media.

S/W product Used – On premises (on computers/private cloud of end-user) – 8523 80 21
S/w product On Cloud of OEM – 8523 80 22 (SaaS/PaaS)

The above recommendation is minimum basic and should not be a limitation to a more wide and granular classification e.g. a different code for SaaS and PaaS etc.

Can we use SAC code?

It is recommended to use HSN rather than SAC for “Software product” for following reason.

(i) The Software ‘product’ attribution is difficult in Services codes and will always be confused with services. SAC is not right place either for a ‘product’ image or for a trade accounting of intangible ‘goods’.
(ii) The SAC code classification is not targeted at distinguishing Software services and Software product. Also, the license to use a database can not be same as license to use a pre-packaged product.
(iii) It is better Software product are defined in HSN to capture both national and International trade Statistics. Not having them at one place will create redundancy, with chances of lot of import happening under a code under existing HSN 85238020. (The idea is to get clear distinction between Software product from services)
(iv) In a “Digital Economy” eventually Software products will have a international trade dimension. Hence, HSN code is a better place.
(v) The whole idea of NPSP is to get Software product recognition with a vision aiming India as a “Software product nation”. Hence, we need to start accounting for intangible mercantile”. To make these changes will nudge the system in that direction.

Note: Some countries have created a HS code under 98/99 for Downloaded Software e.g. China has a code under 980300 for Computer software, not including software hardware or integrated in products. Similarly, some countries are using 9916 as a code for pre-packaged software.

Conclusions

Future of ‘digital economies’ will see trade wards on ‘digital goods’. A meaningful breakthrough from traditional trade regimes is must for a winner. India must be a winner and we should play our games in the area we have enough capability.

Software product Industry is some thing Indian needs badly both for domestic and international trade, specially when our IT Services industry growth is diminishing day by day.

Let us power up the “Software product’ with new coding and classification that recognises Software product with legitimacy to do provided by NPSP.

In 1992, MeitY (then DOE) took lead and created a breakthrough that led to 25+ years of Success of IT Industry. Once more MeitY leadership can take lead and create next 25 golden years by making Indian a Software product nation.

13/03/201917/03/2019

SaaS founders discuss NPSP 2019 with MietY Officials in Chennai

Shri Rajiv Kumar Joint Secretary in-charge of National Policy on Software Products (NPSP 2019) and Senior Director Dr. A K Garg met 20 SaaS companies founders and leader in Chennai on 13th March 2019. At meeting it was discussed that NPSP announced by Government of India on 28th February will soon create a National Software Product Registry, where SaaS companies can register and have access to GEM portal. Also, the procurement process will be suitably amended to allow Govt. departments to procure and use SaaS products. ‘National Software Product Mission (NSPM)’ envisaged in the policy will be setup at Ministry of Electronics and IT (MeitY).

Government has launched NPSP 2019 to focus on Software product ecosystem. iSPIRT has been advocating the cause of SaaS segment in Software products and its importance for India to remain a force to reckon with in Software in next 25 years.

The event was a golden opportunity for SaaS companies Founders and leaders, to provide feedback to and understand from the senior officials in Delhi, about the vision they have to make India a Software product power. Twenty SaaS companies represented in the event.

Speaking on behalf of SaaS founders, Suresh Sambandam, Founder and CEO of OrangeScape said,” Global landscape has changed very fast driven by new technology. We have a 2 trillion Dollar opportunity for SaaS industry. If we get our act right, India can aspire to remain in global game in Software Industry”.

The roundtable was organised by iSPIRT Foundation to facilitate officials to have direct interaction with SaaS industry and understand issues, problems and opportunities in SaaS industry, to enable Government to further carve out schemes/ programs under NPSP 2019 going further.

04/03/201917/03/2019

Policy Hacks – National Policy on Software Products (NPSP) 2019

It is a moment of delight at iSPIRT to see Govt. of India setting its focus on “Software Product”, with the announcement of National Policy on Software Products by government of India on 28th February 2019. The policy framed by Ministry of Electronics and Information Technology (MeitY) is aimed to sustain India as a global power in Software industry in emerging technological changes impacting the industry. iSPIRT had earlier covered this announcement in a blog titled “India powers up its ‘Software Product’ potential, Introduces National Policy on Software Products (NPSP)” A link to PDF document of the NPSP 2019 is given here on MeitY website. https://meity.gov.in/writereaddata/files/national_policy_on_software_products-2019.pdf Ispirt held a Discussion on NPSP 2019 on 2nd March 2019 with Dr. A. K. Garg, Director MeitY and iSPIRT volunteers Shoaib Ahmed, Amit Ranjan, Nakul Saxena and Sudhir Singh. A vedio of the discussion is placed below. Given below is the transcript of the main part of the discussion. (We have tried our best to put this but It is not a ditto verbatim transcript but what each participant spoke in essence). It is advised to watch and listen to the video. Sudhir Singh started the discussion and invited Dr. A.K. Garg to give an overview on the policy. Dr. A.K. Garg – The policy gives wholistic looks and a single window opportunity. issues involved with HS Code. Three tire effort of building a talent pool. First, Appraising Students at school level that there is a difference between product and services. Second, Dedicated pool of developers dedicated to products. Third, Developing a pool of people who can be mentors The other aspects we have looked at is, how do we provide dedicated market access to the product space. Unless and until there is a dedicated and early market access, we cannot create opportunities. We have not looked at graduating this from services industry to product industry, but we are looking at a completely new set of eco-system that will created around the product space, that is one thing which is very important and hallmark of this policy. Sudhir – in the Strategy section 1 that deals with ‘Promoting Software Products Business Ecosystem’ creating ‘Product registry was an important aspect that can be further utilised to create incentives, schemes and programs. Amit Ranjan – what can not be measured can not be improved, going further on the line, what can not be defined can not be measured. The government is taking a proactive view od first defining what is a Product and then a logical breakdown of that is building the registry, building the classification and codification system. So at least the system recognizes the different dimension and different players in the industry and then once you have a clear understanding of it than you know you can tailor policy and you can do specific thing for specific part and creating this registry will lead to mapping the industry and there after many things could emerge out of the system Nakul Saxena – One of the main objectives of iSPIRT was to create a special focus on Software products and thanks to people like Mr Garg and Secty MeitY and the Minister that we finally got this out. The HS code creation can help product companies to get preferential inclusion in Government procurements and Software products being included in many of the international agreements, especially where Govt of India gives grant to developing countries. Shoaib Ahmed – Is the definition of Software product clear (referring to the early phase of development of policy when there was lot of debate on this part). Nakul – the definition on Software product company is that that the company need to be owned 51% by Indian origin person and IP should reside in India.” Dr. Garg – lot of thinking has gone in to Software product and Software product company. The first and foremost thing is that, it is a very dynamic world and what we have taken is an approach where Software product definition can adjust to changing dynamics. Initially we thought we will not keep any definition, but ultimately, we had to with pressure of various stake holders. Sudhir – requested Nakul to take up the second Strategy section on Promoting Entrepreneurship & Innovation. Nakul – One of the important features of the Policy is that Govt. and MeitY will be putting together 20 Grant Challenges to solve for specific eco-system problems in education, agriculture and healthcare. He mentioned that Secretary has asked to quickly start working on the Grant Challenges. Dr. Garg – Can we crowed source ideas using iSPIRT and Policy Hacks platform. Nakul – Yes, we can. This is a welcome idea and suggested we can have Policy Hacks session to structure discussions and then invite ideas. Dr. Garg – (further spoke on skilling) for skill development to suit product space, one has to think product and live with it. We have to think through a program that can create a pool of 10 to 15 thousand product professionals who understand product eco-system can help innovation and creation of new ideas and or mentor product companies. And that will be the most important dimension for creating a product eco-system. Shoaib – I think that is a wonderful point and a very important point, beyond the technology and is a combination of skills with one being important is understanding of product market and development of these skills is important. Amit – The way to think about it is that we have to catch people when they are young and I actually see this playout when lot of times when student are in their secondary education, when they are doing their class 10^th or 12^th, if you are able to educate them at this stage then it takes very early root in their mind. Product system is all about being experimental and all about being failing then retrying and then improving via every attempt. We should educate them about what is a Product how is it different from Services. We do not have lot of Product success stories from India. But educate them and then skill building comes at secondary stage. Dr. Garg – We do not have to replicate the Silicon valley model and that will never work. We have to think and India specific solution that will work. Shoaib – We need to create an India eco-system, there are a few success stories which we have in India, we need not copy but which need to be understood. Sudhir – There are two more points covered in this section of Strategy. One is on common upgradable infrastructure to be created to support startups and software product designers to identify and plug cyber vulnerability. The second being creation of a Centre of Excellence will be set up to promote design and development of software products. Dr. Garg – the first market in Cyber Security is Govt. So creating a single repository of various Indian Cyber products will help. The other thing could be understanding Indian cyber problems and through Challenge grant on some of these problems. Sudhir – let us take up the Strategy section on improving access to market. Requested Nakul to start. Nakul – for Indian Companies to start growing and start scaling it is important getting some anchor customer. The policy has taken care of this aspect for Product companies to get access to anchor customers and then compete within domestic and international market. But the product entrepreneurs have also to be aware how to deal with Govt. RFP. Dr. Garg – So first two anchor customer are important. In Govt. space we are working on Gem to provide interface to Indian Software product. But we need to think how these product companies tie up with System Integration Companies and their interest are not compromised by Sis. Second thing is awareness building in various Govt. agencies. A young entrepreneur may not be able to get to the right stake holder, how does he get this access is what we need to think through. We will be very happy to get your views on creating access to first market. Amit – this is a very important point, especially in the context of SaaS companies, there is an unwritten rule that Indian Domestic market is not big enough or pay enough to sustain many of the SaaS startups. And that is why many VCs are suggesting that you can build a SaaS Company of out of India but that is essentially for engineering, product design but the market it self you will have to go overseas. Development of the Indian domestic market is extremely important. One of the factors which will play a role there is kind of graduating these startups up the Quality ladder as well. The buyer will look for best product in market at best price. By focusing on Quality, they can compete with foreign companies. It is very important to break this negative feeling in the Eco-system that if you are SaaS you can not sell in India, you have to go out. Shoaib – my point is that Quality software and creating a eco-system. Selling Software, servicing Software and manage Software is a complete different eco-system. Making sure that policy supports that and recognizes it, is the first step. I think we have started with that and I am happy to spend more time to contribute on what does it take to do this. Dr.Garg – if you have a Quality and you do not have a brand it a challenge. Sudhir – this section again mentioned in Policy creating a Software product registry and connecting this with Gem for government product. Sudhir – Let us move on to the last strategy section on implementation. I remember that the ‘National Software Product mission’ (NSPM) was proposed by iSPIRT in to the policy. NSPM can play a vital role as it can become an umbrella cover. Using this it may be possible to create many schemes and program. For example, we have a formidable SaaS industry and it may be possible to quickly create a SaaS product registry and use Gem to get access to Government. Once the registry is created may be Govt. can also issue and advisory to state Government to adopt products from this registry. Dr. Garg – One of the important things is we have to educate the people, and secondly, we have to educate the people on procurement model. Most of the time procurement models are one-time purchase, whereas in a SaaS you have to budget every quarter or every month or it will be pay per use also. Which is a very difficult proposition in Govt. to be approved. One of this thing that come in to my mind is the entry barrier have to be made easier, e.g. there is lot of activity around e-commerce. Now Govt. is actively going to promote product. The e-commerce system is far more developed, it has lower gestation. You can find few companies having valuation of Billion dollars, but that is not true of Product startups. So, we need to see how do we make entry barrier lower for entrepreneur of product companies, other wise human nature is to go by the path of least resistance. Product takes much longer to build, the gestations are much longer, risk are much higher. Shoaib – the challenge are to get role models going, to showcase this. Education is some thing we have been talking about from two dimensions, one is the entrepreneur, second is the Indian SME customer or the Indian customer. The Participants did deliberate further on important of early implementation of NSPM and working on various section of Policy and providing active support from iSPIRT. The discussion was closed with final remarks from the participants. (please listen/watch the Video for further details on final deliberations). The main Salient features of this policy for benefit of users are as follows:

The visision is to make India a Software product leader in world
In it’s mission – It aims at a ten-fold increase in India’s share of the Global Software product market by 2025, by nurture 10,000 technology startups, upskill 1,000,000 IT professionals and setting-up 20 sectorl technology cluster.
The policy has 5 Strategie to implement the policy.
Strategy are 1 – Intendents to create a congenniel environment for Sofware product business.
An important feature of the policy is creation of a Software product registry of India that can facilitate implementation of schems and programs in future, creation of a HS Code category for Software products.
To boost enterprenure ship, it itends to create a Software Product Development Fund (SPDF) with 1000 Croroe contributed by ministry in a fund of funds format. Remaining coming from private sources.
20 dedicated challenge grants to solve societal challenges.
Readying a talent pool of 10,000 committed software product leaders
Improving access to domestic market for Software product companies and boost international trade for Indian Software products.
Lastly setting up of a “National Software Product Mission (NSPM)” to be housed in MeitY, under a Joint Secretary, with participation from Government, Academia and Industry. NPSM will further drive implementation of the policy and be able to craft schemes and programs for the said purpose.

An important part of announcing the scheme has been done. This has now to be leveraged to create a momementum in Software product. iSPIRT is committed to see the further development of India as a Product Nation.

07/01/201907/01/2019

Discussion on “The Information Technology [Intermediaries Guidelines (Amendment) Rules] 2018”

Ministry of Electronics and Information Technology (Meity) has put up a new set of draft rules for the IT Act, and is inviting feedback.

The draft rules mostly relates to governing violations on social media.

The Draft is given at:

http://meity.gov.in/content/comments-suggestions-invited-draft-%E2%80%9C-information-technology-intermediary-guidelines

It contains a link to the new rules:

http://meity.gov.in/writereaddata/files/Draft_Intermediary_Amendment_24122018.pdf

This PolicyHacks recording was done on 2nd January 2018 at 5.30 pm covering a discussion on the proposed rules ( amendment ).

iSPIRT Volunteers, Sanjay Jain, Saranya Gopinath, Venkatesh Hariharan (Venky), Tanuj Bhojwani iSPIRT volunteers and Bhusan, a lawyer from IDFC participated in the discussions with Sudhir Singh.

The main aspects of the draft amendment and its impact on the Software product and Start-ups in tech world in India are covered in the discussions. A transcript of the discussion is given below for read. Or you could choose to listen to the recorded audio/video on you tube embedded below.

The draft rules mainly cover information published by users on intermediaries also referred to as platforms in this discussion. The three broad aspects that draft rules cover are :

Putting higher onus on Intermediaries on objectionable content
High level of compliance and penalties
Enforcing traceability of objectionable content

With above introduction to topic floor was opened for discussions by host Sudhir Singh. Below is the transcript of contribution made by participants ( the transcript may not be complete word by word but follows the semantics of contribution made).

On Question on how the draft rules will impact industry

Sanjay Jain – “Two three element that you have highlighted in there.

First is the definition of the platform player. Intermediaries are broadly defined. They include everybody from telecom players, ISPs, a Social network and even a site like apartment Adda, Baba-jobs, because all of these will have some kind of user generated content, which is being published and shared with others. While the law drafting may have had one type of intermediary in mind, but it actually applies to all of them and as such that is where some of the issue starts.

Second part is that by moving some of the Onus to the platform, and I actually think they have not fully moved the onus to the platform, which is very dicey situation because, they have moved and not moved at the same time. And because, the onus is primarily still on the Govt. to notify to the intermediary, that there is something objectionable and they have to remove it. But, at the same time they have said that intermediary shall develop technological means for identifying all of this, as well. Sometimes there is an assumption that technology can do a lot, and in reality while you can have 99.9% accuracy, you still have those 0.1% and that becomes an issue.

Third part, I wanted to say is cost of compliance goes up considerably. They have put a limit 50 Lakh users in India, though we believe 50 lakh may either be little low. They should go little higher and depending upon type of user generated content they should allow for little graded form of compliance.”

Bhusan, from IDFC Institute – “As a context, these rules have come about are drafted based on earlier rules of 2011 and have some new features like graded approach such as significant intermediary to non-significant intermediary. They have put time lines in terms of response from intermediary and so these rules are being built upon existing set of rules.

There is some short of tightening of the compliance on intermediary e.g. 72 hours of time line for response. If you are a significant intermediary, than you have to be incorporated in India and has to appoint a person who is available 24X7, and you also have to have proactive measure to screen content on your side. Some of this is coming from frustration of getting information from intermediaries.”

On issue of how much these numbers are practical for small players? How to save start-ups?

Sanjay Jain – “Differed assumption is that if you publish any content which is against the law, you are liable. Being an intermediary protects you. If you remember the case of Baje.com, the only protection they got was proving to be an intermediary. Hence, you want to call them (Start-ups) intermediaries but get a better procedural control to stop harassment at hand of low level law enforcement.”

Tanuj came in and quoted the the line after 72 hours, in section 5 it says”as asked for by any government agency or assistance concerning security of the State or cyber security; or investigation or detection or prosecution or prevention of offence(s); protective or cyber security and matters connected with or incidental thereto.”

According to Tarun, this statement is so broad that any junior level officer can say I got information that someone from Hissar in Haryana is harassing a person and give information of all users in Haryana.

Venky – “I agree with Tarun, we have the laws or the rule meant to be more sharply defined and have sharp implementation guidelines. In this case seems to be pretty loosely framed.”

Sudhir Singh – “There is another issue in draft rules on once in a month information to user, and taking their consent. Any hard compliance of rules is normally easier for large players, they may easily invest and handle with technology but small players and start-ups it is difficult situation to comply.”

Sanjay – “From technology experience we learn that if you make something automated, user ignore it. So, what will happen is this will be implemented by sending one email to every user, once in a month, stating if you don’t comply, we will delete your account from platform.

That’s an email that is going to get ignored. So, it is a very ineffective suggestion. Also, there is an implicit assumption that all users are identifiable, which is not the case always. So, just to implement it you will have to identify users. That may not be a valid requirement.”

Bhusan – “On the point that you need to have more than 5 million users. My question is procedurally how do you even establish that?

Will platform will have to do GPS type of tracking to ensure that and does this not create a privacy risk in itself e.g. I do not know does platforms like Quora know that they have more than 5 million users in India or not. It seems, there is this focus on regulating Big Techs and this 5 Million number really come from that.”

Sanjay – “Basically, anybody can be hosting user generated content. So, lets us say we are on a common platform, and there is a message flowing from me to you. If I violate the law, and let’s say the message is liable of incitement or any other law, then I should be held liable and not the platform.

For that platform needs to be qualified as intermediary, put under safe harbour and intermediary takes on the responsibility of helping the law enforcement. So, we should not take up start-ups out of its ambit. What we have to do is make sure that, the conditions required is that conformance to the standard should not be so terrible that start-up should be excluded.

So, we need to sharpen the requirement they they should be conforming with and make it easy enough for somebody to confirm.”

It is being discussed that Govt. is aiming for higher level of Penalty. What should be our recommendation?

Tanuj – “If you take very young company any short of hit is bad, but if you can put proportion of revenue basis, it will be at least more forward thinking, even if it is not absolutely fair, in some sense more fair of not having that rule or having flat rule. The amendments of changes we should think about of moving the penalty would be not being in favour of arbitrary penalty.”

Tarun added – “Our recommendations should be around sharpening rules, like who can use it who cannot use, what are the accountability measures on them, more than magnitude of these numbers.”

Saranya – “Just to address the Data protection law vis-à-vis intermediary act. The subject matter of Data Protection law is ‘personally identifiable information’, whereas Intermediary act tries to cover ‘all communication in some sense’ and hence, Intermediary act has a longer leash with regard to the person who can take the intermediaries to task.

The criteria of what would be offensive under Intermediary act is very different e.g. encouraging consumption of narcotics. Hence, the criteria that a person can take intermediary to task is extremely wide and needs to be curtailed.”

Bhusan – “There is an inherent subjectivity in these rules and there is need to some short of standard procedures on how these rules are applied by law enforcement agencies across. All that these rules say is – any request has to come in writing and intermediaries have to comply with.”

Venky – “From an implementation perspective we need implementation guideline. Section 5 is so wide that anybody can drive a truck through it.”

How the numbers (e.g. 72 hours period to respond and 50 lakh users) should be defined in a manner that is suits Start-ups who are in the early phase.

Sanjay – “Broadly, we need to identify the places and various numbers to apply proportionally depending upon the size of entity and size of violation, in our feed back to the Government.”

Sanjay also brought in attention to the “Appropriate Govt”, needs to be defined well. He said, “What we want is the Govt. agencies to be defined.”

Bhusan – “This is very standard way of defining. I have not seen any precise definition on specifying agencies in general regulation and I do not see they will start with IT act on this.

Bhusan mentioned another important issue of end-to-end encryption is a more political point rather than national security issue. (refer section 5 last lines).

Sanjay – “This is about tracking and tracing may not be about encryption. The fact, that I sent information to some body is about meta data, it’s not about information itself. This may be clarified better, but is not about end-to-end encryption but about meta data.”

Sanjay further added, “perhaps one clause you could add is to say that the ‘intermediary should be able to do this based on the information it has, if it does not have information, there should be not requirement to maintain information’ e.g. if you take business of mailinator, they don’t keep record of mails sent in and out.”

Bhusan, added “it should not lead to intermediaries having a requirement to do KYC on users.”

Is 50 lakh only to target large platform players?

Sanjay, “my read is they may have thought that way. But in reality a regional ISP or even a small newspaper will fall in to that category.”

“Bhusan, I don’t think it is a number generate by some study, but it seems like they just picked it.”

The discussion was rapped with thanks to all players.

Author note and Disclaimer:

PolicyHacks, and publications thereunder, are intended to provide a very basic understanding of legal/policy issues that impact Software Product Industry and the startups in the eco-system. PolicyHacks, therefore, do not necessarily set out views of subject matter experts, and should under no circumstances be substituted for legal advice, which, of course, requires a detailed analysis of the relevant fact situation and applicable laws by experts in the subject matter on case to case basis.
PolicyHacks discussions and recordings are intended at issues concerning the industry practitioners. Hence, views expressed here are not the final formal official statement of either iSPIRT Foundation or any other organisations where the participants in these discussions are involved. Media professionals are advised to please seek organization views through a formal communication to authorised persons.