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Taxation and “Digital Economy”

Background

There two precursor blogs recently published to this new article on taxation of digital economy, which are helpful in understanding the context for Software product industry in general and especially for SaaS.

  1. ‘SaaS’ – the product advantage and need
  2. ‘SaaS’ – indirect tax issues in India

Here is a brief overview.

The first blog, made a case for SaaS industry to be a formidable part of the Indian Software product industry (iSPI).

The second blog, explored the problems of double and confused indirect taxation, GST and its implications, applying a product definition as different from service and need for a clear distinction between a ‘product’ and ‘service’ or ‘digital goods’ and ‘digital service’.

This third blog is based on excerpt from representations and notes pursued with the Ministry of finance in last few months, as a solution to the problems in a larger sphere i.e. the emerging “Digital Economy”.

The Tax system if fragmented

The taxation on ‘intangible’ goods and services has been marred with double taxation, confusion, and litigations. The biggest cause of this broken tax system is that tax authorities have been giving piecemeal approach to the taxation in this sector.

Until December 2006, there was no indirect tax by central Govt. on Software. In 2006, excise duty was levied on Software and until 2008, there was only excise duty + VAT (even VAT was exempted till such date in many states) payable on Software. In 2008, Software came under the purview of service tax and for a long time until February 2010, a large number of Software product companies paid both excise duty and service tax, plus the VAT in states. This continued until the pronouncement of notification No. 2/10 No. 17/2010-Service Tax Dt. 27th February 2010, which exempted Software product companies from payment of service tax, if the excise duty or customs duty was already paid on same.

An example problem (on Service tax +VAT) of this fragmented tax system, for Software product industry, has been illustrated in previous blog, ‘SaaS’ – indirect tax issues in India.

Similarly on direct tax front, the finance act 2012 subjected income from sale of Software as “Royalty Income”, and therefore subject to TDS of 10% on every sale. A book is traded as a product (a tangible good), whereas the contents are copyrighted. So a buyer buys the book and not the copyright. Similarly in the case of a software product, the buyer buys the product and not the copyright. However, the tax treatment is as if the buyer has purchased the copyright.

In a period between 2006 to 2012, the Software product industry has been subjected to many such bottlenecks. The tax authorities acted in a piecemeal basis, to first apply a tax to increase the tax net and then had to make course correction through several patchwork notifications in multiple steps, resulting in to a fragmented tax system.

The cause of this piecemeal approach has been that Software product (being ‘intangible’ product) is not recognized and treated at par with other products. We have proposed that defining ‘digital goods’ and ‘digital services’ clearly may solve the problem.

Let us understand, why there is a focus needed on ‘digital’ and why the ‘goods’ parlance is needed.

Digital economy is about digital goods and digital services

India has rightly embarked on a path for “Digital India” in line with world economies in transforming to a “Digital Economy”. The move, in 2015 budget towards a ‘near cashless’ has been boosted with UPI launch, which will further significantly contribute to the transformation in to digital economy.

The ‘digital economy’ will be overwhelmed with ‘Intangibles’ i.e. ‘digital goods’ and ‘digital services’. Software, may not just be standalone computer program. It may work with either data, audio or video products. Similarly the audio, video, data and document products may have a software product running them. Hence Software product, sounds, images, data, and documents or combinations of them may exist as a ‘digital product/goods’.

Recognizing the tradability in ‘digital goods’ is one the most important need of a ‘digital economy’. The volume of such trade will be huge in future as the digital economy is unleashed. Anderson said, “Software is eating the world”. IoT is a reality now.

All this pointing to, a ‘digital economy’, that will be overwhelmed with trade of not only ‘digital goods’ and ‘digital services’, but also the trade of ‘right to use’ or ‘transfer of right to use’ just as there is ‘deemed sales’ or ‘transfer of right to use’ of tangible goods.

All these reflect the pervasiveness of digital in future economies, as well as inseparable pervasiveness of Software products in the digital world. The buzz word is now ‘digital’, end-to-end.

Why Digital?

Since a digital economy will be about a converged digital world where Software products will also be inseparably pervasive, taxation issues of Software product industry should be dealt in a unified ‘digital economy’ domain, where ‘digital goods’ and ‘digital services’ will be the produced and supplied.

If tax authorities just focus on Software, it will again create another patchwork and will not provide long term solution, for the evolution that is happening with greater velocity now. Focusing on ‘digital’ will provide strategic solution to the problem at policy formulation level. And hence, the issues of the Software product industry can be dealt with by clearly defining “Digital Goods” and “Digital Services” in the tax system.

Digital goods and service definition

It has been already illustrated in ‘SaaS’ – indirect tax issues in India the COG-TRIP test can be used to identify a Software products as different from Software service. However, in order to align with existing Indian legal system and the evolving international practices, following definitions (based Digital Goods and services Tax Fairness Act[1], a bill pending in USA) at structural level has been proposed.

These proposed definitions are just the guiding factors that can be used as a starting point by the Government of Indian in this direction.

DIGITAL GOOD – The term “digital good” means any software or other good that is delivered or transferred electronically, including sounds, images, data, facts, or combinations thereof, stored and maintained in digital format, where such good is the true object of the transaction, rather than the activity or service performed to create such good.

DIGITAL SERVICE – The term “digital service” means any service that is provided electronically, including the provision of remote access to or use of a digital good.

For purpose of above definitions, the term

(i) “Digital Goods” means “Goods” as defined in 366(12) of the Constitution

(ii) “Digital service” means a “service” and that which is not a “Digital Good”

(iii) “Delivered or transferred electronically” means the delivery or transfer by means other than tangible storage media, and

(iv) “Provided electronically” means the provision remotely via electronic means

(v) “Software” is a representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment. And, “Software Product” is a standardised set of such software bundled together as a single program or a Module that directs computer’s processor to perform specific operations, exhibiting the properties of an intangible good that can be traded.

Explanatory Note:

In legal parlance, the ‘goods’ exhibit the following properties:

iSPIRT has proposed a COG-TRIP test[2] for identifying it as Software products. The same definition overlaps with the following legally tenable definition and explanation on detailed attributes.

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

‘Goods’ 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.

‘Digital goods’ exhibit all these properties plus the property of being stored and maintained digitally.

This definition of ‘digital goods’ will also imply, that their sales and purchase will be governed by same laws as for “Goods” in the constitution and various acts thereof. Hence just as ‘Goods’ are subject of ‘sales’ under article 366(29A) so will be ‘digital goods’. It is important in the context of ‘ease of doing business’ in trade of ‘digital goods’ and removing the present confusion on taxation in trade of ‘digital goods’.

The ‘right to use’ as a deemed sales of digital goods to be used or consumed at future instance(s) can also be delivered or transferred digitally. It can be a PIN or a Password or a combination of biometric and password to allow access to digital goods.

In digital economies, many a times ‘digital goods’ are stored on a remote server or maintained digitally on a remote location by a producer or its agents/dealers/distributors for use or access by clients and users.

An act of use or remote access of ‘digital goods’ by using the access PIN or password acquired in advance through a trade or commerce transaction in ‘right to use’ of such ‘digital goods’ shall be an act of trade or commerce in ‘digital goods’ and not of ‘digital service’.

Recommendations made

Following recommendations were made:

  1. Definition be introduced through a bill/finance act in future.
  2. Also a clarity be inserted that, ‘digital goods’ will mean “goods” for all purpose, including ‘tax on the sale or purchase of goods’ as defined in Article 366(29A) which also includes the ‘transfer of right to use digital goods’.
  3. Both indirect tax (in future) GST and Income tax Act, should to refer to the same definition for purpose of ‘digital goods’ and ‘digital service’.
  4. Need for a Tariff code (HS Code) for ‘digital goods’.

The future lies with recognition of ‘digital goods’ as an international standard and WTO involvement in the accepting these principles.

In the interim, India can adopt a workable solution.

At present, all that is not covered under HS Code classification as given below (mostly software/digital goods downloaded online or SaaS Software) is treated as a service, despite the fact that packaged software and SaaS is the same whether traded on a media or online as a medium.

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

Source: DGFT HS Code Database and CBEC

A HS code classification for following categories can be issued using the last 2 digits (first 6 Digits being defined under international system) Or Until a global harmonious classification emerges a codes may be defined under chapter 98/99.

Following category of definition will solve the issues of Digital Goods

(i) Pre-packaged software (Software Product) downloads

(ii) Software Product supplied as S-a-a-S model

(iii) Sale of ‘right to use’ digital goods

(iv) Digital Goods other than Pre-packaged Software

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.

Conclusion

The above proposal of definition and the measures in recommendations can solve the issues faced by the industry, help in ‘ease of doing business’, lubricate trade, ensure neutrality and fair practices as well as provide the much needed level playing field.

The proposal does not create any loop holes in system as it does not recommend the change in the tax regime. It merely recommends the changes desired to accommodate the rise of digital economy.

The Software product industry can be the biggest beneficiary of this and members in Software product industry should take up this concept with Govt. of India with full force to help in rise of India as a Product Nation.

References

[1] Digital Goods and services Tax Fairness Act, USA, https://www.congress.gov/bill/113th-congress/senate-bill/1364/text

[2] A framework developed by iSPIRT, under leadership of Shri. Bharat Goenka of Tally Solutions

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‘SaaS’ – indirect tax issues in India

It seems there is still time before the Software as a service (SaaS) blooms well in the Indian domestic market. The biggest friction points are relatively low acceptability of online model, lack of quality internet penetration in country side and the unsupportive policy framework e.g. recurring billing, expensive payment gateway solutions and confusing indirect taxation in India. Owing to these bottlenecks, many SaaS companies relocated outside India or open a branch or foreign subsidiary.

iSPIRT has been pursuing a stay-in-India check list with Govt. of India, with following three top taxation issues embedded in it:

  1. Removing confusion between ‘goods’ and ‘service’ tax on Software
  2. Not treating software sales as royalty income and do away with TDS on sale of software
  3. Start taxing online B2C sales by foreign companies

All three are relevant to the Software product Industry. However, the problem of ‘goods’ verses ‘service’ tax is intriguing to be solved and the subject of this article.

From tax perspective, many get carried away with the etymology of ‘Service’ in SaaS and believe service tax is the obvious classification. However, the classification under service alone, can’t be the most advantageous position for SaaS industry in a complex tax regime like India which is riddled with confusions.

This article attempts to explain this confusions of goods verses service tax effecting software product industry where SaaS is a special case in consideration.

Explaining the confusion between Goods V/s Service tax

The Indian tax system today classifies Software in following manner:

1. Treated as goods – has a tariff code associated (ITC HS Code)

  • Pre-packaged on media or paper license or PUK
  • Pre-packaged embedded with hardware

2. Treated a Service

  • Bespoke/Customized software development
  • Rest everything else that is not covered in a) above (SaaS falls here)

Those covered under a) above have a tariff code (ITC/HS Code) associated with them and hence fall under ‘goods’. The pre-packaged category (i.e. the Software products) have following tariff code assigned currently.

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

Same pre-packaged software downloaded ‘online’ is covered under service tax and is not treated as ‘goods’. Further, the tax system does not understand other models of SaaS, PaaS etc. All other categories of Software i.e. other than mentioned in a) above are covered under service tax by default under a logic of exclusion (not having covered under the tariff code list).

There is no guarantee that if the Service tax is applied there will not be a goods tax applied. VAT is applied in many cases based on interpretation in a way leading to double taxation. Even large players like Microsoft are not able to circumvent the double taxation. Their SaaS based offering (office365 bundled with exchange and storage on cloud[1]) are taxed differently at different point of times. Sometimes just the service tax and at other times service tax + VAT. You can hear a large number of use cases like this.

According to tax authorities in central government, the problem is solved simply by making goods and service tax rate one. They have solved the riddle by bringing in a notification for paying only one of the two at a given time excise duty/CVD or Service tax. But they have no remedy on states charging VAT. Whenever it is considered that the transaction implies ‘Transfer of right to use goods’ for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration, it is deemed to be a sale under Article 366(29A) of the Constitution of India. As a result Software even when defined as a services gets caught in 29A of (366) and VAT is applied based on how local authorities interpret a transaction.

The root cause of this confusion is that the tax regime has not given place to ‘intangibles’ at par with tangibles. As far as the tangibles trade is concerned, intangibles are treated as ‘goods’ as defined in 366(12) of the Constitution and their sale is covered by sale of goods act 1930. All that is defined as goods cannot be service by definition.

Does GST solve the puzzle?

Some people argue that these ‘good’ v/s ‘services’ tax problems will all vanish when GST is rolled out, based on the argument and assumption that the rate of tax in GST will be one.

GST is a ‘supply’ and ‘destination’ based tax system replacing the concept of manufacturing with concept supply of goods and supply of services. GST will also amalgamate most indirect taxes in existence at center and state. Both Center and state will have power to tax under GST for both goods and services. At present states do not have power to tax services.

One tax rate may be a necessary condition for attaining the neutrality and level playing field but not the sufficient condition.

Following are some reasons why even one rate GST is insufficient to solve the problem:

  1. GST bill does not take cognizance of the root cause of absent definition of a ‘digital good’ i.e. including ‘intangibles’ at par with tangibles
  2. The value chain of use and consumption of ‘goods’ and ‘services’ are quite different and hence will pose challenge in practice
  3. The tax structuring is not done exclusively for the either software or the digital business. Also, Tax departments are prone to provide differential rates for new industry structures and business models for social needs under pressure of lobbying and differential tax rate may emerge for some segments of the Software Industry segments. The needs to tax new sectors of business and new models of business all arise in bits and pieces and then rules are overplayed above the basic tax structure, thus causing the confusion.
  4. GST legislation is not clear on tax credit system in its completeness e.g. the inclusion of zero-rated supplies
  5. The Clause (29A) of Article 366 has not been deleted in the proposed constitutional amendment and would need to be deleted as this would be redundant under the new concept where sales and deemed sales will be replaced by concept of supply or it may give rise to misuse under some pretext.
  6. Any new statute has to be tested on ground it takes few years to evolve and align with ground reality. GST will be no exceptions.

GST bill has yet to be passed. After the GST bills is passed the rules will be framed under CBEC and it is expected that CBEC to be in its comfort zone will like to use existing frameworks and for Software product industry adoption of existing framework will not be helpful and it is imperative on us to suggest to government remedy for these long existing problems.

Proposed Solution – the need to define “Digital Goods” and “Digital Service”

To remove the root cause of the problem, a clear distinction between a “product” and “service” or “digital goods” and “digital service” is needed.

In the previous blog ‘SaaS’ – the product advantage and need we have argued that the product side in SaaS cannot be ignored. Even the service component in SaaS is about using this digital (intangible) product. Let us understand the product/goods properties that are commercially viable and legally tenable.

iSPIRT has been pursuing application of a frame work “COG-TRIP Test” that can be used to define Software Products as distinct from Software services. A SaaS product can be mapped to the complete COG-TRIP test. Given below is the framework of COG-TRIP.
1. Countability – no of licenses/users/subscribers
2. Ownership and Intellectual Property Rights
3. Qualification as an Intangible Good
4. Tradability: The Software Products (Goods) can be sold through different delivery modes.
5. Right of service/Right of Use
6. Identifiability
7. Production/Development Cost: All software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value

In the legal framework the above definition of “Product” has to be mapped to “Goods” as defined in 366(12) of the Constitution and hence there is need for the definition of “Digital Goods” at par with constitutional provision of “Goods” in article 366(12) which further is related to the Sale of Goods Act 1930. This will also cover the article 366(29A) aspects.

Gradually the world is also moving toward the above proposed scheme of overlaying the existing structure with a clear definition of ‘digital goods’ and ‘digital services’. US has a “digital goods and services fairness act” pending to be passed by congress. Australia has come up with a new digital GST.

The clear definition of ‘digital goods’ and ‘digital services’ definition not only provide the ease of doing business but also the level playing field against the foreign companies under new emerging business models every day.

Concluding notes – Looking for a long term solution

In a previous blog on ‘SaaS’ – the product advantage and need we have made a case for SaaS industry to be a formidable part of the Indian Software product industry (iSPI). For SaaS Industry, the advantage is in favour of getting defined under product (digital goods) category as an industry. This also infers that SaaS itself is a “Product” that provides a services to businesses or consumers who may actually fall in any industry verticals.

The tax is applicable on a transaction and does not get defined based on sector or industry. Once SaaS is recognized as Product (intangible goods) the next issue to be solved is asking for one single clear tax on a transaction be it “goods” or “services” based on the transaction.

Hence three basic requirements for SaaS segment to get a boost are:

  1. SaaS is identified as a product or digital good
  2. There is clear definition of digital goods v/s digital services in tax regime
  3. There is one single and clear tax on one transaction

Tax and trade are much related in promotion of an industry and we hope these concerns will be addressed by Indian government in near future. SaaS can become a segment that can bring India pride and has possibility of emergence of next google from India.

Footnotes

[1] Consider a real life used case. I am running an office365 email service, procured through an Indian partner of Microsoft and I pay service tax on the subscription. I went ahead and placed order for a new office365 (same service) for a different domain directly from Microsoft online, the invoice charges me 14.5% service tax as well as 5% VAT. I tried to get a quote from other partner of Microsoft and again I get a quotation for 14.5% service tax and 5% VAT. In the first case I am buying from a partner of Microsoft who is a hosting provider. In second case the partner is a usual Microsoft partner selling their products or services.

Now consider buying office365 (office 2016 1 year subscription) for desk top licenses and there is CVD + VAT, even when it is a mix of offering both Product and Service for online storage and fully installed office pack.

The above used case mentioned above is of the office365 business essential plan has all the components built in the exchange online, access to MS Office products online only, online storage etc. It actually carries the many examples of the MS Office 2016 offered as SaaS model, Exchange offered as an email service and Storage offered as a service.

Disclaimer: The above example is based on real life personal experience of the writer and has nothing to do with iSPIRT.

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‘SaaS’ – the product advantage and need

India has all the potential to lead the world in the SaaS segment, yet the largest number of SaaS companies relocate out of India, for want of ease-of-doing-business. SaaS is one of the major blocks in the emerging Software product Industry of India and it needs urgent attention in this digital economy age.

Whether SaaS is a product or service is often debated.

From the perspective of integration of SaaS into the overall policy frame work of the country, it is crucial for us to understand the dynamics of the SaaS business.

This is the first in a series of  blogs to understand the dynamics of  SaaS as a sub-sector within the Software Product Industry. The idea of this blog is not to prove that SaaS is not a service, but to emphasize that it closely relates to the Software Product Industry, and is distinct from the custom built, project/program run or SLA based IT/ITES services Industry. And further, there is a need to include this as a part of the Indian Software Product Industry (iSPI) in order to be in an advantageous position to both  – promote the SaaS business and also to develop an eco-system that is synergistic to all segments of the Software Product Industry.

SaaS has both a product and a service component. The product precedes the service. The service is not just the access but also the elements of all that goes into providing service to a consumer. Whereas customer satisfaction is focal to the service component, the attractively featured product, stability, cutting edge technology, speed and security are focal to the product side. The product needs a continuous investment and development. Product is the flesh and blood of the SaaS business body, and the body needs the air of service, to breath and run. The interplay between the product and the service component of a SaaS offering is important for success.

SaaS – Product advantage side

SaaS as a product or a service is a border line debate. Here are some important pointers to why SaaS has more weight to be classified as a product than a service:

  1. Software-as-a-Service is an online access or delivery model, thus offering a different business model. In most situations, the same Software (with same features) product can also be sold in a Pre-packaged form, delivered and used in an on-premises model.

A software in any form (on media, downloaded online, on premises or accessed online over Intranet or Internet) provides a service to a user but the software itself is a “product” or an “intangible good”. There is no doubt that SaaS is also a pre-packaged software. The distinction is in the delivery model and the business model.

Hence, all three forms i.e. the Pre-packaged software sold on a media, downloaded online and SaaS model possess the properties of ‘digital/intangible goods’. The other models of channel sales and distribution e.g. EULA, paper license and self-generated access PINs, all can apply to any of these three forms.

  1. SaaS is subject to the same IP law and IP right issues as the non-SaaS product is.
  2. SaaS is mostly sold in an MRP format, the price-quantity relation is very clearly defined. MRP is a concept clearly applicable to supply of goods, produced.
  3. The condition ‘license for use’ can be a condition for a service but for a product the license is for “right to use” and as soon as the license is sold to the customer, for a consideration the “right to use” is transferred for the specified period of time. Thus, implying a condition of transfer of “right to use”.
  4. Trade is the most important aspect: Many people assume SaaS means a direct B2C relationship between the SaaS Product Company and the end users. No SaaS company can become global  unless it focuses on the ‘trade’ aspect of the business.

Even direct B2C has to incorporate trade as an important attribute. Microsoft when it sells office365 hosted product is a SaaS company that is trading a bundle of products and an integrated services through its channel partners. Scale can be attained only when a SaaS producer take with him a strong ecosystem of trading partners.

When trade has to be activated as an important attribute of a successful SaaS business, the transfer of ‘right to use’ or trade of ‘right to use’ becomes inevitable. Being a product company carries a built in message to channel partners for trade.

What is traded is the features of product, the ‘goods’ that you sell and the ‘service’ component gets activated only when the end-user interfaces. B2C can either convert in to a B2B2C or B2nb>c.

  1. The Software Products of modern age may be a combination  of complex scientific or commercial applications with a mix of data, voice, video, images, texts, document files.

A combination of one can produce another. SaaS therefore, cannot be limited to the strict periphery of a ‘computer program’ or ‘information technology software’ but graduate to be a ‘digital good’ that forms the basis of a ‘digital economy’.

  1. Considerable capital is invested in R&D, product development and product improvisations on continual basis in any SaaS based product. The differentiation is achieved in Product side by bundling the differential features. The Differentiation in service side is also incidental to the robustness, user friendliness, ease of use, security and most importantly the together the quality of product itself.

Hence, even when the service side is so important to the SaaS business, the Q-o-S itself depends heavily on the quality of the SaaS Product.

The Software Product and SaaS Industry in India

The global Software Product Industry is estimated to reach $1.2 trillion by 2025. The Indian Software product industry today is about 5% of the total exports. The total revenue of software product industry in India is $6.1 billion today. Indian Software Product Industry by conservative 10% estimate will be $100+ billion by 2025.

According to the Google-Accel Report  the SaaS business in India is about $600+ million and will be $10 billion by 2025, which makes it 1% of the entire Software product estimates.

IDC has a higher forecast which says, by 2018, 27.8% of the worldwide enterprise applications market will be SaaS-based, generating $50.8 billion where SaaS revenue is forecast to grow at 17.6% CAGR. 27.8% translates to approximately one third of worldwide enterprise applications market.

If a combination of all these numbers are to be believed, the global SaaS market in 2025 at a CAGR of 17.5% will be $157 Billion. If the share of SaaS (27.8% of global enterprise app market) comes true and is retained the SaaS business in 2025 will be much higher than $157 Billion.

The domestic market in India is not strong enough. Most SaaS players are presently targeting the matured global markets with matured online acceptance and internet penetration. The online acceptance in India is also on rise and the rising e-commerce industry speaks volumes about it.

The Domestic market is going to get further strengthened due to various factors in coming times. “Digital India” will increase internet penetration as well as improved bandwidth accessible to consumers. A drive for cashless economy will push large number of SMEs. “India Stack” will enable large number of SaaS products. Government buying will increase in SaaS space with acceptability of cloud and opex business models.

In view of the above, India can certainly aspire to be at a much more than $10 billion by 2025. India will need to harness its prowess to aim at 15% global SaaS market and hence aspire to cross the $20 billion mark by 2025, which is double of the Google-Accel report which seems to focus just the SMB market.

Pursuing the Policy for Software Products

The above mentioned targets require a serious look at the country level “strategy” and developing a complete eco-system that can help the SaaS industry boom in India.

This requires consolidating Software product as an Industry with SaaS as an important vertical block and accordingly a need for following:

  1. Focused policy by Govt. of India
  2. Aligned trade and tax regimes
  3. Participative Industry action by various agencies on ground

iSPIRT has been following action at various levels on all of the above.

The National policy frameworks provide recognition to an Industry sector or sub-sector as well as provide a strategic frame work for growth of this Industry. There are two major Industrial policy frameworks.

  1. The IT Policy is primarily catering to the IT Services industry and has mixed agenda.
  2. National Policy for Electronic (hardware). The focus of this policy is to promote electronic products.

There is no national level policy focused on Software products.

To further this objective, iSPIRT is pursuing a National Policy for Software Products (NPSP). SaaS naturally forms a part of this proposed NPSP within the realms of Software products industry. Included part of these plans is the trade and tax specific issues with Govt. of India on reforming and making these regimes futuristic to compete in the world trade and ease of doing business in India.

One of the results of this active follow up on Govt. policy has been the Startup policy. SaaS has one of the biggest tractions in the Software Product startup space. SaaS startup is closest to the Software product startup in terms of issues and challenges faced.

Conclusion note

Both the product and the service side of SaaS cannot be ignored. Even the service component in SaaS is about using this digital (intangible) product. Both  – the product is intangible and also the service it provides is intangible  – just as any other enterprise on premises software product. Yet, product is an overwhelming part, right from stage when SaaS is conceived.

The issues of product development, funding, marketing, trade and taxation are all common to the Software Product Industry.

In view of the above, it is advantageous for the SaaS Industry to position itself as a product-based service providing industry.  This will help build an integrative Software Product industry of India, which can develop global products in all segments enterprise, on premises, mobile apps, cloud and SaaS based, even as we keep progressing towards building SaaS as new generation Industry.

SaaS will be the segment to reckon with as India emerges into a Software Product Nation in next decade.

References

[1] Google Accel Report – SaaS India, Global SMB Market, $50B in 2025 Public Version 1.1 – 7 March 2016. http://www.slideshare.net/AccelIndiaVC/google-accel-report-saasinindia-public-version-11-7-march-2016.

2 IDC report reference. http://www.forbes.com/sites/louiscolumbus/2014/12/20/idc-predicts-saas-enterprise-applications-will-be-a-50-8b-market-by-2018/#1de5d71295ae

3 Startup India http://startupindia.gov.in/