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.

22/08/202323/08/2023

Economic Transformation through AI: Key pillar to a large Indian Economy in Global Top 3

In an era characterized by relentless technological advancement, a nation’s economic growth trajectory hinges on its ability to harness the power of artificial intelligence (AI). Goldman Sachs reported that generative AI could raise global GDP by 7%. By 2030, this AI driven Intelligence Economy might add $15.7tn of new economic value as per PWC research.

With its burgeoning tech industry, diverse and large data pool and remarkable human capital, India stands at the precipice of an economic transformation that could either propel it to global leadership or condemn it to follow in the wake of other trailblazers. As political decision-makers, the imperative to recognize and seize this opportunity cannot be overstated in view of India’s bid to become one of the top 3 economies of the world. The availability of the DEPA Training Cycle and the DPDP Bill passage through the Parliament open the door to immediate and strategic action via the creation of a large AI economy.

I. The AI Imperative for Global Competitiveness:

India’s demographic dividend of 900mn+ people is no secret but must be coupled with technological prowess to ensure a multiplier effect for sustained growth. As global economies increasingly pivot towards AI-driven industries, overlooking this shift risks consigning India to a secondary role on the global stage. To maintain competitiveness, India must embrace AI not merely as a tool but as the very foundation of its economic strategy going forward. It must ensure that it is not just a consumer of AI but a critical creator of AI. In fact, it must aim to emerge as one of the 3 AI superpowers in the world.

II. Safe AI Leadership Depends on Data

India’s DEPA Training makes privacy-preserving collaboration between Training Dataset Providers and Modelers (called Training Dataset Consumers) possible at a large scale, which is a critical element in AI journey. The DEPA system does not rely on hard-to-implement enforcement of legal covenants around Anonymized Datasets, as is the case in countries like the US, where AI companies are fighting constant litigation. Instead, it depends on computational privacy guarantees in the use of aggregated datasets. This is core to enabling safe AI systems, built with reliable and traceable access to datasets. Then, it can be deployed quickly with human alignment that India can provide with its billion plus users. As India begins to unlock continental-scale datasets using this system, it will give rise to a vibrant ecosystem of AI Modelers. This dataset advantage in AI is not to be underestimated. By focusing on early Safe AI adoption, India can secure a foothold in these sectors, attracting global investment and cementing its position as an innovation hub whose AI innovations would be adopted by societies around the world.

III. Addressing Socioeconomic Disparities: Remote AI driven workflows & 5G

Harnessing AI’s potential can also serve as a powerful tool to address India’s socioeconomic disparities. AI-driven solutions can optimize resource allocation, improve public service delivery, reduce cost of access and create job opportunities across urban and rural areas. With massive 5G rollout, the possibility of digital global work aided by AI is here. It can dramatically bring income opportunity to rural and smaller cities, if we can bring in Indic language AI tools, which lower the bar for participating in the global workflows. By proactively leveraging AI to bridge gaps and enhance productivity, India’s leadership can demonstrate a commitment to inclusive growth and lay the foundation for a more equitable society. All the while reducing strains of growing urbanization, which might be disastrous for its overburdened large cities.

IV. The Gameplan for AI Leadership: Missing piece of compute clusters

DEPA Training will safely and responsibly unlock the collaboration between India Training Dataset Providers and Modelers. We have the talent already and the market scale to do Reinforcement Learning with Humans in the Loop. What we lack is tensor-scale computing enabled for Industry, startups, academia and Govt itself. The Government of India must address this by enabling the creation of many, not one, tensor-scale GPU cloud providers. There are many ways to do this: Challenge Grants, Viability-gap funding for cloud providers, and Matching-grants for Modelers. We favor the Matching Grants method for effectiveness, transparency, and competition. In addition, we must seek to create AI on the edge compute ecosystem for a strategic future.

V. Collaborative Diplomacy and Global Alliances:

AI does not recognize national borders, and collaboration is key to advancing the field. At the same time, we must recognize that Nvidia H100 boards are already on the US Export Control List for China. The US might leverage its muscle further at some time in the future. We must therefore have a strategic perspective in making our aggregate AI capability and datasets available to others based on a principle of reciprocity. We must build careful alliances with a broad set of players in US, EU and Asia that will accelerate India’s AI capabilities but also position the nation as a global AI thought leader.

VI. The Consequences of Inaction:

The consequences of neglecting AI’s potential are dire. India risks becoming a mere consumer of AI technologies, ceding economic leadership to countries that have embraced AI as a strategic priority. China, our neighbor, has famously vowed to be the sole AI superpower by 2030. This passivity could lead to missed opportunities, economic stagnation, and a loss of global influence. It may even result in India failing to breach the top 3 economies, , as we might have to buy both oil and artificial brains, draining our resources for welfare schemes for our large population. That could risk demographic disaster instead of demographic dividend.

Conclusion: We need to act now!

In the rapidly evolving landscape of the AI economy, the choices made today will reverberate for generations. As custodians of India’s future, we must recognize the urgency of embracing AI as a lynchpin of economic growth. The time to act is now! We must catalyze innovation, ensure global competitiveness, and create a prosperous future where India’s leadership is defined not by its past but by its capacity to shape the AI-powered future world decisively.

Sharad Sherma is co-founder of iSPIRT Foundation. Umankant Soni is the Chairman AI foundry, General Partner ART Venture Fund.

11/04/202311/04/2023

Balloon Volunteering #7: Doubling Down on Building India’s Product Nation”

iSPIRT turned 10 in February this year. We are about rewriting the script of the nation. The past year indicates that some of this has happened with India Stack. The idea of Digital Public Infrastructure, aka DPI, is now part of the national lexicon. It has also become India’s calling card for the world.

Back in 2015, India Stack was a response to possible digital colonization. This risk has been contained.

We have made progress. It is something to be proud of.

But this doesn’t make us a Product Nation.

India has potential. We can be a France instead of Spain, a Korea instead of Thailand. France and Korea have products that the world needs. Spain and Thailand are countries where people work for foreigners.

So, iSPIRT is only halfway there in its mission. We need to remain focused on this unfinished mission. Our next ten years will make India’s true potential come to life.

Can we make it happen? Yes!

We are doubling down. This year will see more public technology from iSPIRT than ever before.

We seek volunteers who can think outside the box and contribute their unique perspectives for this unprecedented journey. Volunteering is very different from a job. Hence, having the right mindset and approach is essential.

To volunteer for iSPIRT, kindly fill the form located at the bottom of the volunteer page available at this link. Join us as we build on our decade-long journey and welcome the next chapter of iSPIRT’s story.

07/02/202307/02/2023

Volunteer Hero: Amit Ranjan

“That will never work!”

To iSPIRT volunteers, those four words are a rallying cry. Words that make us intrepid souls smile with a quiet confidence and inspire an iron will to get the job done. The best among us turn those words into their life’s work by building systems that serve millions of Indians.

iSPIRT’s best work has been in building digital public goods for India. This work is inevitably anchored by a volunteer who selflessly serves the mission; with a relentlessness and belief that could wring water from stone. Today, we celebrate one such volunteer hero: Amit Ranjan.

He had just sold his startup SlideShare to LinkedIn and had set a high watermark for products built in India for the world. After a successful exit, unlike what many others in his position might have done, Amit took the less travelled path of working within the government. Contrary to what one might imagine, even in his new role, Amit crackled with an energy that promised to single-handedly drag government departments into the future; and his eyes would sparkle as he showed you a demo of what would eventually become one of the pillars of India Stack: DigiLocker.

India Stack was built to enable a presenceless, paperless, and cashless society. Aadhaar and UPI were instrumental in enabling presenceless and cashless transactions. DigiLocker is another piece of the puzzle. Amit rolled up his sleeves, joined MeitY, and architected a national federated data and document network for India’s ~1.5 billion citizens.

Today, DigiLocker functions as an interoperable public-private ecosystem for paperless service delivery by digitizing citizen records and enabling their digital usage. Documents and certificates issued by different government agencies such as Aadhaar, PAN Card, Driving License, and even school and college certificates are available today on DigiLocker. The system Amit helped build has led to increased transparency, reduced bureaucracy, and significant cost savings for both private and public sector organizations.

Nearly 15 crore Indians are already DigiLocker users today, using 5.6 billion documents issued by almost 2,500 issuing entities. The impact is felt even in the mundane daily activities like checking into an airport or showing your driver’s license using DigiLocker during a routine traffic stop. And the system is just getting started.

Those who have worked with Amit in the government (like Abhishek Singh IAS, President & CEO NeGD; MD & CEO Digital India Corporation (DIC); CEO Karmayogi Bharat; at Govt of India) sing his praises the same as us. To quote Mr Singh, “Amit Ranjan is a Hero. I believe that we need to celebrate the Heroes and the teams that go into building these Digital Public Goods”.

Creating impact like this on a national scale through sheer grit and commitment inspires every single iSPIRT volunteer. And that’s why we choose to recognize and celebrate Amit with iSPIRT’s highest commendation; To us, he truly is a “Volunteer Hero”!

By Sharad Sharma, Dr Renuka Garg, Shoaib Ahmed and Pankaj Jaju for Volunteer Fellow Council

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].

20/12/202220/12/2022

WANI 3.0: Unleashing Business Innovation and Open Wireless Network Growth for Universal Connectivity

PM-WANI has allowed sachetised access to WiFi connectivity. However, the true vision of WANI standard, where small business owners can participate as network service providers resulting in fast network growth, has not been realised. We propose the next version of the WANI standard where a more open ecosystem can be enabled to facilitate business interactions such as delegated payments and roaming, which in turn can catalyse increased user base, rapid network growth, and business innovations.

The PM-WANI framework is revised periodically, taking into account the new developments, security updates, etc. Version 1.0 was released in 2020 and this was used for the pilot deployments. The updated 2.0 specification was released in 2021 and is the current version in use. You could read more about these versions here. This whitepaper defines iSPIRT’s vision for the PM-WANI Version 3.0 specification

PM WANI 3.0: Unleashing Business Innovation and Open Wireless Network Growth for Universal Connectivity [v.2] from ProductNation/iSPIRT

The blog post and proposal are authored by Saurabh Chakrabarti, Nilesh Gupta, Vishal Sevani, Sharad Sharma, and Himanshu Tyagi on behalf of iSPIRT Foundation. Nilesh Gupta and Himanshu Tyagi are faculty members at the Indian Institute of Management Nagpur and Indian Institute of Science, respectively, and they also represent their views as researchers on the topic.

The authors would like to thank Centre For Development Of Telematics (CDoT) for their detailed discussions and conversations about the workings of PM-WANI. Would also like to thank Bhuvnesh Sachdeva, Shubhendu Sharma, and Satyam Darmora for their insightful comments about the WANI ecosystem.

14/09/202207/02/2023

A New Chapter for Sahamati

Can public-tech usher in cash-flow lending at scale for small businesses? We will soon find out. Early pilots of the Open Credit Enablement Network (OCEN) have gone well. But they were without a key ingredient – the Account Aggregator (AA) system. Last September, AA went live for the public. Since then, it’s been doing well. More than a million consents have happened and growing at a good clip of ~60-65% MoM. Many banks are now connected to the system. SEBI-regulated entities are also joining in. Goods and Services Tax Network (GSTN) data should come in soon. All this augurs well for cash-flow lending for GST-paying MSMEs.

One significant learning from this India Stack effort is that public-tech has a dual role. It has to help innovators innovate better while simultaneously assisting regulators in regulating more effectively. Of course, this is easier said than done! But this is what good design of public-tech is about. For instance, OCEN helps regulators bring much-needed discipline to the wild world of digital lending by helping each type of market player stay in their lane. At the same time, OCEN also powers innovation by these market players in underwriting, disbursement control, and collections.

The public-tech in AA is the Data Empowerment and Protection Architecture (DEPA). Unsurprisingly, DEPA also plays a dual role by helping regulators regulate better, and market players innovate faster. We need thoughtful interaction between the market players and the regulator to leverage this. Sahamati is an answer to this need. It was incubated in 2019 to be a market collective of AA players with the expectation that it will become a Self-Regulating Organization (SRO) one day. It is a market catalyst for the AA ecosystem to grow better.

Sahamati Flying the Nest

Today we are announcing that Sahamati is exiting iSPIRT’s incubation and assuming an independent role. For the past three years, BG Mahesh and his team have steered Sahamati with diligence and a sense of mission. As a result, it has now built its own credibility amongst market participants.

Sahamati becoming independent is a big moment for the AA ecosystem. Sahamati has been making exemplary contributions to the ecosystem. Despite not having a formal status of an SRO, Sahamati has crafted a certification framework and empaneled certifiers to enhance the AA system’s interoperability. It has also harmonized legal agreements through a common participation terms and a dispute resolution system.

One of our core volunteers in the DEPA/AA effort – Siddharth Shetty (also a Co-Founder of Sahamati) – has moved full-time to Sahamati. This shift improves the odds of Sahamati success.

This is also a big moment for iSPIRT.

iSPIRT is as much about building public-tech as it is about creating new ecosystem institutions to bring playgrounds to life. Having Sahamati become independent at this time releases iSPIRT volunteer cycles for the unfinished data agenda of getting the Public Credit Registry (PCR) and the system for Non-Personal Data (NPD, also referred to as the Training Data Cycle) in place for cash-flow lending. We will now be able to focus on these items better.

In our incubation of Sahamati, we have benefitted from the learnings of two early attempts in setting up SROs. Our first market collective incubation was Digital India Collective for Empowerment (DICE) for Drones. DICE never took off despite the efforts of a committed and enthusiastic anchor volunteer. We were also actively involved in the creation of DLAI. Sadly, DLAI pivoted away from its mission to serve India-2 and ended up focusing on India-1. While this was good for its members in the short term, it didn’t address the larger mission of bringing cash-flow lending to small businesses. So, we had to restart our SRO efforts there, and now CredAll is being incubated as an MSME cash-flow lending SRO.

Happily, thanks to Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, and Pension Fund Regulatory and Development Authority, the AA system has momentum today. Sahamati is plugged into this momentum. As long as it doesn’t make any unforced errors by failing to prevent mission capture by donors and market participants, its contribution to the AA ecosystem will only grow. We are excited about its prospects and fully confident in its ability to foster a healthy AA ecosystem.

Who owns Yoga?

Yoga is owned by yogis and ashrams, not by AYUSH Ministry or market players. Likewise, public-tech is often a result of no-greed and no-glory volunteering rather than a creation of a Ministry or market participants. DEPA is an example of this. iSPIRT recognizes its responsibility to keep evolving DEPA. This is also crucial for globalization of DEPA.

There is much to learn from MOSIP in this regard. Today, it is the most successful global Digital Public Good from India. More than 70m citizens in various countries have received their country ID using this system, which is snowballing. MOSIP is based in IIIT Bangalore, and its institutional structure has been instrumental to its successful globalization. Why does this matter?

Take Electronic Voting Machines (EVMs) as an example. Despite their extraordinary success in India, they haven’t been adopted by any other country. The main reason is that the creation and governance of public-tech are in the hands of the Govt. of India, and this worries other Governments. MOSIP breaks this jinx. The MOSIP experience has given us a ton of learnings on how to take our DPGs global. Our decision to make Sahamati independent gives us more cycles to apply these learnings to DEPA going global.

Cautious Optimism

Human spirit is the ability to face the uncertainty of the future with curiosity and optimism – Bernard Beckett

Sahamati will now fly on its own. I will admit that there was some trepidation in our iSPIRT core group about whether this is the right time to make Sahamati independent. Getting the timing right is never easy.

We wish Sahamati the best and hope that it becomes a model market collective for the financial industry. We, at iSPIRT, will of course, always be available for guidance or help at all times.

Within iSPIRT, there is much that remains to be done. Many other things in the pipeline need to be brought to life. We have two decades of work before us to fully ‘rewrite the script of the nation’!

[With inputs from Sanjay Anandaram, Sanjay Jain, Jyothi Iyengar, Prof. Das, Prof. Rajagopalan, BG Mahesh, and many others]

17/07/202224/08/2022

ONDC – Is it the next game changer for Digital India?

If you have not come across ONDC – Open Network for Digital Commerce, its time you know about it and this post is to help better understand what problem it addresses, how it operates, and the value that it brings to consumers, businesses, retailers, existing e-commerce platforms and the state.

Problem statement

There are a number of pain points around current digital commerce:

Its dominated by a few players e.g. Amazon, Flipkart, Zomato, MakeMyTrip, etc.
Consumers have to go to multiple platforms to search and explore the products/services they would like
Consumers are restricted to only a subset of products/services available on the platforms
Consumers need to go to multiple places for different products/services
Penetration is not widespread across the country and small towns
Small businesses are not able to participate and sell in the digital commerce space

Solution

Open Network for Digital Commerce is a network of e-commerce. It is a network-centric model where, so long as platforms/applications are connected to this open network, buyers and sellers can transact irrespective of the platforms/applications they use. It’s like “UPI of e-commerce”

Source: ONDC.org

ONDC works on 3 important use cases to solve the problems, which explained very well by ThinkSchool

Discoverability – allows you to discover products across different platforms using a common catalog

Interoperability – where you can combine multiple platforms to accomplish different services e.g. product with delivery, services with payments etc.

Price comparison – allows you to compare prices across these platforms e.g. ticket prices across different ticketing platforms.

How does it work?

Through an open protocol network, various selling /buying apps such as flipkart, dunzo, airtel, paytm will connect to the network and the consumer will be able to access the product/services through any of the apps.

You can either connect to the buyer network or seller network. One of the important aspects of ONDC is to standardize the product/services catalog so that consumers get a common experience. All the technical specifications are available here

Role of ONDC

ONDC will play three roles as laid out by their CEO

Development – Build and sustain the network with cutting-edge tech and facilitation widespread participation of ecosystem players

Network Management – Establish a code of conduct for the network, with policies and rules for the network

Service Delivery – Foundation services for operations of the network e.g. registry, certification, grievances redressal

Value for stakeholders

Consumers – amazing way to explore and get the best product/services across platforms, sellers

eCommerce Companies – Gets a wide reach with Govt. backing to get to a large user footprint, make them more competitive

Small Businesses – Gets them to sell products and services across the country, without having to be associated with a single platform

Government – Accomplish the mission of connecting India digitally and enhancing the economy significantly

Challenges

This is a massive and ambitious project, balancing of different stakeholders is going to be huge, as well as connecting all of them. Also ensuring the quality of service is going to be a big factor, as the trust factor of the platform plays a big role in deciding where to buy.

But given the Government backing and really smart think tank behind this, these challenges may likely be overcome.

Key Takeaway

ONDC looks to be a huge potential and another game changer for an Atmanirbhar Bharat.

More Resources

ONDC Strategy Paper

ONDC on twitter

ONDC CEO Blog on ONDC 101

Nandan Nilekani ONDC Keynote

ThinkSchool on ONDC

Benefits and Glitches explained in detail

22/06/202222/06/2022

Balloon Volunteers – Sixth Session

“The best way to find yourself is to lose yourself in the service of others” ~ Mahatma Gandhi

This is one of the core values that we cherish at iSPIRT.

We started an open process of bringing in Balloon Volunteers by kicking off our First Volunteer Open House session in September 2020. We did this with slight trepidation, unsure about what to expect. Till then, almost all our Balloon Volunteers had come in through referrals by existing volunteers. However, nearly two years in, we are happy that we opened up the process. Five of the many Balloon Volunteers who came in through this open process have become regular volunteers.

The expertise, dedication, and willingness to share knowledge of these five volunteers have humbled us. Romita has built protocols for dispute resolution. Vineet is building the reference model for OCEN underwriting. Siddarth is applying future-back thinking to Drones. Palak and Harsha are designing an open, modular, and interoperable system for digital consultation for Bharat.

They have become part of this mission to build public goods for Bharat and, in so doing, create a Product Nation. If you want to be part of this movement, check out some of the areas you can contribute to on this page: volunteers.ispirt.in

30/05/202228/10/2022

38% of India’s Unicorns Are Not “Indian”

India currently has 90 unicorns – startup companies that are valued at over $1b – and will likely soon have 100 unicorns, becoming the third such country after the USA and China. Since January 2016 when the “Startup India” program was launched, the startup ecosystem of India including infrastructure for startups, be it incubators, mentorship, funding, corporate initiatives, media coverage, or even patent filing, has improved substantially making life easier for entrepreneurs.

However, it is still not as smooth a ride for the Indian start-ups as it is for startups in the advanced economies of say, the USA, Singapore, and China. Our “ease of doing business” is yet to be on par with the developed world, especially given the high taxation, onerous compliance requirements, inadequate and cumbersome legal protection of IP, as well as time-consuming and expensive processes to access capital and secure exits. It isn’t a surprise therefore that many companies are shifting their primary legal location to foreign jurisdictions like the USA, and Singapore.

How do the numbers stand?

As per a study by Venture Intelligence, of the presently known 90 “Indian” unicorns), 56 are based in India, 25 in the USA, 8 in Singapore, and 1 in the Netherlands spanning sectors from e-Commerce to fintech to gaming and more. In other words, 38% of “Indian” unicorns are not quite Indian as they are domiciled outside of India. Moreover, these 34 unicorns have raised approximately $30B ie, this large money could have been but hasn’t been invested into an India domiciled entity.

Sector Wise break-up of the Unicorns

Chart: Sector-wise domicile of unicorns as on 31st March 2022.

The reasons for incorporating in the USA are different from incorporating in say, Singapore. SaaS founders find it easier to reach out to the large market for SaaS “Software as a Service” based offerings in the USA by incorporating there. Companies incorporated in Singapore for high “ease of doing business”, low taxation, quality infrastructure, and quality of life while remaining close to India.

Out of 12 Indian unicorns in the SaaS category, all except Zoho and Darwinbox are based in the USA. SaaS offerings are expected to be a $1 trillion opportunity and India will lose wealth creation, tax revenues, listing, and related income, by not having these companies domiciled in India.

Of the three unicorns in a frontier technology area like Artificial Intelligence, namely – Glance, Fractal, and Mindtickle, one is registered in Singapore while the other two are in the USA. Of the 3 unicorns in Gaming, Mobile Premier League and Dream 11 are based in Singapore and New Jersey respectively while Games 24×7 is registered in India.

Flipkart, India’s greatest startup success story and the poster boy for Indian e-commerce, which was acquired by Walmart at a valuation of over $20B, was domiciled in Singapore. That set the trend of e-commerce companies having their HQs in the island country. There are many Singapore shell companies set up by VC funds to become holding companies for Indian subsidiaries. Singapore is today the hottest destination for the registration of Indian e-commerce players.

Even more worrying than this trend of registering the parent company outside India is the migration of startup founders to UAE and Singapore. Lower taxes, easier access to capital, government support, simple compliance, and better quality of life while being just a short flight away from India make the UAE and Singapore rather attractive to founders.

Whichever country our startups chose to register or our founders chose to migrate to, the ultimate loser is India with intellectual property ownership and funds being vested in non-Indian jurisdictions.

Stay in India Mission

In order to retain the economic value added by the start-up ecosystem, it is important that India urgently puts in place policies that ensure that founders and startups ‘Stay-in-India”. This will require the coming together of various ministries, particularly DPIIT/Min of Commerce, Ministry of Finance, Ministry of Electronics and Information Technology, and regulators like the Reserve Bank of India and Securities and Exchange Board of India to address the Stay-in-India Checklist.

Stay-in-India is an evolving checklist of issues that need to be solved to contain the exodus of startups from India. These issues fall under four categories: a) Ease of doing business and making it easy to raise funds; b) harmonization of coding of digital economy c) Reducing overall tax anomalies and d) Increased DTA and foreign markets access.

The issues are comprehensively listed in the Stay-in-India checklist.

As an example, let’s consider the anomalies in the taxation of dividends. Dividend received from overseas subsidiaries, that has been already taxed, 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. It amounts to double taxation of income and discourages a model where overseas subsidiaries of Indian startups can pay dividends at lower tax rates to Indian shareholders. Removal of this dividend tax will directly encourage start-ups to remain domiciled in India and receive dividend income from subsidiaries abroad.

Similarly, there are regulatory frictions e.g. TDS on the sale of software products which reduces the working capital in hands of Software product companies, or the need for filling the Softex form (which was relevant in the early days of IT services exports), and which is now redundant as GSTN Invoices already have the required and sufficient data. All that is required is for different departments of the Govt and regulators to connect digitally and share information. The unfavourable tax regime for IPR protection, such as subjection to minimum alternate tax, IPRs being subject to income tax, and not capital gains even when they are held for more than a year is another big irritant. Technology-heavy startups, therefore, tend to relocate to jurisdictions like Singapore and the USA that have a smoother and lower-cost approach. Founders relocating to overseas jurisdictions are typically seen around the time of M&A. One of the reasons relates to taxation: typically, a portion of the financial proceeds arising from an M&A transaction is held in escrow and released to the founders after some time and/or completion of certain contractual obligations. The escrow payments are treated as income by the Indian tax authorities rather than capital gains as other jurisdictions do – this needs resolution.

India is emerging as a global startup hub, with the support of the Govt, with our startups attracting capital and talent while being at the forefront of innovation, jobs, wealth, and intellectual property creation. Brand India is enhanced globally by the success of Indian startups. With more support from the Government by way of removal of regulatory friction and by providing incentives – fiscal and regulatory – the ecosystem required to create, enable and grow Indian startups will dramatically accelerate.

The Ease of Doing Business must be tackled in mission mode with the Stay-in-India Mission (SIIM) being an integral part of India is to secure its rightful place around the global innovation table.

The blog post is co-authored by our volunteers Sanjay Anandram and Amit Agrahari. You can reach out to Amit at [email protected]

Disclaimer: The article depends upon various pubic data sources apart from credible data sources that are relevant at the current date and time. Readers may like to read this accordingly.

Data Sources Courtesy: 1. Venture Intelligence. 2. Invest India

23/05/202226/12/2023

NavIC Grand Challenge Launched by Shri Piyush Goyal, Union minister on 17th May 2022

At the Fourth National Startup Advisory Council Meet held on 17.05.2022 under Hon’ble Minister of Commerce and Industry, Consumer Affairs, Food & Public Distribution, and Textiles Shri Piyush Goyal, the NavIC Grand Challenge (GC) was launched. The GC seeks to mainstream the use of NavIC and establish it as a domestic mapping solution.

iSPIRT has contributed to the development of this Grand Challenge. During the Third NSAC Meet, Sharad Sharma, Co-founder of iSPIRT and a member of the National Startup Advisory Council (NSAC), proposed the concept of prominence to NavIC as a domestic mapping solution.

Later, the iSPIRT Team, led by Captain Amit Garg and our volunteers Sayandeep Purkayastha, Captain George Thomas, and Tanuvi Thakur, presented the concept note and working paper on the GC to DPIIT (Dept for Promotion of Industry and Internal Trade).

Multiple rounds of discussion among the Department for Promotion of Industry and Internal Trade, Indian Space Research Organisation (ISRO), and iSPIRT Foundation brought the final shape to the working paper. All of this culminated in the launch of GC-NavIC on the 17th of May.

What is NavIC?

NavIC or Navigation of Indian Constellation is India’s independent regional satellite navigation system created by DOS/ISRO. Its signals are inter-operable with the civilian signals of the other navigation satellite systems namely GPS, Galileo, Glonass, and BeiDou. NavIC has made in-roads into civilian applications in India like vehicle tracking, power grid synchronization, location-based services (using mobile phones), disaster alert dissemination, etc. Efforts are being made to enable the incorporation of NavlC into drones, the maritime sector, wearable devices, time dissemination, geodesy, etc. The applications are being promoted by the availability of NavlC-enabled off-the-shelf chipsets & devices at competitive rates and by the adoption of NavlC in national and international industry standards.

The GC is a step towards taking NavIC adoption further into the future, i.e. the future of AtmaNirbhar Mapping Solution. The GC brings together the triumvirate of NavIC, Agriculture, and Drones by becoming a big-bang thrust for the Kisan Drones Project as well.

The GC-NavIC

The GC-NavIC has an intersection with GOI’s Project Drone Shakti. It seeks to promote:

The use of drones to solve the problem of agriculture insurance, i.e., the integration of the product to solve cases under the Pradhan Mantri Fassal Bima Yojana, is in line with the Government’s steps to harness technology for agricultural growth;
Building a digital database of agricultural data that will supplement the digitization of land records and crop assessment measures of Drone Shakti;
The use of ISRO’s homegrown NavIC technology in developing drones under the GC will promote the use of NavIC in the commercial drone landscape for remote sensing, imagery, mapping, etc.

The GC has invited innovative solutions that will utilize NavIC-enabled drones to capture data related to farm field topography, process this data, and make it available for use for commercial purposes. Ideas should be such that the product can be deployed across all terrain types in the country. Further, the captured and processed data should be viable and efficient for use within the Pradhan Mantri Fasal Bima Yojana (PMFBY) framework.

A detailed application process (here) calls for a detailed proposal of the tech specs of the participants’ product solution. This will be the basis for 25 participants selected for a presentation of their product before the Experts Panel. 7 selected participants on the basis of an objective and transparent selection criteria will compete in Phase 1 of the GC – the prototype deployment stage. In phase 2, the top 3 participants will compete towards fulfilling the problem statement by deploying their fully functioning product.

Transformative Powers of Challenge Grants

Challenge Grants have transformative powers and scalability opportunities that can serve as an impetus to quality innovation. Treatment Adherence for TB was the first challenge launched under the Grand Challenges in TB Control program. The aim was to devise solutions for improving tuberculosis screening, detection, and treatment outcomes. One of the participants, 99Dots, came up with a novel solution for low-cost monitoring and medication adherence program by using a combination of basic mobile phones and augmented blister packaging to provide real-time medication monitoring at a drastically reduced cost. By 2017-18, 99Dots was used across all districts in India and is now listed as a treatment program on the Government’s Nikshay portal.

The GC-NavIC through its intersection with Project Drone Shakti and the revamped operational guidelines of the PMFBY that emphasize tech-based solutions will help harness technology for agriculture and create opportunities for commercial utilization of NavIC. The recent ban on foreign drones by the Government will move the focus to domestic manufacturing. Encouraging local drones with local technology will increase the AtmaNirbhar potential in the drone and navigation ecosystem and enable Indian Startups to unlock the $5 billion drone market.

Conclusion

The GC-NavIC is touted to deliver three essential outcomes – better regulations in the drone and mapping space, ecosystem development, and channel of public money for private innovation. All three will lead to transformative innovations that will push India into modern agricultural practices and domestic mapping-navigation solutions.

The post is authored by our volunteer fellow, Tanuvi Thakur. She can be reached at [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]

24/01/202224/01/2022

Bharat Distributed Ledger (BADAL) for accelerating trusted commerce in India

India has made rapid progress in digitisation of the economy in the last decade becoming a world leader in identity systems, digital payments and tax, and a new data sharing and empowerment framework. However, many deep-rooted issues still exist, such as extending true financial inclusion; formalisation and creating a higher trust economy, that is essential for growth of mostly small businesses.

In this blog post, we look at innovations in blockchain, distributed ledger and other technologies such as zero-knowledge proofs as potential solutions to build a stronger fabric for the economy for decades ahead. The unique opportunity India has is to boost commerce by enhancing trust, thereby culminating the transformation already underway through existing building blocks of digital identity, payments and data sharing to boost commerce. Unlike many other countries, faster and interoperable payments or reducing the dominance of private money are solved problems for India; the missing piece is to digitise commercial contract enforcement, which on the other hand is a solved problem for developed countries. Lack of adequate contract enforcement caused by contracting parties having different versions of the truth; due to data systems that don’t interoperate reduces trust and creates friction for economic growth. Solution requires connecting the goods and services ledger to the money ledger, so that contracts of any kind become binding promises that can be executed programmatically. Using technology to solve this trust problem is a unique opportunity for India.

BADAL (also happens to be a word for Cloud in local language), a techno-legal solution in the form of “Distributed Ledger for Privacy-preserving Trustful Commerce; is proposed as an interoperable fabric underlying a future programmable economy across large and small businesses to create high trust economy.

We also look at the emergence of Central Bank Digital Currency (CBDC) which is one of the core money applications of this framework and global backdrop in Annexure. There are many other use cases being proposed from land records to decentralised clinical trials for blockchain and allied technologies in different areas of government and business¹ likewise, that can be implemented in BADAL.

First of all, why is trust important?

Trust is the basic glue that connects strangers and promotes economic activity. Money is the basic economic institution in a society building that trust². However, trust builds slowly due to a combination of various factors such as the nature of institutions (political and legal) and the level of formalisation. While formalisation of even small businesses is increasingly addressed by the successful rollout of GST for India, formalisation of trust still remains elusive. At a core fundamental level, trust is a public good that creates friction-free commerce and is a recipe for rapid economic growth.

There is a high correlation between the level of trust in society and GDP per capita³. A study conducted by World Value Survey attempted to measure the level of trust in a country by recording the positive responses received to the question ‘most people can be trusted’. It found that countries with high GDP per capita such as Sweden, Norway and Netherlands recorded high levels of trust exceeding 60% determined in this manner as the graphic below shows.

Douglass C. North, Nobel laureate in economics⁴, found that ‘the inability of societies to develop effective, low-cost enforcement of contracts is the most important source of both historical stagnation and contemporary underdevelopment.’ The Union Minister of Finance and Corporate Affairs has rightly acknowledged the role of the “Hand of Trust”⁵when presenting the Economic Survey of 2019-20.

In societies like India, with limited ability to efficiently enforce routine civil or property contracts, businesses tend to restrict working with those similar to them based on caste, religion etc. (called associational activity) where there is an implicit social and moral enforcement mechanism or with members who have clearly demonstrated reputation in the past (usually the large or the older players). In both these situations, the economic benefit that a new firm can bring with new ideas or new techniques will be muted as its absorption is slower. Similarly, a new player will find it very difficult to compete with incumbents even if such players are economically more efficient. Economist Olson⁶ showed that associational activity is often more detrimental than favourable for an emerging economy. So we need better ways to break this trust logjam. Trust in the money system in India is comparatively high, as promises tend to be kept with sufficient legal backing and can be digitised with e-mandates or automated payments/ collections; but the same is not the case for goods (or services) ledger, leaving room for delays cascading into a logjam resulting in low trust. This is often felt in day to day life by citizens not getting routine services despite advance payment or small businesses not getting paid despite having supplied goods. Delays, defaults and disputes can become the norm if parties have different versions of the truth.

Every economic activity is thus like a mini-contract with one side on the money ledger (payment from party A to B) and the other side, on the goods/services ledger (from B to A) between counterparties, and can be converted into an electronic contract that automatically executes on both ledgers subject to interoperability. To assure the performance of contracts, the money ledger and the goods/ services ledger need to be connected in a way that is scalable, privacy-enhancing, non-repudiable and programmable. This enables a contract agreed between parties becomes a commitment, and fulfilment is guaranteed by code through the electronic contract. Assuring performance of contracts is critical for a country that is seeking to grow through startup activity, not just in tech but other sectors too.

Currently, litigants lose nearly ₹ 50,000 crores annually in wages or business lost which comes to 0.5% of the country’s GDP, because of litigation, an indication of how expensive litigation can be. The majority of civil disputes in courts are related to recovery of money (30.2 per cent) and land-or property-related matters (29.3 per cent) As reported in the 2016 survey carried out by DAKSH. Common reasons for dispute are different versions of the truth of contracting parties, prior to contract (past) or during the performance of contract (future). Having the same truth and programmability inherent in electronic contracts is a boon in this regard.

In an earlier blog, we have explored the benefits of adapted blockchain technologies to solve the problem of SME financing in India with a related post by global experts⁷. We build further on that and believe that India can harness recent advances associated with blockchain technology to enable trust between unrelated parties by combining the best of the scalable and centralized legacy world with a secure and private decentralized world. This can benefit the real economy vastly along with the financial world.

Innovations in distributed ledger technologies and BADAL

Distributed Ledger technology can help in two ways – first by being able to verify past performance before one party strikes a deal with another, and second, by being able to enforce a contract in most situations as performance unfolds in future. Thus, building trust about the past as well as the future.

We thus imagine a fabric based on the following basic principles to help create and grow a large number of applications to record economic activity even while reconciling with other activities and past data and help inject a level of trust by creating a reliable, immutable record of trusted data records and programmable contracts

Single platform to allow standards bodies and organisations to publish their schemas, and reuse other schema elements in composing workflows
Fully privacy-preserving capabilities to allow participants to publish relevant zero-knowledge proofs which do not require private data to be shared beyond the participating entities
A programmatic contracts capability that can help automatically carry out the relevant tasks as agreed on without any further manual intervention

By connecting a new digital money ledger (such as Central Bank Digital Currency, or stablecoins) with the new goods & services ledger, we envisage a boost to trust across economy and commerce. As such, BADAL is the first such framework we are aware of globally, uniquely suited to India’s needs, opportunities and strengths.

We have discussed the early version of this in detail in an earlier open-source document⁸. BADAL is thus a privacy supporting, trust enhancing mechanism of coordinating economic activity, and information recording and sharing. Originally this group started out of a process to explore the domain around and figure out the appropriate model to support CBDC, support data sharing between participants, and coordination and automation of event-based standing instructions across events in the goods and services ecosystem and/or money flow.

We then reviewed exciting developments in related areas first to understand their relevance given India’s unique needs. Blockchain technologies generally are seen to enable unrelated parties to trust each other and transact without depending on a central institution or intermediary. These technology innovations are around three key areas:

Maintaining immutability and integrity of data across the distributed ledgers of parties.
Governance mechanisms, especially for decentralised networks
The programmability of such transactions to allow automatic execution.

Public blockchain technologies like Bitcoin and Ethereum, on the other hand, are based on a philosophy of distrust of centralised institutions like Central Banks and are designed for unrestricted access and decentralised decision-making. But they have had to develop new approaches to contend with a few challenges, especially given the huge growth off late that see further wor:

The enormous consumption of resources to establish ‘proof of work’ that limits efficiency and scalability, leading to newer approaches
Exposing all transactions on these networks that generally do not allow sensitive data to be private on the key layer, is as critical for confidential business data as it is for personal data
Rise of many networks that are not interoperable with each other or with the mainstream economy, though some bridges do exist
May have ability to operate outside banking conduits and regulatory frameworks that challenges government’s sovereignty and financial stability through greater oversight has been coming recently

Research on amending throughput, reducing costs and enhancing privacy/auditability/KYC compliance has been ongoing at a rapid pace, especially over the last couple of years.

Despite these unresolved issues, Public blockchain-based tokens, so-called cryptocurrencies, NFTs etc have become an unregulated asset class, especially amongst the young rapidly given the ease of use, creating concerns on possible misuse as well as potential opportunities. We were also part of the recent consultation of the Parliamentary Committee on Finance on ‘Cryptoassets: Opportunities and Challenges’ and had shared with them some of our ideas above in our submission here⁹.

Various solutions have been employed to address some of these challenges:

Permissioned blockchains, such as Hyperledger Fabric and Corda, allow only trusted parties to participate. Corda uses Notaries for verifying transactions. Such solutions have been successfully used in finance, supply chain, property rights, healthcare, education and e-governance
Zero-knowledge Proofs (ZKPs) allow proving/verification of specific aspects of data without actually making the data public

BADAL builds on the above primitives and is offered as an open and interoperable platform to enable money ledgers such as CBDC/stablecoin along with applications relevant for finance and commerce. This can be designed as a permissioned network relying upon a few regulated entities, and interoperable to ensure that its benefits are widespread and at much lower costs than permissionless systems. It consists of a private ledger that holds sensitive user data with access restricted to participating entities only, and a public ledger that contains notarised zero-knowledge proofs about transactions between users. It supports different schemas (configurations) that enable usage across different use-cases.

This programmability coupled with immutability akin to electronic contracts, allows applications in BADAL to be used to leapfrog the trust logjam, without diluting sovereign privileges of control of money given India’s stage of development. BADAL will thus establish provenance that helps establish credibility and reputation of transacting parties, proof of title/ownership of goods and assets, proof of the history of transactions including promises made and ambiguously defined and fulfilled; automatic execution of terms of contracts along with privacy as a fundamental right.

Historically, monetary accounting has solved for only one side of this metaphorical coin- the monetary value. All monetary systems denote a money value to any transfer of goods or services. BADAL, being a ledger that can record value in any domain, solves for the non-monetary aspect of the transaction. Integrated with electronic contracts for a variety of applications, BADAL will enable digital claims on non-monetary assets, including new age asset classes such as crypto assets, NFTs, where claims can be financialized and liquidated. An inherent promissory layer can be enabled into the current transaction mechanism. This extends to all data types, from land records to hospital quality service quality etc, rather than just transactions involving money and goods/ services.

The ability to connect any of the data types across domains can give rise to massive amount of efficiency gains with automated execution thanks to new data from machines like cars, consumer durables like refrigerators or health wearables coming from advances in IoT (Internet of Things), 5G, Imagine a use case of automated crop insurance with sensors that monitor weather from a satellite in space to moisture in soil etc. and deliver claim benefit to the farmer with zero friction in real-time.

One of the biggest problems BADAL could solve at bottom of the pyramid is financial inclusion in India. This is not only in the form of increased monetary transactions through it, but also the ability for MSME’s to gain cheaper credit. This is a possibility as MSME’s will find it easier to prove their liquidity and income to banks and other lenders due to the monetary traceability the system will provide. An increased ability to prove financial stability will lead to greater leverage for borrowers and more systemic trust for lenders. This increase in the systemic trust will not only lead to an increase in credit creation but catalyse an increase in money velocity in India as a whole.

In a subsequent blog post, we will detail the potential use cases; as well as preliminary design of a prototype of one sample use case that is being built currently.

BADAL fabric supporting India Stack could boost digital India

India has pioneered transformations in Identity, Payments, and Data empowerment (these building blocks are popularly called the India Stack) through a techno-legal approach. These address friction of doing business, information asymmetry, and distributed systems. Breakthroughs along the way were public platform (identity), public protocols and standards, and techno-legal approaches to solving big societal problems.

Some examples of this:

Aadhaar enabled e-KYC has significantly reduced the onboarding cost for finance companies and utilities from ~Rs 1500 to as low as Rs10/¹⁰. This lower KYC cost has helped in expanding the reach of government initiatives like PMJDY and similar massive private rollouts like Jio.
Unified Payments Interface (UPI) has led to an explosion of digital wallets and payment technologies that reduce transaction friction. India has logged more real-time online transactions¹¹ than China and USA in 2020.
The recent launch of the Account Aggregator (AA) model (based on Data Empowerment and Protection Architecture, DEPA) allows the controlled sharing of private financial data by citizens with various financial institutions to get the best deals. This is a global first and in some sense, an export of a truly global standard¹² from India.
Open Credit Enablement Network (OCEN) is creating a way to democratise access to credit, to the level of making it accessible to a street vendor for small sums. These public goods prevent any large player from monopolising the data ecosystem and at the same time reduce the cost of providing service. For instance, microloans as small as Rs.300 can be availed on GeM-SAHAY leading to true inclusion at the bottom of the pyramid.

These techno-regulatory concepts are now being considered for adoption by several countries across the world. Overall, India is arguably ahead of most countries in adopting technology for promoting financial inclusion as well¹³.

The next building block now is the trust layer through BADAL, ensuring every commitment is met and every contract is enforceable, boosting transparency and growth over the next decade. Trust permeates through all three ends of this triangle as identity is the ‘who’; and data and payment relate to ‘what’ of commerce. In BADAL, identity and data sharing can be achieved without diluting privacy to enable trusted payments (& commerce).

Annexure: CBDC Developments

While BADAL provides fabric to money or goods ledgers, we describe CBDC in detail here, given its importance. Money was traditionally issued by the sovereign (through a Central Banker) and circulated in the economy through layers of banking intermediaries. With the advent of permissionless public blockchains, some of which also seek to portray themselves as alternate currencies, the sovereigns have taken note and introduced their own variant as a public good to protect the financial stability of the nation-states. This sovereign/state-issued digital currency is popularly known as Central Bank Digital Currency (CBDC).

Central Banks have been increasingly researching and in some cases developing prototypes of CBDC since 2017 as per a survey¹⁴ by the Bank for International Settlements (BIS). 86% of the world’s central banks¹⁵ are studying CBDCs actively. Sweden has finished its phase-1 pilot for CBDC called e-Krona in April 2021¹⁶. China published its plan for a CBDC retail pilot called e-CNY in July 2021 and has already put this in production apparently timed ahead of the Winter Olympics that will be hosted this year. This seems to already cover a fifth of the population ¹⁷. The USA is evaluating its own CBDC¹⁸; has been considering a regulatory framework for Stablecoins and has come out with a detailed report titled ‘Money and Payments: The U.S. Dollar in the Age of Digital Transformation in January 2022¹⁹’. In India, RBI is actively studying the benefits of CBDC²⁰.

fig: Central bank’s work on CBDC advances further

While there are different types of CBDCs such as wholesale/ retail and account-based/ token-based, ultimately a payment using CBDC can be immediately settled. This is akin to using paper money and unlike a cheque or money transfer between bank accounts that require a process of clearing and settlement adding to inefficiency and costs. CBDC can potentially thus leapfrog depending upon the development of existing banking systems in different countries.

Advanced Economies (AEs) and Emerging Markets and Developing Economies (EMDEs) have different motivations for issuing CBDC to end-users (via Retail CBDC) and financial institutions (via Wholesale CBDC), illustrated in the diagram below.

fig: Motivations for issuing a retail CBDC

In countries like China²¹ and Sweden²², a significant part of money moves digitally on private networks and central bankers are losing visibility and control of money flows. Both countries are moving quickly towards the launch of a retail CBDC.
China is also possibly viewing its CBDC as a tool to emerge as a global reserve currency²³ like the USD. China was also home to some of the largest mining pools²⁴ that spend enormous electricity on cryptocurrency. In this backdrop, China has recently banned crypto-mining and private cryptocurrencies.
In the USA, payments are expensive due to its legacy system of banking. This has led to a burst of digital payment options, the latest being ‘stablecoin assets’ (digital currencies backed by real assets like US dollar, treasuries, etc) that also compete with their money-market funds. Stablecoin assets have crossed $100 billion 25 in market value and are a popular choice to transact in Decentralised Finance (DeFI). DeFi is a parallel financial system evolving around crypto-assets. DeFI is not subject to transparency and compliance required in the conventional financial world at this point in time. As DeFi becomes big and interacts with the conventional financial world, there is a growing systemic risk arising from failure or fraud in DeFi. The US Government, therefore, wants to regulate some aspects of DeFI²⁶ and may thereby bless some stablecoins and crypto-assets as explicitly permitted financial products. Earlier in 2015, Bitcoin was determined to be a commodity²⁷ by some authorities there. The US Fed has also begun a consultation process towards design choices and feasibility of CBDC implementation.

Indian perspective

In India, the focus of policy has rightly been on promoting financial inclusion to formalise the economy and drive economic growth. One important factor which drives the usage of unregulated informal value transfer systems is the lack of banking facilities and corresponding amenities for managing money, which leaves rural communities without alternatives other than a person-to-person method of transferring monetary value. Even though India has seen a significant increase in the number of bank accounts created, Reserve bank data still highlights little improvement in account usage and institutional borrowings, which feeds into the broader issue of financial inclusivity.

Initiatives like Pradhan Mantri Jan-Dhan Yojana (PMJDY) opened doors to big change. UPI has been very successful as a payment mode but still needs underlying bank accounts to transact and thus depends on the banking system & its motivation to provide access to the poor. The PMJDY scheme announced in 2014 has increased the number of adults with bank accounts to 43.47cr ²⁸ (~46% of 93.55cr adults with an Aadhaar²⁹). Despite this headway, there is still a lot to be achieved. The Financial Inclusion Index (FI) recently launched by RBI shows that India is at 53.9 on March 21 (vs 43.4 in March 2017) – a little more than halfway towards complete financial inclusion (FI of 100)³⁰. Presently, the banking system acts as the main gateway to financial inclusion as the banking system is the main distributor of cash. Hence, various government programmes (like PMJDY) rely upon banks for financial inclusion, despite those being not remunerative for banks. The accounts also have various restrictions on the number of debits/withdrawals to ensure low cost.

Even with the existence of such low-cost bank accounts, the poor do not have an incentive to use a bank account regularly as they do not save enough to use the bank account as a store of value. They use these accounts mainly to collect remittances and withdraw cash at ATMs as bulk of their transactions is in cash, not leaving a visible money trail that in turn makes financial inclusion difficult. Cash in circulation in India even now is Rs 29.38 trillion³¹ (~14.9% of estimated GDP for 2020-21 32) despite the availability of these cheaper accounts, demonetisation in 2017 and the subsequent formalisation of the economy with GST, RERA, etc.

In addition, the cost of handling cash by the central bank and commercial banks (currency printing, operating currency chests, logistics of moving currency, ATM operations, etc.) has been estimated to be ~Rs 21,000 cr (Rama Bijapurkar) and ~1.7% of GDP ( (Visa Inc., 2016). High adoption of CBDC can help in reducing this cost while creating enormous amounts of data and enabling policymakers to diagnose and regulate better. At a later stage, CBDC can also be used for targeted monetary policy actions when its impact on the financial system is well understood. Experts are concerned that CBDC may result in the disintermediation of the financial system. This risk can be mitigated by following design principles set out by the Bank for International Settlements (BIS)³³ (i) “do no harm” to monetary and financial stability; (ii) coexist with cash and other types of money in a flexible and innovative payment ecosystem; and (iii) promote broader innovation and efficiency.

CBDC inherently provides an alternative to cash to directly reach a customer and can complement the banking network to make adoption quicker. By providing a digital alternative to cash will enable building verifiable money trails that can lead to greater financial inclusion by private players providing customised health, insurance, investment & education products in compliance with privacy laws. In the financially excluded segments, CBDC, being a form of central bank currency, is likely to be well trusted and be adopted easily.

The blog post is co-authored by Sanjay Phadke, Dhananjay Nene, Sharad Sharma, Navin Kabra, R Barve, K Babel, V Agarwal, K Gokarn, Kalyan Narguru, Shashank B, Arun Maharajan, Karan Sirdesai, P Sahu, P Rao, A Kulkarni, Krishna Iyer, V Nene and A Lath.

If you have any queries or comments, please contact us at [email protected].

03/01/202203/01/2022

iSPIRT’s Fifth Open House Session on Volunteering

At iSPIRT, we are about nation-building. So what kind of nation are we talking about here? And does it matter? Well, you do need to watch the video to get those answers.

What sets this Volunteer Open House session apart is that it includes four volunteer stories. Almost every volunteer who comes in leaves a mark. Get a sense of how that happens in this session.

Previous Open House sessions have pointed to specific volunteer challenges. The focus here is to explain playground building in more detail. Often, playground building is an impetus for volunteers to do something they have never done before. This is a different perspective on volunteering.

If you want to be an ISPIRT volunteer, check out the video and fill the form on our volunteer page: volunteers.ispirt.in

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