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

20/07/202006/08/2020

Need to Remove SOFTEX form and TDS on Software products immediately

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

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

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

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

SOFTEX form

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

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

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

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

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

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

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

TDS on Software

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

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

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

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

The TDS provisions

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

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

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

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

24/10/201924/10/2019

Indian Software Product Registry – All That Product Companies Need to Know

Earlier this year, National Policy on Software Products was rolled out to create a robust, participatory framework to bring together industry, government and academia on a common platform to make India as a global hub for software products development. This is a much-needed initiative to provide holistic and end-to-end support to the Indian software product ecosystem. The registry is the first step among many towards solving the real problems of the industry and nurturing the software product companies. If done right, this initiative will have immense potential and far-reaching impact to benefit the industry.

Under this policy, one of the key initiatives is the set-up of the Indian Software Product Registry (ISPR) through industry ownership. It is a collaborative platform which will act as national coordination, facilitation and inter-connected centre for all activities related to the Indian software product ecosystem.

The main purpose of this policy is to focus towards the promotion of Indian software products which are defined as under for implementation:

Indian Company: As per sub-section 26 of section 2 of the Income Tax Act, 1961, “Indian company” means a company formed and registered under the Companies Act, 1956 or Companies Act, 2013, provided that the registered office or, as the case may be, principal office of the company, corporation, institution, association or body in all cases is in India.

Indian Software Product Company (ISPC): An ISPC is defined as an Indian company in which 51% or more shareholding is with Indian citizen or person of Indian origin and is engaged in the development, commercialisation, licensing and sale /service of software products and has IP rights over the software product(s).

ISPR aims to create a platform to enable discovery of Indian Software Product Companies and their products while simultaneously giving automatic access to the Government e-Marketplace (GeM) platform. This will enable the government to identify Indian companies as part of their buying process. However, more work on specific allocation of government buying and redeveloping of RFP’s in government for products will also be initiated so that the government can finally buy Indian products.

Secondly, by listing on exchange on ISPR will enable MEITY to get a better understanding of the industry so that specific product-related interventions like recurring payments for SaaS companies, credits for R&D to enable Indian companies to invest in research and development, and facilitation of Indian software product industry for providing fiscal incentives, if any, at a later stage among others will also be achieved.

Thirdly, ISPR will also enable Indian Software Product Companies to list their products here and connect to buyers across the world. Since this is a government-backed platform, it provides a high level of trust and authenticity in the global market.

Indian Software Product Companies can register here. For any more queries, please feel to reach out on [email protected].

06/05/201906/05/2019

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

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

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

Objective of this blog

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

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

Present status of HSN and SAC Code

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

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

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

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

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

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

SAC code

Item Description

9973 31

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

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

9984 34

Under 9984 Online Content

Software downloads

Most prevalent uses are of

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

Following Codes are specifically for use of Software Services companies

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

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

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

Present coding is bottleneck for Software product trade

The above coding scheme has emerged from a traditional regime which

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

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

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

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

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

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

What is needed to boost SPI under NPSP

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

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

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

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

Recognize Software product and Distinguish Products from Services

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

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

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

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

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

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

The latter is category called “SaaS” based products.

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

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

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

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

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

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

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

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

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

Break through from tradition leads to success

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

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

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

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

Recommendations (for creating SW product ecosystem)

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

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

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

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

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

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

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

Can we use SAC code?

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

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

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

Conclusions

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

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

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

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

13/03/201917/03/2019

SaaS founders discuss NPSP 2019 with MietY Officials in Chennai

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

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

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

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

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

04/03/201917/03/2019

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

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

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

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