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National Software Policy 2.0 needed

national-software-policy-2-needed

A recent article by Andy Mukherjee, predicting the end of India’s IT industry has caused lot of commotion. Though, the ‘end’ is an exaggeration, the warning of the ground slipping is not new. The declining growth is owing to the rapid transformation in technology and Software Industry itself, globally.

The first Software policy of 1986, resulted into Software Technology Park (STP) scheme in 1991. Undoubtedly, the policy was highly successful with IT industry today accounting more than 9 % of GDP.

Despite diminishing growth, even after 25 years, old Software policy (1.0) of 1986 still prevails, with focus on IT services. A reworked IT policy 2012, is generic, remained redundant with no meaningful churn out for new age Industry.

Failure to capitalize on the capability built in last quarter century can have serious consequences. The onus lies with Ministry of Electronics and IT (MeitY). However, MeitY seems to be missing on following four issues.

One, Software is core, not IT enabled Services (ITeS). Two, not able to gauge the shift in fundamental industry structure globally from ‘services’ to ‘products’ and also ‘cloud’ based products. Three, not able to appreciate ‘national competitive advantage’ has moved up the maturity curve to ‘Innovation stage’. Four, a phlegmatic approach resisting shifting gears swiftly.

To address these strategic paradigm shifts, a Software 2.0 policy is needed with ‘product’ as focal to it. We are at least 5 years late in our action here. Let us delve here into the four issues and related actionable.

Software is the focal sector in IT

It is important to understand here, that the genesis of today’s IT Industry was ‘Software’. The empirical evidence highlights real horse power coming from Software. IT enabled services (ITeS) is a derivative or related sector that grew through a ‘pull through’ effect of various related determinants (R. Heeks 2006). This is true even when we cut through the industry’s maturity stages. The ‘core’ has to be energised for new paradigm.

Product focus (new paradigm)

The big sector level transformative shift is ‘Standardised Product’ taking the center stage. This cuts across the ready Software packages (small, modular or enterprise grade), SaaS, PaaS and mobile apps.

The only subtle difference which remains is, whether a ‘product’ is sold to the end-user as ‘goods’ or a ‘product’ is hosted by SaaS or PaaS producer to provision the ‘productised service’. Even IT services business now hinges at standardised ‘products’ for revenues.

Shifting National Competitive advantage

For about a decade no one believed that Software policy 1.0 could make India a super star in Software sector. It is only after about a decade, researchers recognized that India, a developing country could become a follower nation in Software sector. This was in sharp contrast to other 2 rising countries in same period of late 1980s i.e. Israel and Ireland, who were ascribed as Industrialized nation by world bank even in that period among the 3Is.

Usually academic researchers have not been very successful in predicting or prescribing favourable industrial policy for a country. But, they have played an important role when we apply an established research for analysing a sector’s performance and understanding the needed strategic shift.

Also, the classical economics models of ‘comparative advantage’ do not fit well for a sector like Software which is replete with advanced factor conditions.

The most comprehensive model to deep delve into this search is Michael Porter’s theory of competitive advantage (The Competitive Advantage of Nations, 1990). It goes beyond the macroeconomic theories on competitiveness and also incorporates the aspects of business and industry with advanced factors such as technology & innovation. The “diamond” model is based on four main determinant categories viz. factor conditions, demand conditions, Related and Supporting Industries and Firm Strategy, Structure, and Rivalry. It also incorporates and interlinks two extra parameters of a) chance and b) Government policy. For India both these played a vital role.

full-diamond2

Porter’s Diamond Model. Source: The Competitive Advantage of Nations, 1990, Michael Porter’s (Kindle book, position 3060)

The national competitive advantage is based on the advanced level interplay of these determinants in the above diamond, network.

The model may lack in taking into account the new emerging factors of cloud and mobility computing. Yet, it offers a comprehensive and advanced postulation that can help understand the sectoral impacts.

Richard Heeks (2006), using this model concluded the competitiveness of Software sector of India. So also Bhattacharjee and Chakraborty (2015), further building on Heeks study. Richard Heeks (2006) says, “full diamond is not (yet) in place”. Whereas Bhattacharjee and Chakraborty (2015), recognize the full diamond in place. (Please see reference below at bottom)

Going beyond famous diamond model, the stages of development as postulated by Porter are more relevant to understand our readiness for ‘product’ stage.  The stages in order are ‘factor driven’, ‘investment driven’ and ‘innovation driven’ (the last wealth creation points decline). R. Heeks (2006) finds ‘Investment driven’ stage in 2006. Bhattacharjee and Chakraborty finds ‘innovation’ having swept in the period 2012-2015.

stages-of-development-from-kindlebook-location9634

Stages of development. Source: The Competitive Advantage of Nations, 1990, Michael Porter’s from kindle book location 9634

“Govt. helping improve the quality of domestic demand and encouraging local startups” is representative of ‘innovation’ stage, says Heeks (2006).  One can easily map here, the conditions arising to launch of StartupIndia policy 2015 and other accompanying developments.

Yet another symptom of ‘innovation driven’ stage is the domestic demand conditions undergoing a rapid change. ‘Digital India’, GST and UPI are not only concurrent, country scale demand generation programs, but also innovation boosters in domestic industry.

Porters, argues for a proactive role for cluster in National competitive advantage. The clusters enable innovation and speed productivity growth. The Silicon Valley and Israel’s Silicon Wadi are clusters that contribute to regional growth as well as making them as global brand.  India has a distributed cluster model spread across various Tier 1, Tier 2 and Tier 3 cities. Bangalore, Hyderabad, Pune, Delhi NCR and Chennai being prominent.

India has enriched these clusters in the investment phase recognized by both the referred researches above.

In India, a mass of new age Software product startups has emerged touching wide array of industries. Advanced and specialized factor resources are emanating from the Software product development happening in the captive offshore center, R&D centers of MNCs or by outsourced product development (OPD) vendors, across all major IT cluster in country.

India therefore is poised for a phase 2 of Software Industry this time with product focus.

Emerging SaaS segment has global reach

SaaS can be the next game changer for India. The national competitive advantage can be capitalized for creating a SaaS industry, and puts India in first three slot on global map.

Many Software as a Service (SaaS) companies like Zoho, Freshdesk are already global market place names, pitching for leadership in their own segments. It proves the power of SaaS to give edge in exports.

Out of more than 200 SaaS companies, number of them have incorporated outside, owing to the friction in doing global business from India. Software 1.0 policy doesn’t care for their issues. This loss can be plugged with Software 2.0.

Swift action needed by Government

India’s IT sector is strong enough to face changing technology challenges. It needs a ‘product nation’ based proactive strategy, that deals with ‘product ecosystem’ development, R&D, domestic demand boosters, frictionless trade and tax regime.

MeitY should rise to the occasion and announce a macro level policy framework, without wasting further time. Action plans (schemes, programs, incentives and institutional setups) can follow on need basis and in phased manner. This is how it happened in Software 1.0 policy as well. A new institutional setup is required. ‘National Software Product Mission’ should be setup urgently to cater to emerging Software product industry.

‘Software product power’ is cardinal to retaining global Software ‘power’ tag. Globally Software product market is estimated to be $1.2 trillion by 2025. India needs to target for 10-15 % of this.  At home front, India needs to create ~3.5 million new jobs by 2025. Choices are limited.

iSPIRT has been working with MeitY for last 2 years to persuade them for taking a stand for a national level product industry while the service industry keeps growing. A nine point strategy draft is under consideration. But it has taken lot of time. In hardware product space, we have National Electronic Policy 2012. A National Policy on Software Product will replenish the industrial policy basket of MeitY and usher in growth in new areas of both domestic and international trade.

“Mere incremental progress is not enough. A metamorphosis is needed. That is why my vision for India is rapid transformation, not gradual evolution”, said Prime Minister at NITI Aayog recently.

We hope the announcement of the long pending ‘National Policy on Software Product’ (NPSP) will soon be forthcoming. Only then will PM’s dream of rapid transformation, become a reality to catalyze an “Indian Software 2.0 industry”.

Main References used

1. Research article “Using Competitive Advantage Theory to Analyze IT Sectors in Developing Countries: A Software Industry Case Analysis”. By Richard Heeks, Development Informatics Group Institute for Development Policy and Management School of Environment and Development University of Manchester, Manchester, United Kingdom. http://itidjournal.org/itid/article/viewFile/228/98

2. Research paper, “Investigating India’s competitive edge in the IT-ITeS sector”. By Sankalpa Bhattacharjee and Debkumar Chakrabarti (Peer-review under responsibility of Indian Institute of Management Bangalore). http://www.sciencedirect.com/science/article/pii/S097038961500004X

3. The Competitive Advantage of Nations, by Michael E. Porter’s Free Press edition 1990

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GSP at GSTN what we know till now

Recently GSTN invited application for becoming GSTN Suvidha Provider (GSP) under GSTN for enabling much awaited Goods and Service Tax. GSTN received total 344 applications. CEO GSTN reported in GSP workshop on 25th October that about 98 of these applicants are qualified for further evaluations according to them.

gsp-at-gstn-what-we-know-till-now

The GSP application process, when started created lot of confusion and concern on the eligibility criteria. The eligibility criteria are given here. One common concern was the financial capability criteria’s set by GSTN of:

  1. Paid up / Raised capital of at least Rs. 5 crores and
  2. Average turnover of at least 10 Crores during last 3 financial years.

iSPIRT had proposed that instead of a heavy turnover criterion the GSTN could have used a performance guarantee or a surety bond, both to ascertain the serious players and cover the risk of fly by night operators. This would allow some startups to take the risk and succeed to become GSPs.

The announcement did not clarify what is a GSP or what role will it have in the system.

A large number of interested startups through the GSP was about an application provider of product to file and comply with GST. Hence, the above criteria were considered as a barrier to startups. GSTN although off the record said they will accept application from all and will then evaluate who will be fit to become a GSP. This was however a very subjective approach, where GSTN will use their discretion to allow an enterprise to setup a GSP or not.

These concerns and doubts created confusion in minds of many startups, who have been looking towards the GST as an opportunity to innovate and implement in the space of tax compliance with added value with analytics and business intelligence.

It is subsequent to the workshop that many of these doubts have been cleared.

What finally turns out to be is that the GSPs are the middle layer infrastructure or utility provider or a API gateway to large number of GST filing apps. There may be a mix of GSP/ASP model where an ASP sets up a captive GSP. Even in that case GSP is merely a Gateway.

This blog is to answer some of the questions raised by participants in a Google Hangout conducted by Nikhil Kumar an iSPIRT volunteer. Additionally, it also answers other basic question with the related topic of GSP.

What is GSTN?

GSTN stands for Goods and Service Tax Network. It is a section 8, not for profit private company, with shareholding of Government of India, Government of States and UTs and financial institutions.

As a Special purpose vehicle(SPV), GSTN’s mandate is to establish, develop and manage the required infrastructure, systems, technology, partnerships and eco-system for implementation of GST.

What is a GSP?

GSP stands for GSTN Suvidha Provider. GSTN does not want to facilitate or connect to Goods and Service Tax filing application (called ASPs by GSTN and in this document) directly. This is for reasons of security and scale. Therefore, GSTN has planned a number of GSPs who will act as a middle layer between the ASPs or business and GSTN.

GSPs will facilitate the use of GSTN system to the businesses as well as products and application (developed by ASPs) to file the GST returns, match sales and purchase invoices to settle tax credits. The GSPs will hence help secure GSTN from direct exposure to users on internet as well as distribute the load in a large economy like India.

A GSP will hence act as a gateway that will pass enable the pass through of GSTN APIs (application programming interface) to and from users. There are three types of GSPs envisaged:

  • Plain GSP (Independent GSPs) who will just facilitate the ASPs to use them as Gateways
  • Captive GSPs – (GSP/ASP) used by large businesses for their API consumption/pass through. These may include ASPs wanting to become GSP and use the GSP for their APS having heavy load
  • Open GSPs (GSP/ASP + ASPn) who may use for their ASP and also allow independent ASPs

gsps

Source: GSTN website click here

This is how it is depicted in the above slide shown in GSP workshop. However, during the talk on GSP workshop it was mentioned that it will be mandatory for all GSPs to allow any ASP to use the GSTN APIs. Hence, it remains to be clarified by GSTN, weather the model 2 shown in above diagram means a Captive GSP and weather a captive GSP can deny access to third party ASPs to it’s GSP.

GSTN will sign an agreement with the selected GSPs which will govern the contractual relationship between GSTN and GSPs.

How many GSPs would be allowed?

There is no final decision on how many GSPs will finally exist or be allowed. However, in the first phase, 98 GSP applicants would be allowed to participate in the technical evaluation. How many will pass or how many more will be evaluated has not been declared yet.

Who is an ASP? What is relationship between an ASP and a GSP?

Application Service Providers are – Accounting Software, Invoicing Software, Point of Sale (POS) systems and other innovative applications that can enable businesses comply with GST. ASPs can work with multiple GSPs to enable GST for their customers.

Some ASPs may also have their own captive GSP. Dominant accounting and ERP product companies may have their captive GSP as this further opens up in future.

ASPs will have a contractual relationship with GSPs that they use.

How many ASPs can exist? Does ASP is related to GSTN under a formal relationship?

As per GSTN, they do not want to control the ASPs and leave this for market forces to decide how many ASPs can be there.

ASPs are not a directly related party with GSTN. ASPs will have a contractual relationship with GSPs and GSTN will ensure the GSPs provide a free and fair access to ASPs to the GSTN resources.

Can an ASP apply to become a GSP later?

GSTN , says yes they will evaluate on case to case basis. There is no defined policy. On eligible as per the criteria laid out it in the next phase

What are the commercial terms for a GSP?

As per current information, GSTN will waive the first year charges for the GSPs. However, the GSPs would be allowed to charge the downstream ASPs. GSPs can also provide value added services on top of GSTN APIs and charge for them.

Again there is no define answer. The market will decide many things in future. For startups and small ASP players, it is important number of independent GSPs emerge for a fair and free market to exist.

Can GSP share or use Data for business?

As per announcement at GSTN workshop, the GSPs will not be allowed to share the GST data of businesses filing returns or sell the data to third parties. However, GSP can use this data themselves to create value added service offerings like business analytics and charge the individual businesses to do so. This means the data can be used to create a service offering for the given business only and cannot be cross sold to other parties. GSP will have to strictly adhere to data privacy clauses.

How will GSTN ensure third party ASPs get GSP services early on launch of GST?

NSDL e-Governance Infrastructure Limited (NSDL e-Gov) is the depository (promoted by NSE, now running infrastructure and services for many mission mode projects of Government of India. NSDL is also slated to run the GSTN services.

NSDL will provide the neutral GSP services as an official independent GSP to ASPs. GSTN thus ensures that at least one GSP is ready for third party ASP providers get a GSP to serve the market.

Will GSPs expose the same API set as per GSTN Sandbox?

As per GSTN answers to this questions, the GSPs will be legally bound to expose the GSTN APIs on a complete transparent pass through. However, GSP can provide additional rapper APIs for value add that they will like to build or management of their system.

Will the developer sandbox be available to anyone?

As per GSTN response, Yes.

Will there be any further workshops or hackathons?

GSTN may conduct these in the future. However, none planned as of now.

Where can one find the workshop PPT and other resources of GSTN?

One can use following resources of GSTN to get to more details.

What is iSPIRT pitching for?

At iSPIRT we are continuously involved with GSTN. Role of GST will be a game changer for India’s economy.

Our endeavour is that GSTN is able to offer a thriving platform for number of Product companies existing and new. It is also able to provide an open environment for innovation that can help some startups emerge offering valuable products to the business community.

[this blog is based on Google Hangout conducted on the topic by iPSIRT voluteer Nikhil Kumar, the inputs at GSP workshop conducted by GSTN on 25 Oct 2016 and group discussions with Bharat Goneka, Pramod Verma and Gian Franco Bonini of iSPIRT]

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The payment gateway friction in cross-border trade of Software products

The payment gateway problem in exporting online from India

It is not easy for Indian Software product companies to export products online and receive payments in India.  This is true for both the downloadable Software product or Software as a Service (SaaS).

Experts say there is no legal or policy hurdle from RBI. Yet, there is friction. An Indian payment gateway service provider denies foreign currency cross-border transactions from India to a startups or small company.  Only exceptions could be some large companies.

the-payment-gateway-friction-in-cross-border-trade-of-software-products

As part of ‘PolicyHacks’ at iSPIRT, we attempted to attend to the issue of recurring billing in a previous blog here. This blog is another continued effort in this direction. It is based on a discussion with experts from payment solution companies. Embedded below is a video discussion with Krish Subramanian, Cofounder of Chargebee and Kiran Jain of Razorpay.

The options available and adopted by most small Software product companies’ today are:

  1. Use a foreign payment gateway like PayPal, 2 Checkout, Skrill etc. Or
  2. Setup a branch office or a subsidiary in a foreign country
  3. Incorporate in a foreign country and sell globally from there including India

The option #1 above of using international payment providers comes with a heavy transaction cost. The services are not of same order as one can avail being in US or Europe.

So, option #2 and #3 becomes much attractive. This leads to exodus of Indian Software product company’s to USA, Singapore or Europe etc. India stands to lose in the game.

Krish mentions that, “the Indian companies are forced to move abroad to seek the frictionless experience in the payment part, where they allow month on month and do seamless upgrades and downgrades”. He further adds up, “Indian companies being in India do not get the level playing field, even when the strengths of product are very similar to a foreign product. Even using a solution like 2Checkout being in India does not provide seamless upgrade and downgrade. Hence, many companies go and incorporate outside”.

This problem, therefore, is one of the ‘biggest hurdle’ to the ‘stay-in-India’ concept for startups. It is vital that policy makers pay attention and remove friction to this problem for startups to believe in ‘India Story’.

Kiran Jain of Razorpay mentioned that the added attraction for Indian Software product company to move abroad is that, “an Indian company selling on international payment gateway from outside India does not have to comply with service tax”.

This is another level playing field problem. Being in India the Software product sales online is subject to service tax. On other hand being a foreign incorporated company and selling a B2C product the service tax is totally exempted. This is so in current policy framework and is going to stay same in the proposed GST framework.

Although, this is not directly related to the payment gateway problem, it does add-up to the exodus of Startups problem. This issue has been covered in an earlier blog here. It is a policy agenda item on list of taxation issues (of iSPIRT) to be addressed by Government of India and also an item on Stay-in-India checklist.

The cross-border online trade of Software product is directly a Payment Gateway issue. Let us further understand what are the underlying causes, policy issues, possible resolutions and suggestions.

Is there a regulatory hurdle? If not, then what is the cause of problem?

Kiran says, “RBI came up with OPGSP guidelines in 2014”. And, “this policy allows the operation of International payment gateways”, that can facilitate both the foreign currency cross-border transactions and recurring billing. According to Kiran, many Indian banks have capability to provide platform which can accept international cards and multi-currency systems. Few banks support up to 17 different foreign currencies, though the settlement is all done in US dollars.

Why are banks not giving it? Kiran said that in last one year in USA, out of $28.33 trillion online transactions, $16.33 billion were classified as frauds. Indian banking system does not have a capability to incur such losses, “that is the threat to Indian banks”. This threat is the result of ‘returns’ or ‘charge-back’.

In case of delivery of downloadable Software product, at least there is a trail of transaction that can establish that the Software was really downloaded and if unsuccessful the Software can be delivered again. However, in case of services it may be difficult to handle the consumption trail at least in B2C transactions. In B2B transactions, such problems normally do not arise.

Hence, handling the risk of returns and charge-backs is the problem to solved. Solving this will encourage India banking systems to offer free and fair cross-border international payment gateway services.

What is the solution to problem?

Large players by virtue of volume or by offering a risk covering instruments can easily avail the service from banks themselves.

Small and Medium players can use payment aggregators. PayPal and 2Checkout are nothing but aggregators. Thy have infrastructure built in USA. In India they provide services under OPGSP guidelines. Their relationships with issuing banks in USA enables them to provide services in India.

Kiran says, “as on date we have many aggregators in India”. But, “we have not seen any Indian aggregator moving to US and partnering with banks like Wells Fargo or Worldpay”, who could build “an infrastructure trail in US and bring it to India and start providing cross-border payments”.

This will be a powerful option according to Kiran. This option can be used to ease out cross-border multi-currency payment system aggregation. This will give exporters alternative to PayPal and 2Checkout etc.. This will also reduce transaction costs by at least 30%. Now, an Indian merchant pays 4 to 6% plus the currency conversion costs as a compared to the 2.9% + 30 cents per transaction in USA.

The other advantage of Indian aggregator with US infrastructure will be the better understanding of the Indian merchants and the risks involved. Hence, better placed to manage the risks. “Today PayPal looks at every merchant as risky merchant”, says Kiran. The Indian players can have option of either aggregating the merchants on PayPal model. Or offer facility directly to mid and large players.  In later case the entire risk engine is managed by the aggregator. The risk engine will take care of detecting the fraud cards, stolen cards, charge-backs cards as these will not be the capability of a merchant.

In the aggregator model, it is possible to play on volumes by on boarding a large number of small and mid-size merchants. This way an aggregator can easily go to a bank and say my charge-back to sales ratio is just about 1.76%.

Kiran further adds that as an alternative risk mitigation mechanism an Industry body could register small and mid-size Software product companies (merchants) and provide some kind of a certified credit rating. This could help banks and aggregators to assess the risk associated with the individual merchant.

Krish feels, a Govt. body like MSME could build a registration system of merchants with past history, people involved etc. (this could be like extending the Performance and Credit rating scheme of MSME). “This could act as a KYC”, says Krish for the aggregator, payment gateways and banks.

Are there Indian Aggregators offering such services?

As mentioned above, banks offer services in a limited way to large merchants. Aggregators like RazorPay also provide services but again with conditions attached.

Kiran says,“Razorpay provides the services on selective basis. We do not offer the option of card details to be held by merchants”. He further informed that merchant account with many charge-backs are suspended and that cases with one-off charge types may be allowed.

So, there is conditional availability of Indian service providers of cross-border online payment gateways.

Concluding remarks and iSPIRT views

“It is a crying shame if many startups still incorporate outside India just to get a level playing field”, says Krish Subramanian. He also listed following observations:

  • there is an option that is emerging (in terms of aggregators);
  • there are no regulatory hurdles per say;
  • it is more about risk mitigation;
  • the risk mitigation is about creating awareness by closely working with banks;
  • it is also about creating awareness amongst merchants themselves to be able to understand reasons why banks act in certain way and about clarity on pricing, return and refund policy etc.
  • creating overall awareness in eco-system

iSPIRT views on the overall situation on the given problem and present policy status are as follows:

  1. For India to be a Software product nation, Indian resident companies should be able to carry out cross-border trade and receive foreign currency payments onlineseamlessly without opting for incorporating a subsidiary outside India
  2. For a healthy Software product ecosystem, it is vital that Software product companies have access to several options of payment gateway service providers with differing service offerings
  3. RBI alone cannot solve this problem.RBI policy of OPGSP allows the payment gateway players to provide services in India. The inherent risk does not encourage service providers to offer cross-border payment services. RBI may have to become more reformative in encouraging Indian international payment gateway providers.
  4. Government of India needs to intervene and devise an integrative policy that:
  5. promotes an ecosystem of Indian cross-border payment providers
  6. build a mechanism that helps banks and OPGSPs to mitigate their risk without hurting consumer interest
  7. support Software product companies in their cross-border trade by a proactive policy

MeitY can incorporate enabling policy measures in National Software product policy and offer an Indian Software product company registry that has an inbuilt mechanism to ascertain and certify a Software product company’s credibility. Also financial instrument like an Industry corpus fund could provide a common bank guarantee, that can be backup with surety bonds from individual product companies for a defined threshold.

In a digital world order, cross-border trade is going to be highly dependent on easy availability of international payment solutions. Indian merchants able to scale their international trade with ease is vital for India to be retain leadership in Software trade.

 

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Recurring Billing for SaaS. Is it available in India?

Recurring Billing  – demystified for SaaS companies

Abstract

For any SaaS Startup with India market focus, the biggest bottleneck today is recurring billing. It is not available as an open, over the counter service from payment gateways. Most startups have to work around to solve this problem. The workaround may be using an expensive international payment gateway or it may be incorporating a subsidiary in foreign geography. Many startups also move all out of India, if they can afford to do so. In the process India loses some good SaaS companies.

Reading into details, recurring billing is not banned by RBI in India. But, banks and payments gateways do not have the offering available over the counter. Complying with two factor authentication (2FA) and the associated risk of chargebacks are the reasons behind. The payment industry experts say, banks offer it but needs to cover their risk for chargeback scenarios. So, one has to negotiate with banks and therefore large players are able to avail these services.

To bridge the gap startups like Razorpay are building the aggregator payment platform that that can work between the SaaS startups and the Banks to offer recurring billing.

Since, it is not smooth enough, recurring billing is an area, which requires policy maker’s attention. To realize the full potential of a single unified market under GST,  the ‘Digital India’ requires a more open, clearly defined and an enabling policy and procedure on digital payments, at par with developed countries.

This article is based on a deep dive into the problem of recurring billing, with experts from payment solution companies Krish Subramanian, Co-founder, Chargebee (Subscription Billing & Recurring Payments Software) and Kiran Jain of Razorpay (a payment gateway aggregator).

Embedded below is a hangout video with these two experts. You may like to watch the video and/or read the blog piece below (which is built on the conversation in the video).

Some terms used in online payment industry

Recurring billing

It is a subscription driven model of charging or collecting payment from customer. Both the frequency interval of charging and amount charged are fixed to qualify for recurring billing. Software as a Service (SaaS) companies are the biggest users of this service.

Merchant: A person or business who want to sell goods or services.

Acquiring Bank: It is the Merchant’s Bank

Card holder: The buyer who owns and uses a credit/debit/prepaid card etc. to buy goods and services

Issuing Bank: It is the Cardholder’s Bank. An issuing bank issues credit cards to consumers.

SaaS industry and status of recurring billing?

SaaS startups offer products or productized services in a subscription model that runs in a per user/seat at a fixed frequency say per month. In SaaS industry, the recurring billing is often at a low cost transactions e.g. $10 to $50 per user per month.

In developed countries like USA online payment gateways and payment aggregator offer these services. A startup in India can sign for the service from these international payment gateways (like 2Checkout and PayPal) sitting in India. This  can be done with minimum paperwork and absolutely no hassles. But, the cost is almost double the cost of payment gateway services in India. The down sides are payments may not be real time. Also, currency conversion cost twice. Once, when the Indian customer pay in foreign exchange and again when the international payment gateway pays to the Indian merchant.

Problem is the Indian payment gateways do not provide the recurring billing option as seamlessly as foreign payment gateways. Hence, the need to go to foreign gateway, when an Indian SaaS company wants to sell to Indian customers.

Krish of Chargebee adds, “for SaaS companies a non-negotiable aspect to provide frictionless experience to customers is the ability to collect payments on month on month basis”. (please see the video)

Statutory position of recurring billing in India

If one reads through the RBI’s circulars on two factor authentication (2FA), there is no mention of recurring billing. The RBI’s communication vide RBI/2011-12/145 DPSS.PD.CO. No.223/02.14.003 / 2011-2012 August 04, 2011 covering card not present (CNP) transactions which includes online transactions as also the IVR transactions states following two conditions:

Based on the feedback from the stakeholders and keeping in view the interest of card holders the following directions are issued:

(i) It is mandatory to put in place additional factor of authentication for all CNP transactions indicated in para 4 of our directions dated December 31, 2010 with effect from May 01, 2012.

(ii) In case of customer complaint regarding issues, if any, arising out of transactions effected without the additional factor of authentication after the stipulated date, the issuer bank shall reimburse the loss to the customer further without demur.

For an avid policy interpreter this means 2FA is the requirement for every transaction. It is not a straight forward clear position.

Kiran Jain of Razorpay, reads in to the sentence of same communication, where it says, “The matter was discussed in a meeting of banks with the Reserve Bank of India on June 22, 2011 wherein it was emphasized by the Reserve Bank that while it was not advocating any specific solution in this regard,”. Kiran says, “From RBI perspective there is no restriction in India”. According to him recurring billing is allowed under RBI guidelines provided in first transaction 2FA is followed and there is no restriction even by banks. (please see the video)

If recurring billing is allowed why is it not available openly?

Banks have a risk in complying with the mandatory charge back, in case when customer files a complaint. The issuing banks are supposed to refund to customer in case complaint from the customer. Normally the risk is never transferred to the acquiring bank.

Kiran in the conversation talks about the lack of understanding on risk involved, by merchants in India. Banks needs to cover their risk through transaction fee. Merchants in India don’t want to pay high transaction fees, that can cover the risk involved in charge backs.

Banks are not willing to underwrite the risk for small players. This is why there are no readymade recurring solutions available in Indian online payments.

How can this risk problem be solved?

Kiran says, “the alternative is to create a partner in between the banks and the ecosystem of SaaS companies, who is willing to underwrite the risks”.  Razorpay is one such player, who is attempting to solve this problem.

Why can’t a Startup go to Bank directly? What is the way out?

The problem in recurring billing is not only the payment gateway but also the management of the subscriptions. Baking systems are all legacy systems. They are not able to handle the dynamic situations. For example, if a customer lost the card, the new card information should be updated in time. Such gaps are filled by the layer created by third party Payment Gateway solutions.

Also, this further requires some subscription management systems in an online system. Krish calls this “billing intelligence”. This can either be provided by ready made solutions like Chargebee or can also be built in-house.

Startups can solve this puzzle by availing solutions offered by companies like Razorpay and Chargebee. Razorpay reduces the complexities of recurring billing on banking side. Similarly, Companies like Chargebee reduce the complexity of “billing or invoicing intelligence”.

What more can be done on Policy side?

Krish feels, if we engage with banks and banks can build a system that can underwrite risk for small players and also make Bank realize how service providers can help mitigate risk, there can be a chain built to see a successful recurring billing system in India, easily available to SaaS startups.

Kiran’s view is, from policy perspective not much can be done as RBI does not mandate anything specific. It has do’s and don’t type of framework. His view is charge backs are like non-performing assets (NPAs). So, large merchants in India will still get recurring billing solutions from many payment gateway solutions easily and will also have in-house capability to build billing and invoicing platforms.

Looking further (iSPIRT’s Views)

If one researches hard there is possibility to find payment gateways offering recurring billing solutions in India. However, there are lots of questions asked and it is certainly not available as an across the counter service and definitely not to everyone.

Aggregator service like Razorpay have a chance to fill this gap and they will offer valuable service much needed by Startups. A combination of solution like Raozorpay + Chargebee could solve the problem for many startups.

RBI has not banned the recurring billing. On other hand it has also not put the record straight. Going further, there is a need that RBI and Government of India recognize the importance of recurring billing in a digital economy. Once the need is recognized, a layer of reform in policy framework by RBI should be added. Clear regulation that covers all stakeholders as well as encourages banks to offer recurring billing solutions, is needed. A digitally signed online agreement that is backed up by a 2F authentication in first transaction should be enough to cover the paper formalities required for a fixed amount, fixed tenure (frequency of payment) transactions. The buyer of service can revoke the online service agreement online any time. Customer’s risk is therefore limited up to the time he opts out of the service agreement.

RBI will not take actions that promote an Industry. It is Government of India, who should create an enabling policy for SaaS companies. Ministry of Electronics and IT (MEIT) can carve out a scheme that can mitigate risk of Bank, in turn helping SaaS industry. Such things should happen under the National policy on Software product being considered by MEIT.

The bottom line is that the Indian businesses must have access to multiple choices of service providers for availing recurring billing services at a low cost per transaction with a well laid out fraud protection and complaint redressal mechanism.

Both GOI and RBI needs to work together in direction of removing the bottlenecks. India is unveiling a unified digital market with GST coming in. Without seamless digital payments not only we will fall short in our dream of creating a globally competitive SaaS industry but also a fully buoyant ‘Digital India’.

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Taxes on Imported Services

Tax on Services procured from foreign service providers

Startups and SMEs in a digital world use many services from across the world. Skype, Google ADwords and hosting services from foreign hosting providers are some examples. So also are the online services of consultants, designers, content writers and developers etc.

There is a service tax required that apply on many such services. Many people confuse on when a service tax applies or advised that there is no service tax. We also come across an opinion floating around that we can circumvent the service tax by paying using personal cards.

Yet, another confusion is on online advertisements. This got complicated further with the addition of equalization levy introduced in budget 2016-17. In some extreme cases entrepreneurs were advised that only 6% equalization levy is to paid when buying from foreign providers. So, we talked to some local consultants. And, to our dismay we found the confusions was equally prevalent among them, on equalization levy on online advertisements..

There is lot of material present on Internet on equalization levy (introduced in finance bill 2016). So, also are articles on service tax on import of service and online  online advertisements. Most of these articles are in very legal language. Also, they are not presented at one place to clear the confusion for young entrepreneurs.

This article is aimed at clearing the confusions and helping small companies in understanding the issues involved, to enable them in right compliance. Let us understand the issues in following order:

  1. Provisions of service tax on import of service
  2. Service tax on online advertisement services
  3. Equalization levy on online advertisements

Service tax on import of services

A service tax is payable on all ‘taxable services’ in India. Present rate as on date is 15% (14% Basic, 0.5% Swatch Bharat Cess, 0.5% Krishi Layan Cess).

What are taxable services

To know if a service is taxable or not, one has to refer to provisions of Service tax act and the negative list. The negative is the list of items excluded from service tax. Usually all services that do not fall in negative list are ‘taxable services’.

The most common services that startups use are:

  • Consulting or professional services – Designers, Coders etc.
  • Services like Skype
  • Online advertisement services (google add words/ADSense)
  • Hosting or cloud services etc.

Please note that the Software is a service, unless it is physically imported on a media through a port of entry. This means the downloaded packaged Software and Software in SaaS model are ‘taxable service’. So also are other digital goods (pdfs, eBooks, music, video etc) downloaded.

Who is liable for Service tax on import of service?

Generally, the liability to pay service tax is on the ‘service provider’. Since it is an indirect tax, the service providers bills the service tax to service receiver, collects tax from service receiver and deposits it to the service tax department. However, in case of imported services it is different.

An import of service occurs when a ‘service receiver’ located in taxable territory of India receives a service from a ‘service provider’ located in nontaxable territory i.e. from outside borders of India.

Since, in case of import of service the ‘service provider’ is not located in the taxable territory of India, the responsibility of service tax lies on ‘service receiver’. This is known as reverse charge mechanism, in service tax act parlance.

The reverse charge mechanism (RCM) is applicable vide Notification No. 30/2012-ST dated 20.06.2012. This RCM notification prescribes that, “in respect of any taxable services provided or agreed to be provided by any person who is located in a nontaxable territory and received by any person located in the taxable territory”, 100% of service tax shall be payable by the person receiving the service.

This provision is not applicable in case of ‘individuals’ who have received such service other than for the purpose of use in business or commerce (Provisions made under section 66A of the Finance Act, 1994).

In view of above let use answer following two questions.

Am I liable to pay Service tax?

A business receiving services from a service provider located outside India, is liable to pay service tax at prescribed rate and as per rules in force at the time.

Can I pay from my personal credit card and get reimbursed from my company?

An individual can receive services for a consideration paid to a service provider located outside India, without a liability to pay service tax, provide the services received are not for business or commercial consumption.

This means, you should not buy services on your personal credit card and use for business. Small amounts may go unnoticed or not enforced by service tax department. But, substantial amounts of such transactions can put you in trouble at later date.

Using online advertisements from foreign suppliers

In case of online advertisements, we come across following two provisions:

  1. a)      Service tax on online advertisement services
  2. b)      Equalization levy on online advertisements

As mentioned above we came across some entrepreneurs confused on weather both of applies or one of them apply.

Service tax on online advertisement services

Finance act 2014 brought in changes to negative list to broaden the tax base. It now includes provision of online advertisement space on Internet as a taxable service.

Hence, a 15% tax will apply on service of advertisement.

Some people confuse on payment of service tax when they buy from companies like Google and Microsoft. At times, such companies provide some selective services from Indian subsidiary. And, they provide other services from their parent company or a subsidiary outside India.

One should be watchful on where the billing of services is being done from. If this is Google India (e.g. for ADwords), the service tax will be billed to you. The service recipient can see the service tax in the bill. E.g. Google provides Adwords from Google, India.

Many a times when you buy a service using a card online, you buy it from foreign entity. This may go unnoticed as the payment happens in Indian rupees. This happens because of real time conversion from US$ to Indian rupees by the payment gateway.

The transaction is so seamless that the buyer of service does not realize that she actually bought from a foreign company. This happens quite often in case of companies like Google and Microsoft. You buy in Indian Rupees but the transaction may be done by Google, Ireland.

You should be careful about such transactions and your liability to pay service tax. Check is the service tax is mentioned in bill as an item. If not and your billing party is foreign entity or person the service tax is your responsibility.

Special case of ADsense (or similar services)

As per common knowledge ADsense services is presently provided by Google Inc. USA. Hence, the advertisement space revenue received by the Indian websites is in US$. There is an argument that this being export of service is not subject to service tax.

The ADsense issue is not straight forward. clear. The advance ruling issued by service tax department says it is subject to Service tax. Since the agreement is between the Indian website company and Google, INC, some experts treat this as export of service. Thus not falling under service tax net.

However, there is a warning here as per service tax place of business rules. If one is able to establish the end use of service being done by an India company i.e. the advertiser is Indian company, then the situation is complex. The service tax department can call for scrutiny of cases to prove that there was not use of service by any Indian company.

So, ADsense case is not crystal clear and there is needs for caution to be exercised.

Equalization levy

The finance bill 2016 introduced an equalization levy of 6%. This is a type of withholding tax on income of non-resident (foreign service providers) from their sales in India.

The first important point to be noted here is that this is not linked to service tax at all. Service tax is an indirect tax on consumption of service, administered by service tax department. The equalization levy is a type of a direct tax levy on income and administered by Income Tax department.

What is covered under Equalization levy?

The equalization levy is applicable at a rate of 6% on the gross consideration payable for a ‘specified service’. It is applicable if the aggregate value of consideration in a year exceeds Rs. 1 lakh (approximately US$1,500). At present, the ‘specified service’ as defined in the provision are:

  • Online advertisement
  • Any provision for digital advertising space or any facility/service for the purpose of online advertisement

In addition, the notification also says more services can be added in future.

Who needs to comply?

As in case of service tax individual consumers are exempted. So, the levy is currently applicable only on B2B transactions.

Every resident person and foreign company (having a PE in India) is required to withhold the equalization levy when making payment to a non-resident (individual or business) service provider.

It is not applicable to non-resident service providers having a PE in India, because they will be subject to regular taxation as a PE in India e.g. Google Inc, USA having a PE in India (Google India Pvt. Ltd) is exempted from equalization levy.

Who bears the burden?

The equalization levy is designed as a withholding tax to be deducted by Indian service recipient from payments to be made to foreign service provider and deposited with Income tax department. The foreign service provider can take the tax credit in home country as per procedure.

However, there are apprehensions that some service provider will not agree to these deductions and finally the Indian companies will bear this as cost.

In any case, the responsibility to deposit the tax with Government lies with Indian service recipients.

Why was equalization levy applied?

The background of equalization levy lies in a ongoing hot debate on subject of base erosion and profit shifting (BEPS) Action Plan. BESP has been under discussion at Organisation for Economic Co-operation and Development (OECD). In digital world, companies from one country can sell online across their borders without having a presence in that geography. This can cause profit erosion in these geographies across borders.

OECD does not favour proactive use of equalization levey. But, they agreed that countries could introduce one in their domestic laws as an additional safeguard against BEPS, provided they respect existing treaty obligations, or include them in their bilateral tax treaties.

It is a tax to equalize the tax burden on remote and domestic suppliers of similar goods and services in a digital world and a safe guard against BEPS.

It has been introduced in in India through Finance bill 2016, by inserting a new chapter titled Equalization Levy.

Situation in GST transition

The clarity on all aspects has still to come in GST. Yet, concepts like reverse charge mechanism (RCM) will apply. Software or all intangibles will be treated as ‘services’ as per model law. We from iSPIRT are arguing against it and wants Software products treated as ‘digital goods’. The rate of service tax will further go up. States will also be charging service tax. Hence, there will be two services tax that will be payable in GST. The state GST (SGST) and center GST (CGST).

Equalization levy has nothing to do with GST. It is going to stay and may be extended to other e-commerce in cross border trade, in future.

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Company Incorporation further Simplified by MCA

Ease of doing business – Some new additions in Company Incorporation rules

Ministry of corporate affairs (MCA) has announced the Companies (Incorporation) Third Amendment Rules,2016. The set of announcements made will replace or change the the Companies (Incorporation) Rules, 2014.

There are about 12 changes announced in the notification published at MCA website here. However, the simplifying impact is well associated with few clauses with reasonable clarity.

Mr. Sanjay Khan Nagra, iSPIRT volunteer explains the new announcements in below the embedded video.

Rule 13(2) of Companies (Incorporation) Rules, 2014 following explanation has been added

2014 notification: Following provisions existed

i) The memorandum and articles of association of the company shall be signed by each subscriber to the memorandum, who shall add his name, address, description and occupation, if any, in the presence of at least one witness.

ii) Where a subscriber to the memorandum is illiterate, he shall affix his thumb impression or mark which shall be described as such by the person, writing for him, who shall place the name of the subscriber against or below the mark and authenticate it by his own signature

2016 notification: Now the type written or printed particulars of all the subscriber and witnesses shall be allowed.

Rule 16(1)(m) – of Companies (Incorporation) Rules, 2014 following explanation has been added

2014 notification : Every subscriber to the memorandum was required to submit and file Proof of Identity with the jurisdictional Registrar of companies.

2016 notification: If the subscriber is holding a valid Director Identification Number (DIN), and the same  have been updated as on the date of application and the declaration on this effect is given in the application, the proof of identity and residence need not be attached.

For other changes in the rules we suggest you refer to the Notification given at MCA website. Access this link here.

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ESOP provisions get a booster from MCA for Startups

ESOP another Stay-in-India checklist item gets MCA nod

Ministry of corporate affairs (MCA) has recently relaxed sweat equity issuance norms for startups. These new relaxations are for limited to Startups recognized by Department of Industrial Policy and Promotion (DIPP).  The announcement will immensely help startups. For startups not recognized under DIPP, there is not change.

The new announcement is  – Companies (Share Capital and Debentures) Third Amendment Rules, 2016 (Amendment Rules). It amends the Rule 8 governing sweat equity shares issuance and Rule 12 of Rules 2014 that pertains to issue of shares under ESOP. The other rules to draw out an ESOP plans remains same.

This blog explains the new announcement and some basic concepts for those who may not be aware of terms like ESOPS and Sweat Equity and how they benefit the startups.

Mr. Sanjay Khan Nagra, iSPIRT volunteer explains the new announcements in below the embedded video.

There is lot of material on internet on examples and ESOPS plans and how they benefit the entrepreneur and the employee both. The objective of this blog is to set a background and describe new announcement.

An ESOP plan effects the basic capital structure of the company. It also has long term legal or tax implications. A good ESOP plan can maximizing the benefits from the existing and new provisions. Hence, we suggest startups interested in drawing up an Employee Stock Option Plan (ESOP) should seek a professional advice.

What is an ESOP?

An Employee Stock Option Plan (ESOP) is a benefit plan for employees which makes them owners of stocks in the company. ESOPs have several features which make them unique compared to other employee benefit plans. Most companies, both at home and abroad, are utilising this scheme as an essential tool to reward and retain their employees. Currently, this form of restructuring is most prevalent in IT companies where manpower is the main asset. (Definition Source: The Economic Times).

How ESOPS benefit Startups

ESOPs are a proven tool for startups to succeed and grow. There are many ways that ESOPS can be beneficial for startups.

Some of the ways this helps are as given below:

  • Promoters or founders who can’t contribute capital but bring knowledge and dedication to startup can be have access to equity.
  • Startups can attract experience and talent with sweat equity
  • Startups can use ESOPs as a reward to motivate employees
  • It gives sense of ownership to employees and hence act as an employee retainer ship tool

Change made for Startups

MCA has announced two changes. One, that will increas the base of sweat equity that a startup can issue. Two, that will expand the horizon of sweat equity to promoters and director. Both the changes have are described below.

Increase in limit of Sweat equity shares issued by start-ups

The Rule 8(4) of Rules, 2014 restricted companies from issuing sweat equity shares in excess of 25% of the paid up capital at any time. The rule also limits the issuance of sweat equity shares per year to 15% of the paid up capital or issue value of Rs.5 crores whichever is higher.

The amendment in new announcement expressly permits Start-ups to issue sweat equity shares not exceeding 50% of its paid up capital up to 5 years from the date of its incorporation or registration.

The limits of 15% of paid up per year or capital or Rs.5 crores whichever is higher will still need compliance.

Stock options to promoters and shareholder/directors of startups

The new announcement allows Startups to issue the sweat equity under ESOP to their promoters and to directors who hold more than 10% for the first 5 years from the date of their incorporation. The restriction on issuing stock options to promoters and such directors continues for all other companies

In order to provide this benefit MCA has used notification to exempt the startups from application of Clause (i) and (ii) under Explanation C of Section 62 (1)(b) of Act, 2013 that defines the term ‘Employee’. The Explanation in Section 62(1)(b) reads as below.

Explanation:

For the purposes of clause (b) of sub-section (1) of section 62 and this rule ”Employee” means-

(a)   a permanent employee of the company who has been working in India or outside India; or

(b)   a director of the company, whether a whole time director or not but excluding an independent director; or

(c)    an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company but does not include-

             (i).   an employee who is a promoter or a person belonging to the promoter group; or

           (ii).   a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.

[The clauses (i) and (ii) given in blue does not apply on DIPP registered startups for 5 years]

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Cloud Telephony Startups seek support from TRAI

This write-up should be read along with the previous blog – The Value Added Service Providers in Cloud Telephony. These blogs help us to accumulate the progressive development in discourse on policy for this segment of Industry. It is important for our common understanding and help Software product industry innovating in telecom sector in general and cloud telephony in specific terms.

The Startups providing Value Added Services also refereed to as Cloud Telephony submitted their response to Consultation Papers by TRAI on Voice Mail/Audiotex/Unified Messaging Services Licence. 

TRAI also received responses from other service providers (which includes licensed Telecom Operators and ISPs) and Industry Bodies and Individuals. iSPIRT response was also submitted on the due date and can be accessed here from TRAI website.

The responses have been analysed and as required the counter comments have  been filed with TRAI.  Given below is our Response submission.

Counter Comments to responses received on Consultation paper by TRAI on Voice Mail/Audiotex/Unified Messaging Services Licence. Dt. 08/08/2016

After reading the responses to consultation papers, it is evident enough, that there is a clear divide between the Startup or SME players and the Telcos or the industry bodies representing them.

As previously described by us, almost all companies presently providing the services in this (voice mail/Audiotex) space are startups or SME players who have built their own Software products. Unified license operators are already allowed to provide these service. So, there is no barrier for them to enter in to these services, except creating specialisation around these services and building the requisite Software that runs the service.

The licensed Telecom operators in their responses to consultation paper have blindly favoured a license regime in this space, as well as attempted to make the case of revenue loss and breach of license. This is clearly an attempt to hog the telecom sector landscape.

We believe the approach taken by the large players in the Industry is contrary to the direction, thought and objectives of present Government. It confronts the principles of building an innovative society and multiplying growth opportunities for the enterprising youth of our country.

Recognize them as value added Services

We already stated this in our response earlier submitted. However, it seems there is a need to reinforce the point.

The services provided in this space are highly specialised “Value Added Services”. They are by no means either the carriage services or network services. It is a layer on top of the existing mobile and basic telephony that delights the consumer by fulfilling their needs that basic/mobile telephony cannot.

Value Addition is done on the services hired from licenses telecom operators, which have already been subject to revenue share mechanism. Hence, the very claim that these services can be sold at a cheaper rate than the local calls is squarely an imagination. So, also the revenue loss story does not stand any ground.

Therefore, the need to recognize this aspect of “Value Added Service” providers, is primary to any policy framing under consideration on the subject.

Regulate doesn’t imply inevitability of license

There is a serious need to catch up with technological advancements. A large country like India can’t be left to mercy of few companies on this account. This calls for reform and further deregulation of the telecom sector to a degree that it is accommodates the changes from time to time.

In order to allay any doubts of the stakeholders in this sector and better value to the consumer, there may be need to regulate this sub-sector of Value Added Service provider.

Regulation does not always mean “a license”. This value added service sub-sector does not hurt the incumbent licensees in any way. Hence, a simplified regulated regime with lower administrative burden and lowers costs is desirable for suitability to this segment of the telecom sector.

Hence, a registration system with period monitoring and control rather than a license regime has been recommended by us.

Promote Innovation in Digital economy

Indian is entering in to a ‘Digital Economy’ era. Digital India is also not just about connectivity and switching networks. So, a ‘Digital India’ cannot be created by just handful of licensed Telecom players. The consumer in a digital economy is going to consume variety of data and application. Innovative Software products can power up the Digital India to make it a functional ‘Digital Economy’.

Innovation is going to be the lubricant of future digital economies

This segment of the Value Added Service has been born out of innovation of individual entrepreneurs and service provision works on Software products. So, also the commercial part of the service in integrated manner.

At this juncture, when India is wanting to unleash the innovative power by its StartupIndia policy, the license raj or barrier created by large Telcos can be counterproductive to digital economy or the Digital India dream.

Telecom sector and telecom policy at large has to imbibe this need to create friendly promotional environment for innovation to happen. It is not hidden from any one that innovation worldwide is being driven by individuals and small players.

All stakeholders in telecom sector including the licensed telecom operators should contribute to Innovation. Hence, the need to support these small Value Added Service providers and welcome the new ones to emerge.

iSPIRT Request

We seriously feel that growth cannot come from fixing ourselves to status quoist approach. There is a need to further add value to the telecom sector and hence a need to create scope for number of small players to contribute to the overall telecom sector.

There is a huge opportunity for Indian Software industry to innovate and contribute to telecom sector. We from iSPIRT, request that TRAI takes the above points and our earlier response submitted in to consideration and create an enabling environment for India to grow.

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The Value Added Service Providers in Cloud Telephony

Industry discussion on response to Consultation Papers by TRAI on Voice Mail/Audiotex/Unified Messaging Services Licence

TRAI floated a consultation paper to review the license of Voice Mail/Audiotex/Unified Messaging Services. The consultation paper throws light along with an in-depth analysis of various issues involved.

Many call these companies as Cloud telephony companies. Cloud telephony is a wider terms. Plus its creates confusion on switching happening from cloud. This can be problematic for a dialog with TRAI or DOT. Hence, We have called them as Value Added Service Providers. This argument is justified in this discussion below.

For iSPIRT this sector is important as

  1. Most of these companies have a Software product at the core developed by them
  2. They are mostly startups and
  3. There is enough scope in  this sector for more innovation to happen.

iSPIRT conducted a discussion on important issues of this segment of the Industry. The discussion was to touch on important aspects of the consultation papers of TRAI. The discussion is organized in 4 parts as follows:

  1. License issues
    • License v/s no license, separate licenses Technology and license mapping
    • Entry Fees, Revenue Share, License Period
  2. Issues like conferencing, dial out, point-to-point conferencing
  3. Unified License – how to tackle this
  4. Focus on innovation, Startups, Ease of Business (compliance)

Following people from Industry joined the Discussion:

  1. Ambarish Gupta, Sandeep Upadhyay and Sriram from Knowlarity
  2. Gurumurthy Konduri from Ozonetel
  3. Shivakumar Ganesan – Exotel
  4. Anik Jain – Myoperator
  5. Ujwal Makhija  – Phonon

Those interested can watch the video embedded here. Also the text below the video describes the common points and agreements of the essence of the discussion.

License issues

There are several questions asked in consultation paper on, What kind of licensing is required for various services. (Q1 to Q8)

At iSPIRT we feel most of these providers fall under one category. And they all should get recognition under one category name. This will include all, those who provide Voice mail, Audiotex, Audio Conferencing service etc. They can focus on one set of service or the entire suit of services.

Nomenclature – Call them Value Added Service providers

Cloud Telephony means a telephony service provided from cloud hosted infrastructure. simple reason that the service offered from cloud. Present policy regime of India calls them content providers. Now this may be difficult to digest for remaining IT industry. This include  provider licensed under the Voice Mail/Audiotex/Unified Messaging Services License.

Application service provider (ASP) and Communication application service provider (CaaS) are other nomenclatuers ascribed.

These providers are not supposed to carry telecom traffic or provide switching of telephony. In essence these providers are “Value Added Service” (VAS) providers. These value added services can range from be voice mail box, an IVR, a virtual PABX, a virtual call center to analytics based services.  There can be lot of innovative ways to deliver services. The VAS operator charges for their value added part. The VAS operator does not have its own network but relies on network resources of the Telcos for the basic or mobile telephony.

Weather a license or a simple Registration process

Everyone in the panel agreed that licensing cumbersome and costly. There is no need for a license and that there should be a simplified registration process.

The registration should be under one category e.g. Value Added Service Providers. This can cover all Voicemail, Audiotex along with Audio conferencing and the Unified messaging.

The registration helps DOT to keep track of fair use of the policy, with complete neutrality and level playing field. DOT can keep watch the registered VAS providers through a simple compliance process.

License issues – Entry Fees, Revenue Share, License Period

There was common agreement in the discussion on fees and charges. Presently there is a bank guarantee of 3 lakhs for Voice Mail/Audiotex licenses. A policy to either keep it at same level or evolve to simplify further is welcome.

License/registration period of 10 or 20 years are good enough.

Issues like conferencing, dial out, point-to-point conferencing

The consultation paper deals at length these issues. For the industry they are of high importance as most confusions arise from them. Often the threats of inspection and service disruption from TERM cell arise from these provisions. There is always a doubt that the VAS operator may be involved in routing call traffic for business motives or running a switching service clandestinely.

In such a dubious doubtful environment this budding segment of Industry cannot grow. The VAS operators addes lot of value to both their suppliers and clients. The customer pays for the value they add not for the telephone calls. For suppliers (Telcos), the VAS operator is a bulk service customer

The common agreement was that this area needs a serious look from TRAI and DOT.

When industry is complying with all required prohibited clauses of the policy such as

  1. No VOPI integration
  2. No toll bypass
  3. No number masking

When the Call deail record (CDR) are all tapped in the Telco’s network;

AND

When there are further detail logs and records that are avaialable from VAS provider;

there does not arise a chance of

  1. Security  breach by VAS operators and
  2. Revenue loss to Telcos

The revenue of Telcos increase happen to increase even when they VAS providers buy from Telcos at a discounted rate. VAS operators increase the size of Pie.

In view of above, the common agreement in the discussion was that

  1. There should be clarity on conferencing, bridging call out provisions
  2. There is nothing like point to point conferencing
  3. The policy should allow VAS operators to use telecom resources from multiple operators. The limiting principle should be dial out to same operator from where incoming call comes.  Multiple operators are the need for reliability or redundancy.

OSP like provisions or OSP should be allowed for VAS providers?

There was an opinion on OSP being allowed to VAS operators. This will give them more flexibility to operate and grow their presence. The opinion attempts to justify the OSP based on analogy of large Captive call center operators allowed OSP with network spanning country wide with a central logic running.

iSPIRT’s opinion is that this may create conflict with other areas of policy under TRAI and also face sever resistance. It is advisable to take up this issue in a phased manner. May be first limiting OSP to one telecom circle at a time. Plus it advisable to approach it, after due consultative interactions with TRAI and DOT.

Unified License – how to tackle this

There are number of questions on Telcos operating under unified license to offer VAS. The questions also point to inclusion of “Voice Mail/Audiotex/Unified Messaging Services” in unified license.

The common opinion that emerges out from discussion is that the Value Added Services is a different ball game. The market should be free for all. Eventually there is a unique Software Product existing behind these services. The quality of service is highly dependent on this core product.

There does not seem to be any apposition to Unified license getting extended to the value added service suit.

Focus on innovation, Startups, Ease of Business (compliance)

This fourth part got truncated from the recording, perhaps for time limit getting crossed unnoticeably.

For benefit of the community. A very short discussion on how this small industry could further be boosted by perhaps giving more access to domestic market through promotional policy measures.

Certainly there is agreement that there is lot of scope to innovate and do more within this segment of the Industry.

The discussion ended by a Thank you note.

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Convertible Notes

In this session we take up another announcement by ministry of corporate affairs on convertible notes. This is a step forward to solving the problem of receiving funds as loan from foreign investors as convertible notes.

Sanjay Khan Nagra talks about the issue in the video embedded below.

What is a convertible note?

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

Convertible notes are quite popular in startup ecosystems like Silicon Valley in USA. In India, there are other forms of convertible instruments. Such as CCDS/CCPS (compulsorily convertible debenture or preference share). These are not exactly akin to convertible notes prevalent in valley.

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

What is the new in the recent announcement?

In existing CCD/CCP instruments, company receiving funds upfront enters into an agreement defining the value or a formula at which these will convert in to equity. This value, at which they will convert cannot be lower than the present fair market value. The CCD or CCP are compulsorily convertible if there is a next round of valuation in a specified period. If there is no valuation in that period, then the money raised remains as a simple loan to be repaid.

The convertible note practice in valley is better placed. There also, a convertible note is also a loan given by investor to company. The difference being, the lender gets an advantage to convert debt to equity at a later date at a discounted rate.

So if a Rs.10 share value at later date is Rs. 50, the lender may get a conversion at Rs. 40. Next valuation round may also happen at lower than present fair market value.

So, this seems more of less like similar, what is the problem then?

The anomaly is that the Indian company can raise funds using convertible notes from Indian lenders only, and not from foreign investors.

RBI does not allow valuation linked convertibles notes. iSPIRT approached RBI with this stay-in-India check list item. RBI felt that there has to be an acceptance in company law for the convertible note concept, as akin to the practice in developed world.

iSPIRT approached ministry of corporate affairs (MCA), and the new announcement is a step forward in this direction. We soon expect RBI to follow suit and permit convertible notes from foreign investors.

Are there any conditions in MCA announcement?

MCA has announced a definition for “convertible notes” under G.S.R. 639(E) by amending the Companies (Acceptance of Deposits) Rules, 2014. You can read the complete circular here.

The limitations are:

a) The provision of Convertible note applies only to Startups
b) The amount has to be 25 lakhs or more

As per circular the definition of convertible note is added as follows:
“convertible note” means an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument.

iSPIRT stand

iSPIRT will actively pursue this further with RBI.

DIPP and MCA have taken an appreciable step forward, in getting the regulation relaxed for DIPP registered Startups.

However, in order to bring the Indian startup ecosystem at par with developed world, the limitation to DIPP registered Startups should not exist. These measures are to be adopted for all startups/companies across country.

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Domestic venture debt

In this session on Domestic venture  debt, we talk about a recent announcement by Government of India, that relaxed the provision on raising debt from domestic non-banking sources of funds. Sanjay Khan speaks on the subject in below embedded video.

What is the problem, that this new announcement on domestic venture debt solves?

Private companies can raise debt funds in a restricted manner only. They could raise debt from some allowed sources. These could be like company directors, their relatives and other companies etc. But, not from sources like angel funds, domestic VCs who are not companies. A debt raised from such sources fell under deposits category.

To accept ‘deposits’, companies need to follow number of conditions, which are quite tedious.

What is the new announcement?

As per sub-clause (iii) of Clause 68 of Section 2 of Companies Act, 2013 definition of Private Company, “means a Company which by its articles prohibits any invitation to the public to subscribe for any securities of the Company”.

The new announcements open up some new avenues of raising debt funds from domestic markets.

These new sources of funds, added to this non-public funds category are funds registered and operating under SEBI’s regulated regime. Following are these three new sources

1. Alternative Investment Funds (AIFs)

2. Domestic Venture Capital funds

3. Mutual Funds

Prior to this announcements funding from these sources was treated as deposits and not loan.

What are the limits of announcements?

Whereas this announcement opens up these three highly potential sources of domestic debt funding, it is limited to Rs. 25 Lakhs only.

So the announcement is likely to benefit startups in their early phase.

The other good part is that, this is not limited to recognised Startups or startups registered under StartupIndia with DIPP. It is open to any private company hence it can apply to any startup.

The announcement adds up to efforts made by Government of India in creating better environment for funding. It is a step forward in the direction.

iSPIRT believes and is further taking up with the Government to not limit this provision to Rs. 25 lakhs.

The video below covers this topic with Sanjay Khan, the expert who was instrumental in building up the stay-in-india checklist of iSPIRT.

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Investment above Fair Market Value – no more Angel tax for Startups

In this session we take up a long pending issue of “Angel Tax”. It has been given partial reprieve recently, under StartupIndia plan. We also discuss how startups can raise money from Angels, without getting trapped in fair market value rule of finance act 2012.

Sanjay Khan speaks on the problem, the latest announcement and the way out for startups to raise equity without DIPP route, in the below given google hangout video.

What is this issue of Angel Tax? And what changes after new announcement?

Startups receive equity infusions from various sources. One of the most lucrative and internationally prevalent source is the Individual investor (Angels).

In India income tax department is skeptical about angel investment. This is because, at times angel investment was misused to channelize black money. Artificial valuations is mostly the doubt in mind of income tax authorities.

As per, Finance Act 2012, capital raised by an unlisted company from any individual against an issue of shares in excess of fair market value would be taxable as ‘income from other sources’ under Sec 56 (2) of the I-T Act. This came to be popularly called as angel tax.

So, if fair market value is say e.g. Rs. 10 per share and a startup receives Rs. 15 investment from an Angel investor. Income tax treats this difference i.e. Rs. 5 per share, as income.

As per the above provisions, the angel investments are subject to assessing officer’s approval. The jurisdictional assessing officers of income tax enjoy the discretionary powers. Instances of misuse of these discretionary powers by assessing officers created problems for startups.

Many startups are not serious about the documentation. Mostly, such startups get into problems due to lack of documentary evidence about their valuations.

Govt. of India recently announced a change under StartupIndia policy of DIPP. A Central Board of Direct Taxes notification, dated June 14, made the required changes to Section 56(2)(viib) of the Income-Tax Act, exempting startups raising funds from angel investors. This is limited to the startups approved by DIPP.

Is it available to all DIPP registered startups?

No, not to all startups approved or recognised by DIPP.

There are three kinds of startups now.

(a) General Startups, that have not applied to DIPP or are not even eligible to apply to DIPP.

(b) those who applied and got recognised by DIPP but did not apply for Income tax exemption.

(c) those who fall under (b) and also got the income tax exemption approval of the inter ministerial board of DIPP.

Only the third (c) category of startups are eligible. These startups need not worry about the assessing officer discretion now. The benefit is available so long as they enjoy the income tax exemption under startup policy.

So, if this is not applicable to all startups, does it mean other startups cannot raise equity from Angel investors at all?

The Finance act 2012 provision does not bar angel investments. Startups not under (c) above can raise the investment from Angels (individual investors). The limitation is that the valuations in such cases will  be subject to examination by assessing officer approval.  They have to extra careful about the valuation at each round of funding.

Such startups should get a professional third party valuation reports. Get a valuation reports for all rounds of valuations with proper documentary proofs. You can face the assessing officers with proper documents without any fear.

The recent hype created in media was mainly arising from down rounds. That is when the new round of investment was done at a lower rate than the previous round. This led to income tax doubting the misuse.

In such challenging valuation situations like down round valuations, the startup can get a professional third party valuation from 2 or 3 sources. This way they can deter the assessing officer’s misuse of discretionary power as well as stand any litigation test, if put through.

In essence, a startup can raise honest angel investment at right fair market value. A professional valuation exercise with all objectivity can help you cover the risk.

iSPIRT’ stand

Startups ecosystems in developed countries enjoy a favourable investment climate that proactively promote and protect the angel’s investments.

Government of India should show give clear signal of favourable investment climate in the country.

Government of India should think of measures that can deter black money getting invested in the Startups, instead of doubting each and every investment. For this Govt. should repeal the the provision introduced by finance bill 2012 should. Discretion to assessing officer is not serving the cause of building investment climate.

India seriously needs a policy that promotes angel investments in general, with responsibility of money invested taken by investors rather than Startups.

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Demystifying Startup Tax

Over the past couple of days, a lot has been written/discussed about the so called ‘startup tax’ and its perceived ill effects on the startup ecosystem. Under iSPIRT’s new initiative, PolicyHacks, I attempt in this note to demystify the legal/tax jargon around this tax and to clarify the proposed rule for the benefit of ecosystem participants, particularly startups.

What is the law?

Simply put, if a private company issues shares to a resident Indian at a price above the fair market value (FMV) – say the FMV of a share is INR 100 and the company issues it at INR 110 – then the excess consideration (INR 10 in this case) is considered to be the company’s income (since, in a way, it deserved INR 100, but received INR 110). The amount of INR 10 is, therefore, liable to be taxed as the company’s income (which presently is at a rate of 30%). FMV is an important element here, and we will get back to it later. It is popularly called the ‘angel tax’.

Who are exempted from this?

As highlighted above, this provision is applicable only to investments received from resident Indians. Thus, at the first level, it does not affect foreign investments. In addition, the provision does not apply to investments made by SEBI-registered entities. One, therefore, need not worry about money received from angels/VCs/PEs which are either investing from foreign sources or have been registered with SEBI.

Who are hit by this?

Whoever is not covered under the above exemptions or otherwise exempted by the government. Prominently, the Indian angels (which constitute an overwhelming majority of the overall angel investors). Hence, the term ‘angel tax’.

What is ‘startup tax’ then?

As is clear from the above, the law is applicable to all private companies and does not single out startups. However, it has been reported in the media lately that startups which have raised down-rounds will be scrutinised by the tax department, and the valuations of such down-rounds will be considered to be the FMV of all previous (up) rounds.

In other words, if:

  • in the last round:
    • the valuation of the company was INR 1,10,00,000; and
    • the FMV per share was INR 110;
  • in the present (down) round:
    • the valuation of the company is INR 1,00,00,000; and
    • the FMV per share is INR 100,

then the valuation of the down-round, i.e., INR 100 will be considered to be the FMV of the previous round.

Hence, applying the law set out above, anything received by the company in excess of the FMV (in this case INR 10 per share) becomes its income, and is taxable as such.

So what is new in this?

Nothing. There is no change in the law. The issue that the industry has been facing since the introduction of this law is that the income-tax officers (who have wide ranging powers) were found to be using this provision to harass companies.

I have raised money from resident Indians and now I expect a down-round; will the tax department come after me?

Since this is not a new or proposed law, nothing stops the income-tax officer from going after any company even today. In fact, such proceedings have been initiated against quite a few companies in the past.

The key thing here to note is this – No tax can be levied on a company just because it has raised a down-round. The only money that this provision permits to tax is the consideration received by a company in excess of the FMV. It is a settled principle that each funding round can, and quite often, is raised at an FMV different than the previous round. So long as one can justify that in a down-round, the fall in FMV is on account of genuine external factors, and not because the FMV in the previous round was artificially inflated, one should be fine. Thus, even if one receives a notice from an income-tax officer in this respect, all one needs to demonstrate is that the FMV in the last round was calculated in accordance with the valuation mechanism provided under the IT Act, and there was no foul play in that respect. For startups falling in this category, there is nothing (or not much) to worry about, at least prima facie.

iSPIRT view and efforts

At iSPIRT, as part of the Stay-in-India initiative, we have been in continuous discussions with the government to rationalise this provision to ensure that genuine investments using legitimate money (such as angel investments) are not hit by this provision, and there is no unnecessary harassment.

Also, the government has exempted startups (which register on Startup India portal and are approved by the inter-ministerial board) from income-tax. Thus, ideally, such qualified startups should be exempt from this tax as well. We continue to discuss this with the government.

Author note and disclaimer: PolicyHacks, and publications thereunder, are intended to provide a very basic understanding of legal/policy issues that impact Software Product Industry and the startups in the eco-system. PolicyHacks, therefore, do not necessarily set out views of subject matter experts, and should under no circumstances be substituted for legal advice, which, of course, requires a detailed analysis of the relevant fact situation and applicable laws by experts in the subject matter on case to case basis.

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Clearing the confusion on – SOFTEX form filing need

There are instances, when Software exporting companies operating outside an export oriented scheme (STP, SEZ, EOU etc.) are advised, that there is no need for them to file SOFTEX forms. The young entrepreneurs in Startups, obviously get confused on this. In some cases, companies stopped getting SOFTEX certification done, after complying in past when they moved out of STP/SEZ schemes, owing to this advice.

There are always two parts to deal with regulatory compliance. One, the policy aspect and second, the procedural aspect. There is lot of material available on internet, on the procedural (process) part of filing SOFTEX form. And perhaps none, that explains the policy aspect.

This article is meant to clear the confusion on SOFTEX form among the Software product community by explaining the policy aspect of SOFTEX and background process, in the realm of foreign trade regulations.

Why and how SOFTEX form came in to existence?

In general exports means sending ‘goods and service’ to clients in foreign country (outside territorial borders of India) for purpose of sale. Physical goods are exported through a physical port of shipping (a sea port, airport or foreign post office) monitored by Central customs department.

When physical goods leave borders, from any port of shipment, the exporter is required to declared value of goods. In India, this was done through a form called GR form (PP form in case of exports by post office) for non-EDI ports and SDF for EDI ports, along with invoice and other supporting documents. Recently, as part of simplification of process, the GR and PP form have been substituted by a new form called ‘EDF’ (export declaration form) and SDF has been merged with shipping bill. Please see RBI circulars. RBI/2013-14/254 A.P. (DIR Series) Circular No.43 September 13, 2013) and RBI//2014-15/599, A.P. (DIR Series) Circular No.101, May 14, 2015.

This value declared is required to be accepted and certified by the customs office, at the port of shipment. This is called “valuation of export”. Once the valuation of export is complete, the value is accepted both by RBI and its authorised dealer (the exporter’s bank). RBI then monitors, the remittance of an equivalent value in exporter’s bank account.

A ‘Software’ exported on a media (CD/DVD, magnetic tapes etc.) has to pass through these steps, as it is exported physically through a port of shipment, as physical goods.

In early 1990s, when Software Technology Park (STP) scheme came in to existence, the need to export Software through data communication links emerged. Customs department had difficulty in managing this, as nothing physical was visible in a Software transmitted, as well as did not have human resources and knowhow to deal with exports through telecom links.

DeitY (then Department of Electronics) enabled an innovation in government policy and could get RBI to announce SOFTEX form as an alternative to the GR/PP forms, to suit the export of Software, through data communication links.

STPI being the administrative authority of STP scheme, became the designated authority for “Software export valuation” and certification of SOFTEX form, in place of Customs. As on date the jurisdictional STPI Directors and SEZ Commissioners are the designated authority for SOFTEX valuation.

The purpose, policy and process of SOFTEX form is same as in GR/PP (or new EDF) form.

The only policy point difference between GR/PP or EDF form and SOFTEX form is that GR/PP forms are submitted and valued, simultaneous to the exports actually happening from port of shipment. Whereas, SOFTEX form is a post-facto approval, after the actual export of Software has actually taken place.

An important policy aspect to understand here is that before the SOFTEX form was launched the Software was put at par with ‘goods’ in the foreign trade policy, as policy makers could not conceive a trade in anything that is not ‘goods’. Even today, a services export in non-IT sector does not need any declaration or export valuation. Therefore, Software (IT and ITeS) was given a special status in international trade equivalent to ‘goods’.

Valuation of exports by Customs/STPI/SEZ is a crucial part of process

As described above, there are two policy aspects embedded here,

  1. Regulation of foreign remittances by RBI against export done by exporter (the origin of this procedure and policy behind lies in the name of GR form – “Guaranteed Remittance”) and
  2. Valuation of export done by Customs officials at port of shipment (by STPI/SEZ for SOFTEX)

The second part of the process is “valuation of exports”. Exporter declares the value of exports supported by relevant documents. The designated officer in customs/STPI/SEZ considers and certifies this value and has all right to reject the value declared or examine any declaration for overtly undervaluation or overvaluation. The process is very smooth and in more than 99.9999% cases the value is accepted and certified. Rejections are only subject to a real doubt, unlawful trade happening and exporter not able to justify genuine exports. The valuation is done under the Customs Valuation (Determination of Value of Export Goods) Rules. Since there is no separate rules defined for ‘Software’ and the export oriented units (STP, SEZ, FTZ, EPZ) operate under customs bond, the same rule applies to ‘Software’. In absence of a rule for non-EOU exporters the law would rely on same rule as well.

An export of goods and software without valuation is incomplete. RBI depends on designated officers for this valuation exercise as they are the ones who have delegated powers under the constitution to do so.

A form not certified by jurisdictional designated officer is incomplete, legally.

Who should not file EDF or SOFTEX?

An exporter of physical goods has no option other than filing EDF, as goods passes through the port of shipment managed by customs. Similarly, exporter registered under STP and SEZ has no option as the value to be accounted as exports by exporter is taken from the SOFTEX forms signed in name of the exporter.

Exporters of Software (both IT and ITeS companies) not registered in STP or SEZ (or other EOU schemes) scheme should also file SOFTEX, as per foreign trade policy.

Such exporters popularly called non-STP units can file for SOFTEX with jurisdictional STPI Director.

Only those exporters whose exports are not goods or Software can escape the filing of SOFTEX. The foreign remittances received as exports proceeds, without certification of EDF (replacement of GR/PP form) or SOFTEX form will fall in two categories, either a general service or an unlawful remittance.

Exports of services that do not fall under IT and ITeS category are exempted from filing the export declarations and certification required thereof.

What is covered under the term ‘Software’ in RBI circular

The RBI circulars on SOFTEX mentions exports of ‘Software’. It implies both IT and ITeS exports. The genesis lies in how foreign trade policy evolved, ever since STP scheme was added to the bandwagon of export oriented schemes.

‘IT’ covers both Software services and Software products (including SaaS). Software services is a whole lot of things from consulting to design, development, implementation, maintenance, re-engineering of Software or a Software product.

‘ITeS’ covers all those services that are delivered to clients across borders of India using an IT driven system and process over a telecom/internet link (include BPO, KPOs, Digitization, Call centers, Data processing etc.).

What happens if exporter does not file SOFTEX (or alternative EDF) form?

If SOFTEX (or EDF in case of physical exports) form is not filed, and exports proceed is realized, the remittance received is either treated as ‘general services’ or not as an export proceed or illegal.

For general services such as management consulting, technical services there is no declaration form.

Advice for Software product including SaaS companies

For Software exporting companies not operating under STP or SEZ, it is possible to bypass and get remittances without filing SOFTEX or EDF, under the guise of a ‘service’ export. There is no immediate threat of non-compliance, unlike the exporters in STP or SEZ.

However, not getting classified as ‘software’ can create problems in future. First problem created is your exports are not ‘Software exports’. The other problems can erupt from regulations in other areas of taxation etc. Complex Service tax rules can create problem. Any situation, where an exporter will need to prove and protect herself can end up in to a nightmare.

The important part here is the export valuation process by STPI, SEZ or Customs. Once EDF/SOFTEX form is certified, your export is also certifies as export of ‘Software’, under foreign trade policy.

For Software product companies including SaaS companies, is it advisable to mandatorily file SOFTEX form or and EDF form for Software product export in physical media, even when they are not part of STP, SEZ or similar schemes.

iSPIRT efforts in further liberalization of SOFTEX \EDF

Many argue, why this documentation. The need to declare export value, monitor foreign remittances, export valuation and balance of trade & payment accounting will not vanish for a nation state. There has to be some minimal documentation and process to fulfil all these needs.

However, there is scope for further liberalization and need for an easy liberal regime for ‘ease of doing business’.

iSPIRT is aiming for a 100% “Digital” SOFTEX and EDF run under aegis of RBI, where the process can be executed and compliance completed even at single invoice level or a monthly consolidated statement level, based on various practical needs, with export declaration fully ‘dematerialised’.

This is much needed for a ‘digital economy’ and can be a boon for exporters especially in SaaS segment and startups, where orders and invoices are generated online. And online interface can be extended in to a fully ‘digital’ export declaration regime of RBI.

India to progress to a Product Nation, in a digital world, has to take some of these steps. Sooner the better.