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iSPIRT’s response to Union Budget 2023

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

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

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

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

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

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

  • Digital Public Infrastructure: The resolve to deepen the DPI and the belief in their role in economic growth. India Stack to build the DPIs has become central to the thought process. Taking the queue ahead the budget 2023 announced the development of DPI for Agriculture, which will be an open source, OpenAPI digital public good, to build inclusive farmer-centric solutions, credit & insurance, farm inputs market intelligence. An Agriculture Accelerator Fund has been announced to promote Agritech start-ups.
  1. Vigyan Infrastructure: efforts to boost R&D, though limited to some sectors right now. Notable among these are – It encourages private sector R&D teams for encouraging collaborative research and innovation in select ICMR labs in the PPP model
  2. One hundred labs for developing applications using 5G services will be set up in engineering institutions. 
  3. Center of Excellence for AI for “Make AI in India and Make AI work for India
  • MSMEs funding & growth is part of the budget thought process, which may lead to the use of another DPI called Open Credit Enablement Networks (OCEN) for enabling MSME funding.
  • The importance of Ease of doing business is reflected in some announcements like using PAN as a Common digital identifier and entity DigiLocker for MSMEs.
  • Wanting to keep the startup revolution going is reflected in the intent to use Startups to build technology in multiple sectors and also use the policy for a new India.

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

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

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

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

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Union Budget 2020 – iSPIRT Recommendations

India is among the top startup ecosystems in the world with home to 50,000+ startups and 3,500+ funded startups growing at a rapid pace at 30 per cent. While the future outlook of the Indian startup ecosystem is definitely promising, further accelerated growth can happen only if the government introduces more startup-friendly policies, other than the existing support under ‘Startup India’.

With Budget 2020 less than two months away, the startup ecosystem is hoping to get a major boost with respect to the following measures:

  • Improve ease of doing business for startups.
  • Attract domestic and foreign investors.
  • Increase working capital flow for startups.

iSPIRT has made a 13-point recommendation list for Budget 2020 with respect to the above-mentioned measures:

1. Remove the TDS payment for DPIT registered Startups

Currently, payments to DPIT registered startups are subject to Tax Deduction at Source (TDS) of 10% under section 194J. It takes at least 1-2 years for startups to get refunds after filing of their returns, which blocks their working capital for that time period. 

2. Harmonise the Tax Rate and Holding Period between Listed and Unlisted Securities of Startups 

The higher holding period and higher tax rate disincentivise investments into startups from Indian sources. Globally, no such differentiation exists.

This recommendation seeks:

  • Reduction of the holding period for unlisted securities to 12 months from the current 24 months.
  • Levy of a lower tax rate of 10% on the sale of unlisted securities.
  • Removal of the “superrich” surcharge of 25%/37% on the sale of unlisted securities.

3. Change in the taxation of ESOPs for Startups:

The existing definition of Rule 3(8)(iii) of the Income Tax Rules, 1962 does not take into consideration the discrepancies in the determination of ‘Fair Market Value’.

The new recommendation seeks amendment to this rule as as per Rule 11UA(1)(c)(b), provided such fair market value shall not be less than the exercise price.”

4. Clarification on the February 19th, 2019 DPIIT circular on “Angel Tax” with regard to Form 2

This circular states that the exemption lapses in the case the startup has or will invest or conduct any of the activities below for a period of 7 years after investment, inter alia:

  • Make capital contributions to other entities, 
  • Make investments in shares and securities, 
  • Give loans and advances (except in the case of lending startups

The recommendation seeks an amendment to this notification

  • Extend the “business model” test applicable to all the other investments mentioned in Form 2 to all points mentioned therein
  • Allow Startups to make Loans and Advances in the ordinary course of business provided that the PAN of the recipient is reported
  • Allow startups to invest into shares and securities and make capital contributions provided that such downstream investments do not make further investments into any of the other points listed in Form 2

5. Allow for AIF expenses to be capitalised/passed-through

Expenses of an AIF can add up to up to 25%-30% of its corpus during the lifetime of a scheme, making a large chunk of the fund is a “dead-loss”.

The new recommendation seeks AIF expenses to be capitalised as the Cost of Acquisition or allowed to be set off against the income.

6. Classification of securities held by AIFs as Capital Assets by amending section 2(14) of the Income Tax Act, 1961.

There is still friction between the startups, investors and income tax department with respect to taxation of short-term gain from the sale of securities under AIF.

The new recommendation seeks an amendment to Section 2(14) as “any securities held by a Foreign Institutional Investor or AIF which has invested in such securities in accordance with the regulations made under the SEBI. 

7. Pass-Through Status for CAT III AIFs

Unlike CAT I and CAT II AIFs, CAT III AIFs do not have pass-through tax status, rendering their income to be taxed at the maximum marginal rate for their income earned, regardless of the tax status of the underlying investor.

The new recommendation seeks an amendment to Section 115UB and Section 10(23FBA) by including CAT III AIFs.

8. Allow Universities and Public Trusts to invest in AIFs

Currently, investments are allowed in SEBI registered Mutual Funds or notified Mutual Funds set up by a public sector bank or a public sector financial institution.

The new recommendation seeks an amendment to this section to include ‘Units of an Alternative Investment Fund registered with the Securities and Exchange Board of India”

9. Notify all SEBI registered AIFs as “long-term specified assets” under section 54EE

Section 54EE was introduced on April 1, 2016, to give capital gains exemption of Rs 50 lakhs for any gains invested into “long-term specified assets”, defined as “a unit or units, issued before the 1st day of April 2019, of such fund as may be notified by the Central Government in this behalf”

So far, the Central Government hasn’t notified any such funds, so no tax-payer has been able to avail of this benefit.

The new recommendation seeks issuance of a Central Government notification to notify all SEBI registered AIFs as “long-term specified assets” under section 54EE and announce measures to extend this to April 1, 2025.

10. Time-bound response from the Inter-Ministerial Board (IMB) and allowing all startups to reapply

The IMB has not been effective yet in timely responses to startups.

The new recommendation proposes DPIIT to issue a notification stating that:

  • IMB will respond in 60 days from the date of submission by the Startup.
  • Startups who were denied IMB recognition prior to February 19th, 2019 can re-apply for IMB recognition once again under the new criteria.

11. Exempt Software product Companies from Softex

Software product exporters are required to file SOftex form to report the inward remittance on export invoices in convertible foreign currency. However, Software products have a publicly listed MRP/List price and hence do not require any valuation.

The new recommendation seeks RBI to exempt software product companies from filing Softex and create a separate category of Purpose code for disposal of inward remittances by authorised dealers.

12. Creation of aHSN code for Software Product Startups

Under the GST regime, all IT Software has been treated as “Service”.  Yet, there exists HSN codes and SAC codes both. 

It is recommended that an HS code classification for specific categories can be issued using the last 2 digits (first 6 Digits being defined under international system). 

13. R&D Credits for Software Product Companies 

As startups and young software product companies don’t have taxable profits, they are unable to take advantage of current R&D tax benefits that involve setting off R&D expenses against taxable profits. To overcome this limitation, they should be allowed a deferred tax credit for up to 7 years after the R&D investment.

You can read about Budget Representation 2020 in detail here.

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A budget for “Digital Economy” sake

Looking deeper in to the budget 2017.

[An immediate official iSPIRT response to the budget was issued as a Press release on 1st FEB 2017. It is placed in media section. You can access it here.]

Budget can’t be construed as main stream policy making exercise. Yet, the policy analysts and experts, track it with utmost seriousness, to understand Government’s thought process in economic policy. Similarly, industry looks in to budget for the sectoral emphasis, allocations that will influence the demand/ supply, reforms and special provisions in the sector. A reminiscent of this in recent period of history is 2012-13 budget speech of then finance minister Pranab Mukherjee, when analysts were counting how many times he used “inclusive growth” as a phrase.

This budget speech was unique in many sense and very tactical. The proposed GST regime, the rigours of demonization and skepticism of coming state elections have all effected this budget. The usual rigmarole by media of comparing prices of commodities and consumer goods from cigarettes, electronics to automobiles is missing.  GST being in pipeline, the indirect tax section, which was usually the largest section of finance bill is almost missing. Hence, allocation of resources and the direct taxes had all the share of FM’s mind in budget. The new item on the block is “Digital economy”.

We have been seeking attention of Government on:

  • increasing domestic demand,
  • promote innovation (Startups)
  • ease of doing business and
  • level playing field for Indian companies.

These four parameters impact our “product nation” focus. Let us briefly analyse how these have been taken care in the budget.

Influencing Domestic Demand function

The usual model of a demand stimulating economic policy has been based on consumption led demand relying mainly on sops and taxes for several years with doses of investment driven demand and growth from time to time.

Increased efficiency, transparency, formalization of economy and investment driven growth are four major thoughts embedded in this budget. The former three are additional determinants of demand function of emerging new economies and a means to achieving developmental agenda. Relying mainly on investment driven demand and growth is very need of the time of low sentiments.

A big measure towards increased efficiency is the change from plan and non-plan classification of expenditure. “This will give us a holistic view of allocations for sectors and ministries. This would facilitate optimal allocation of resources”, said the FM in speech.

The agriculture and rural sector of India cannot be ignored by any Govt. Hence, increased focus in budget on these two important sectors is about inclusive growth, and also in “Digital economy” perspective an attempt to avoid a digital divide.

Both continual emphasis on infrastructure investment and targeting doubling farmer income will provide an investment driven demand push and a consumption driven demand function at higher level.

What is most heartening on domestic demand side for ICT sector is the huge recognition of the “Digital Economy” in the budget. For past some years iSPIRT has been pursuing the “Digital economy” agenda at various forums. There was cautious optimism, but not full acceptability. Thanks to demonetization, “Digital” is now a mainstream concept.

Devoting a full section in his speech on “Digital economy” and dealing with it in ‘direct tax’ provisions speaks a volumes of the mind share this has taken at top in the present Govt. The finance minister stated in his speech, “Promotion of a digital economy is an integral part of Government’s strategy.”

Further, the finance minister said, “Government will consider and work with various stakeholders for early implementation of the interim recommendations of the Committee of Chief Ministers on digital transactions.” This is especially important for iSPIRT as Nandan Nilekani and Sharad Sharma of iSPIRT are special invitees on this committee.

The demand conditions for ICT  sector can best be boosted by increased adoption of the ICT by masses and the businesses, especially the SME businesses. This throws open a number of opportunities for many new startups to emerge and contribute to the development of an ecosystem, friendly to “Software product”.

Following are the notable announcements in the budget on “Digital economy” Steps:

  1. Stepped up the allocation for BharatNet Project to Rs. 10,000 crores in 2017-18.
  2. Targeting high speed broadband connectivity on optical fibre in more than 1,50,000 gram panchayats, with wi-fi hot spots and access to digital services
  3. A “DigiGaon” initiative will be launched to provide tele-medicine, education and skills through digital technology
  4. No transaction above 3 lakh should be permitted in cash.
  5. Limit the cash expenditure allowable as deduction, both for revenue as well as capital expenditure, to Rs. 10,000. Similarly, the limit of cash donation which can be received by a charitable trust is being reduced from Rs. 10,000 to Rs. 2000.
  6. All indirect tax/ duty exempted on miniaturised POS card reader for m-POS, micro ATM standards version 1.5.1, Finger Print Readers/Scanners and Iris Scanners. Also components for manufacture of such devices exempted.
  7. Increased digital transactions will enable small and micro enterprises to access formal credit. Government will encourage SIDBI to refinance credit institutions which provide unsecured loans, at reasonable interest rates, to borrowers based on their transaction history.
  8. To make MSME corporate tax with annual turnover up to 50 crores will be 25%
  9. Presumptive income tax for SME tax payers whose turnover is up to 2 crores reduced from 8% to 6%.
  10. BHIM app with cashback and referral schemes
  11. exemption of service charge on railway bookings,
  12. Aadhaar based smartcards for Senior citizens
  13. Create a Payments Regulatory Board in the Reserve Bank of India by replacing the existing Board for Regulation and Supervision of Payment and Settlement Systems.

Also Government has on mid the ‘indigenous’ in ICT sector. This is reflected by the proposal on metro rail policy for upcoming metro infrastructure across the country. The budget statement reads, “A new Metro Rail Policy will be announced with focus on innovative models of implementation and financing, as well as standardisation and indigenisation of hardware and software.”

Further in related electronic sector, the budget has exponentially increased the allocation for incentive schemes like M-SIPS and Electronic Development Fund (EDF) to 745 crores in 2017-18. The draft National Policy on Software Product already intends to have a synergy with the EDF in PPP model.

This is not enough on “Digital economy” if the Government itself does not implement the “Digital” in its own functions in pervasive manner. The thought process of the Government seems to be aligned in this direction also.

The Finance Minister has said in his speech, ”we are trying to bring in maximum use of Information Technology to remove human contact with assesses as well as to plug tax avoidance.” 

Innovation and Startups

Both innovation and Startups still occupy the thought process at top leadership level. There are signals and clear provisions indicating this.

The income tax exemption window slider for Startups, approved under DIPP, has been increased for 3 years in five years to 3 years in 7 years.

Another new measure is promoting innovation right at secondary education level and in backward areas. “An Innovation Fund for Secondary Education will be created to encourage local innovation for ensuring universal access, gender parity and quality improvement. This will include ICT enabled learning transformation. The focus will be on 3479 educationally backward blocks”, mentions the Finance minister, in budget speech.

Ease of doing business

Ease of doing business is an important topic in PART-B of the content list of budget document. Hence, its importance in thinking process of Government.

iSPIRT has pursued a Stay-in-India-checklist with the Department of Policy and Promotion (DIPP) with an intent to remove various frictions faced by industry in funding, company formation, corporate regulation and taxation issues. A number of steps have been taken up by Government in past one year to sort out these issues.

Announcements like abolition of FIPB, rationalization of taxation (on FPIs, convertible instruments, long term capital gains, etc), lower rate of taxation of 25% for companies with revenue of less than 50 crores, rationalization of labour laws, carry forward of MAT for 15 years, etc. are all in line with the philosophy of iSPIRT’s Stay-in-India checklist.

Among key issues from the Stay-in-India checklist which were expected to be addressed in the budget but have been missed out are angel tax and tax parity between listed and unlisted securities etc.

Level Playing Field

There many ‘level-playing field’ issues that iSPIRT has been taking up with the ministry of finance. Most in taxation domain. None of these issues have been addressed in this budget also e.g. TDS on sale of software, service tax on B2C sales of domestic products.

We hope the proposed National Policy on Software product will crystallize ground for taking up specific ‘Software product’ industry issues with Government in future.

Conclusion

Overall the budget is very encouraging. The main take away for iSPIRT is “Digital economy” recognition. We have to further leverage this in our policy initiatives with different departments in Government and most importantly with MeitY to realize the dream of “Product Nation”.

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Budget recognises the Software Product Industry #Budget2014 #ProductNation

The Union Minister for Communications and Information Technology Sh. Ravi Shankar Prasad spoke to iSPIRT members on July 1 in Bangalore during his first ever visit as Minister. Reacting to the pitch by iSPIRT members about transforming the face of India through a strong software product industry, Sh. Ravi Shankar Prasad strongly endorsed the Government’s backing to the industry.

Government to Transform India into a Software #ProductNation from iSPIRT // ProductNation on Vimeo.

What started as a conversation ten days back has today been further reaffirmed by the Hon’ble Finance Minister and Defence Minister Sh. Arun Jaitley in Parliament. In his budget speech Sh. Jaitley recognized and mentioned the Indian Software Product Industry as one of the key industries of growth.

iSPIRT believes that the software product industry in India is an enabler for many other industries like Defense, Electronics and Communications. The creation of 100,000 Software Product Companies in India can potentially lead to direct and indirect employment of 3.5 million people and the creation of $500+ billion in market value in a decade.

With the impetus that the Government has initiated, there is no reason why the next Facebook, Google or Whatsapp should not emerge out of India. In fact, Software products have a clear role in shaping various core sectors of the economy including agriculture, education and healthcare and bring efficiencies and cost benefits to the masses.