The future of ‘civic’ technologies after COVID-19

In 1973, the British economist Ernst Schumacher wrote his manifesto “Small is Beautiful”, and changed the world. Schumacher’s prescription — to use technologies that were less resource-intensive, capable of generating employment, and “appropriate” to local circumstances — appealed to a Western audience that worried about feverish consumption by the ‘boomer’ generation. Silicon Valley soon seized the moment, presenting modern-day, personal computing as an alternative to the tyranny of IBM’s Big Machine. Meanwhile, in India too, the government asked citizens to embrace technologies suited to the country’s socio-economic life. Both had ulterior motives: the miniaturisation of computing was inevitable given revolutions in semiconductor technology during the sixties and seventies, and entrepreneurs in Silicon Valley expertly harvested the anti-IBM mood to offer themselves as messiahs. The government in New Delhi too was struggling to mass-produce machines, and starved of funds, so asking Indians to “make do” with appropriate technology was as much a political message as it was a nod to environmentalism.

And thus, India turned its attention to mechanising bullock carts, producing fuel from bio-waste, trapping solar energy for micro-applications, and encouraging the use of hand pumps. These were, in many respects, India’s first “civic”, or socially relevant technologies.

The “appropriate technology” movement in India had two unfortunate consequences. The first has been a celebration of jugaad, or frugal innovation. Over decades, Indian universities, businesses and inventors have pursued low-cost technologies that are clearly not scaleable but valued culturally by peers and social networks. (Sample the press coverage every year of IIT students who build ‘sustainable’ but limited-use technologies, that generate fuel from plastic or trap solar energy for irrigation pumps.) Second, the “small is beautiful” philosophy also coloured our view of “civic technologies” as those that only mobilise the citizenry, out into farms or factory floors. Whether they took the form of a hand pump, solar stove or bullock cart, these technologies did little to augment the productivity of an individual. However, they preserved the larger status quo and did not disrupt social or industrial relations as technological revolutions have historically done. 

Nevertheless, there has always been a latent demand in India for technologies that don’t just mobilise individuals but also act as “playgrounds”, creating and connecting livelihoods. When management guru Peter Drucker visited post-Emergency India in 1979, Prime Minister Morarji Desai sold him hard on “appropriate technology”. India, Drucker wrote, had switched overnight from championing big steel plants to small bullock carts. Steel created no new jobs outside the factory, and small technologies did not improve livelihoods. Instead, he argued, India ought to look at the automotive industry as an “efficient multiplier” of livelihoods: beyond the manufacturing plant, automobiles would create new sectors altogether in road building and maintenance, traffic control, dealerships, service stations and repair. Drucker also pointed to the transistor as another such technology. Above all, transistors and automobiles connected Indians to one another through information and travel. Drucker noted during his visit that the motor scooter and radio transistor were in great demand in even far-flung corners, a claim that is borne by statistics. These, then were the civic technologies that mattered, ones that created playgrounds in which many could forge their livelihoods. 

The lionisation of jugaad is an attitudinal problem, and may not change immediately. But the task of creating a new generation of civic technologies that act as playgrounds can be addressed more readily.  In fact, it is precisely during crises such as the ongoing COVID-19 pandemic that India acutely requires such platforms.


Consider the post-lockdown task of economic reconstruction in India, which requires targeted policy interventions. Currently, the Indian government is blinkered to address only two categories of actors who need economic assistance: large corporations with their bottom lines at risk, and at the micro-level, individuals whose stand to lose livelihoods. India’s banks will bail out Big Business, while government agencies will train their digital public goods — Aadhaar, UPI, eKYC etc — to offer financial assistance to individuals. This formulaic approach misses out the vast category of SMEs who employ millions, account for nearly 40% of India’s exports, pull in informal businesses into the supply chain and provide critical products to the big industries.

To be sure, the data to identify SMEs (Income Tax Returns/ GSTN/ PAN) exists, as do the digital infrastructure to effect payments and micro-loans. The funds would come not only from government coffers but also through philanthropic efforts that have gained steam in the wake of the pandemic. However, the “playground” needs to be created — a single digital platform that can provide loans, grants or subsidies to SMEs based on specific needs, whether for salaries, utilities or other loan payments. A front-end application would provide any government official information about schemes applied for, and funds disbursed to a given SME.

Civic technologies in India have long been understood to mean small-scale technologies. This is a legacy of history and politics, which policymakers have to reckon with. The civic value of technology does not lie in the extent to which it is localised, but its ability to reach the most vulnerable sections of a stratified society like India’s. The Indian government, no matter how expansive its administrative machinery is, cannot do this on its own. It has to create “playgrounds” — involving banks, cooperative societies, regulators, software developers, startups, data fiduciaries and underwriting modellers — if it intends to make digital technologies meaningful and socially relevant.  

Please Note: A version of this was first published on Business Standard on 17 April 2020

About the author: Arun Mohan Sukumar is a PhD candidate at the Fletcher School, Tufts University, and a volunteer with the non-profit think-tank, iSPIRT. He is currently based in San Francisco. His book, Midnight’s Machines: A Political History of Technology in India, was published by Penguin Random House in 2019

Disciplining The Not So Angelic, Angel Tax

If you are an entrepreneur, investor, or simply interested in the start-up sector, then you already know that Angel Tax is the buzzword right now.

Based on a law that was introduced in the 2012 budget by Mr Pranab Mukherjee, the rule aimed to target money laundering through high share premium. But unfortunately, the same provision is today attacking startups for their “high” share premiums and treating the difference between book value and DCF (Discounted Cash Flow) projections as income taxable at 30%. (For those interested in a more in-depth study of the provision and associated rulings can check out this article.

Thus, a law to penalize shell corporations and sham transactions are now being used against startups employing tens of people and generating value for the community.  Valuations are usually based on a startup’s future potential for growth and revenue and using book value, a method that’s better suited to asset-heavy manufacturing industries, is like measuring time in light years – it sounds right but is blatantly inappropriate

Hence the problem. This section hasn’t kept pace with the other anti-laundering and anti-abuse measures instituted by law and has become a blanket provision with little opportunity for a Startup to distinguish itself from a fake business. It also specifically discriminates against domestic investments thereby discouraging both investors and startups from accepting investments from Indian residents.

Latest changes, notified just yesterday, provide some way out for certain startups. However, this is a partial solution to a much larger problem, the CBDT needs to solve for the basic reason behind the cause of Angel Tax to be able to give a complete long-term solution to Indian Startups.

While the share capital and share premium limit after the proposed issue of share is till 10 crores and helps startups for their initial fundraising, which is usually in the range of Rs 5-10 Cr. Around 80-85% of the money raised on LetsVenture, AngelList and other platforms by startups is within this range, but the government needs to solve for the remaining 15-20% as startups who are raising further rounds of capital, which is the sign of a growing business, are still exposed to this “angel tax”. Instead, the circular should be amended to state that section 56(2)(viib) will not apply to capital raises up to Rs 10 Cr every financial year provided that the startups submit the PAN of the investors.

The notification also introduces the concept of an “accredited investor” into the startup ecosystem, which is an acknowledgement of the role that domestic investors play. Globally, an accredited investor tag is given to sophisticated investors investing in risky asset classes to denote that they acknowledge the risks associated with such investments and that they have the financial ability to do so. But instead of fulfilling both criteria of income and net worth, they should follow the global model of fulfilling either criteria and lowering the threshold to 25 lakhs of income or a net worth of Rs 1 crore. Their investment into startups should be excluded from the scope of section 56(2)(viiib). As a process mechanism if the CBDT could put in place a simple once a year mechanism for the Investor to submit his returns and giving him a reference number valid for the financial year, this will enable him to invest in more startups in the year without the need to get permissions every time the investor invests his funds.

Most importantly, any startup who has received an assessment order under this section should also be able to for the prescribed remedies and submit this during their appeal. They should not be excluded from this circular since its stated scope is both past and future investments. The CBDT should also state that the tax officers should accept these submissions during the appeals process and take it into consideration during their deliberation.

So, to summarise:

  • The angel tax should not apply to any investment below Rs 10 crore received by a startup per year, from Indian investors provided that the startup has the PAN of the investors
  • The angel tax should not apply to investors who have registered themselves with DIPP as accredited investors, regardless of the quantum of investment
  • The threshold stated should be either a minimum income of Rs 25 lakhs or a net worth of at least Rs 1 crore
  • Any startup who has received an assessment order should be able to seek recourse under this circular during their appeal

Through this circular, DIPP has reaffirmed its commitment to promoting entrepreneurship and startups in India. With these suggestions, the spectre of the “angel tax” will end up as a footnote in the history of the Indian startup ecosystem. We look forward to these pending matters

Start up India, Stand up India.

The post is authored by our policy experts, Nakul Saxena and Siddarth Pai.

Ease of Doing Business – Is India Game?

Conducting business in one’s own country is never easy, let alone conducting business overseas, where rules, regulations and business environments differ. ‘Ease of doing business’ is also an Index created by the World Bank. It ranks economies from high to low, with the former indicating easier, simpler and better conditions for business as compared to the latter, indicating difficulty in conducting business. This article aims at giving you a glimpse into the world of  investing in and conducting a business in India.

ease-of-doing-business-is-india-game

Economies are ranked based on parameters such as starting a business, dealing with construction permits, availability of electricity, registering property, availing credit, protection of minority investors, paying taxes, international trading, distance to frontier, entrepreneurship, good practices, transparency in business regulation, resolving insolvency and enforcing contracts. For any business, It is important to acknowledge these factors, or at least those that apply, as they decide how easy or difficult it is to conduct or start the business in a country.

For the year 2016 by World Bank’s records- India moved up from 134th to 130th rank in the Ease of doing business Index. Among the parameters mentioned earlier, India has best ranked in the protection of minority shareholders. It has also bettered its rank in availability of electricity, getting construction permits and starting a business. On the downside, paying taxes and accessing credit have been the most difficult for business. Additionally, two key parameters that India needs to work on are enforcing contracts and resolving insolvency, that have both been a hindrance in conducting business.

To give you an idea of how few other countries fare in the rankings; Singapore, New Zealand and Denmark occupy the first three spots in the world, whereas Eritrea, Central African Republic and Libya occupy the last three spots.

The Indian Government has taken several initiatives towards increasing the ease of doing business, here are some that deserve a mention:

Registration

  • The availability of www.ebiz.gov.in, a Government portal where services are provided such as employee registration, name availability, Director Identification Number, PAN, Certificate of Incorporation, TAN, RBI (Foreign Remittances), EPF, Importer-exporter code, Foreign currency – transfer of shares, etc. Making registering and running a business much easier than before.
  • Now Aadhaar eKYC and eSign are being used to grant Digital Certificates to directors (DSC) of the company. This process is now made paperless and takes only a few minutes.
  • The requirements for minimum paid-up capital and common seal for companies has been removed as per the Companies (Amendment) Act, 2015 and the process for starting a business is now streamlined.
  • The Indian Prime Minister has shown particular interest in building a positive entrepreneurial spirit. He launched MakeInIndia, a website helping young entrepreneurs set up, access information, and build a business of their own.
  • Employee Provident Fund Organisation (EPFO) and Employee State Insurance Corporation have online portals so that businesses have real-time registration, online application for clearances and payments be made through 56 partner banks.
  • An Investor Facilitation Cell has been introduced as a first in order to help investors and guide them through the course of their business.

Taxation

  • GST(Goods and Service Tax) will replace indirect-tax, to be implemented by 2017. That is the removal of several layers of multi-layered taxes and multiple tax rates into one uniform Goods and Service Tax. This will make India attractive to foreign Investors as well as boost India’s exports because of less regulatory and bureaucratic tangles.

Infrastructure

  • In cities like Delhi and Mumbai, online construction permits such as DPMS(Development Permissions Management Systems) are in the process of being launched. Since the permits are completely digitized, the biggest impact this will have is speeding up the process of getting a permit by 5-8 months. It will save one the trouble of meeting someone in person, which has a direct positive impact on reducing corruption, delayed work and human error to a large extent.
  • A business being affected by a cyber crime is every founder and investors’ nightmare. Training programmes for officers in the sensitization towards cyber crimes and related infringements is also a significant initiative taken by the Indian Government.
  • Special management teams have been set up to fast track and facilitate investments made to India from South Korea or Japan. The plans are coined ‘Japan Plus’ and ‘Korea Plus’.

Compliance

  • If your business deals with cross-border trading, you’re in luck. The Government has made the process highly efficient by reducing the time utilised at ports and airports. Necessary clearances for exporters and importers has also been prioritized. As a result of the improvements made, export and import clearance that once used to take nearly 5 and 11 days has reduced by more than half the time.
  • Minority shareholder’s Interests are well protected in India. Apart from ranking high on the ‘ease of doing business Index’, greater disclosure is now required of the board members on matters of ‘conflict of interest’.

Legislations

  • A National Company Law tribunal and appellate tribunal was set up to replace the existing Board for Industrial and Financial Reconstruction(BIFR) and Company Law Board(CLB). The National Company Law Tribunal was set up to resolve corporate disputes faster and efficiently, to examine existing laws that relate to winding up procedures and to suggest reforms regarding winding up and insolvency in an effort to match up to international standards and practice in this field.
  • The ease of doing Business in India is also about exiting a business efficiently as much as it is about starting and running one. Thankfully, the Government is soon to enact the ‘Bankruptcy Code’, which will make it easier for investors to exit a business in case of Insolvency.  At present, it takes 4 years to resolve an issue related to insolvency. With the new code, time taken to exit from a business will be reduced to a period of under a year.

Foreign companies that invest in Indian businesses have contributed heavily to India’s economic growth over the past years. The Government has set up FDI and FEMA measures to increase economic activity, set regulations and caps on sectors and generate employment opportunities.

  • Foreign Direct Investment (FDI)

Money that India receives from investors abroad is FDI. Foreign companies that invest in Indian businesses gain a monetary advantage in terms of labour wages and benefit from the high economic growth rate prevailing in India.

The Foreign Direct Investment allowed for an Entity based in another country is:

Sector FDI Allowed
Direct route Indirect route
Insurance and Pension 49%
Defence 49% above 49%
DTH, Cable, sky broadcasting 100%
Brownfield Airport Projects 100%
Scheduled Air Transport Services 49% 49%-100%
Foreign Airline Companies 49% of paid up capital Upto 49%
Marketplace Model of e-commerce 100%
Food products manufactured/produced in India 100%
Asset Reconstruction Companies 100%
Brownfield Pharmaceuticals 74% above 74%
Private Security Agencies 74%
Non ‘News and Current Affairs’ linking channel 100%
Mining and Mineral separation of Titanium Upto 100%
Publishing/Periodicals/Journals Upto 100%
Publication of foreign newspapers Upto 100%
Publication of Indian versions of foreign magazines Upto 26%
Satellites Upto 100%
Telecom 49% 49%-100%
Banking Private Sector 50%-Upto 74%
Banking Public Sector Upto 20%
FM Radio Upto 49%
NBFC 100%
Commodity Exchange 49%

(Figures as of August 2016)

Source: http://www.makeinindia.com/eodb

  • The Foreign Exchange Management Act, 1999 (FEMA)

The Foreign Exchange Management Act, 1999 was set up with the aim of Increasing foreign exchange through increasing external trade and promoting foreign exchange markets in India. All Offences relating to Foreign exchange are considered Civil offences.

Some of the revisions in regulations of FEMA to promote the ease of doing business are:

  • Acquisition and transfer of fixed/immovable property – several conditions for which RBI approval is no longer required to buy immovable property outside India by a company registered in India.
  • Possession and Retention of Foreign currency – an individual can have up to a maximum of USD 2000 in foreign currency at any time. This applies in all cases other than if the individual is not  a permanent resident of India, he obtained the foreign currency while being resident outside India or if such currency was brought in compliance with the laws applicable.
  • Export and Import of Foreign Currency – the upper limit of notes an individual can take outside the country or bring into India is INR 25000(currency notes or RBI notes).
  • Import of Foreign Exchange – foreign exchange sent to India has no upper limit except in the case of currency notes, traveler’s cheques and bank notes. The upper limit on these types is USD 10000.
  • Postal Order/Money Order – any person can buy foreign exchange from any Indian Post Office in the form of money order or postal order.
  • Declaration of exports – for businesses that are either engaged in exports or those that are set up in Special Economic Zones or Special Technological Parks need to declare their exports backed up with evidence.
  • Insurance – regulations that are stated for an individual resident in India that avails a general or a life insurance policy issued by an insurer outside India and vice-versa.

Routes to Invest in India

  • Automatic/ Direct Route – No permission from the Central Government required under this route.
  • Government Route – Applications that are considered by the Foreign Investment Promotion Board (FIPB) come under this route.

Who can Invest in India?

  • An Individual – FCVI, Pension/PF, Financial Institutions.
  • A Company – Non-Resident Indians, Foreign Trusts, Wealth Fund.
  • Foreign Institutional Investors – Private Equity Funds, Partnership Firm, Proprietorship Firm.

Note: Investors from Pakistan and Bangladesh can Invest only through the Government of India. Residents from Pakistan cannot invest in Defence, Atomic, Space and other select sectors of the economy.

Foreign Investors can invest in India in the following ways:

  • Incorporating a company – Either a ‘Private limited’ or a ‘Public Limited’ Company.
  • Sole Proprietorship/Partnership – Under RBI approval.
  • Limited Liability Partnerships – Allowed under Government Route in sectors that have 100% FDI.
  • Other Structures – Non for Profit entities, etc. are subject to FCRA regulations.

The steps an Investor should follow before investing are:

  1. Identify Sector
  2. Obtain Central Government approval if required for that sector
  3. Transfer Funds through eligible financial instruments
  4. Meet the stipulated requirements of the RBI Act
  5. Registration and Document Filing (PAN, TIN)
  6. Find Ideal Space and obtain clearances, if any
  7. Obtain Licence/s if required
  8. Finding staff, paying taxes, etc

Taxation

  • An individual – Is taxed on the net income earned based on the tax bracket.
  • A company – 30% tax + surcharge + education cess. Profits withdrawn are Taxed.
  • Branch Office or Permanent Establishment – 40% + surcharge + cess.

Incentives provided by the Government

  • Special Economic Zones (SEZ), Export Oriented Units (EOU) and National Investment and Manufacturing Zones (NIMZ) offer incentives such as tax reduction and tax holidays for businesses set up in such zones. Manyata Tech Park and Eco-Space are examples of SEZ’s.
  • Incentives on exports such as duty remission/exemption scheme, market schemes, focus products, duty drawback, etc.  to increase exports.
  • Area based Incentives for operating in particular areas of India such as Uttarakhand, Assam, Jammu and Kashmir, etc.
  • Apart from these Incentives, each State Government has its own incentive policy.

It is safe to say that with the Governments several acts and initiatives to stimulate increased investment and growth, India has truly built favourable all-round business conditions. India emerged as the top destination for foreign direct investment (FD) by capital investment in 2015, attracting $65 billion worth of investments, overtaking China and USA. Business in India? Absolutely.