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Need to Remove SOFTEX form and TDS on Software products immediately

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

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

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

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

SOFTEX form

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

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

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

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

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

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

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

TDS on Software

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

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

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

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

The TDS provisions

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

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

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

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

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SMBs and Indian Software Product Industry: Intertwined Fortunes

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. ― Winston Churchill

Small and Medium Sized Businesses (SMBs), the growth engine of India, are on the threshold of a tremendous opportunity. Globalization of trade and the rapid proliferation of computing and communication technologies are affording them a platform to expand their reach to national and global markets and compete head-to-head with global players. But on the flip side, those SMBs that do not recognize and capitalize on this wave quickly are likely to be swept away by the stiff global competition. If SMBs are to successfully counter global competition in their own backyard and elsewhere, they need to adopt software technology on a large scale, enabling them to run their businesses efficiently and effectively. But, few SMBs have the financial muscle or the technical know-how necessary to implement customized software solutions. Therefore, the majority of 13 million SMBs would count on standard business application software that requires minimum upfront investment and ongoing maintenance, to fuel their growth. Such software is distinct from the software deployed in large corporations and I refer to this as ‘Small Business Application Software (SBAS)’ to distinguish it from large enterprise application software.

Business application software (SBAS) such as accounting software, ERP, CRM etc., offers multiple benefits to SMBs –

  • As shown by research, SBAS significantly enhances the internal productivity of SMBs as well as their ability to manage relationships with vendors and customers, leading to superior firm performance.
  • It forces SMBs to adopt standard processes and best practices, moving them rapidly up the quality and value curve.
  • Most important of all, by streamlining day-to-day operations, it not only frees up the entrepreneur’s time for strategic planning but also assists her with the tools needed to make informed strategic decisions.

 

The question now arises – How can Indian SMBs get the right fuel for their growth? This is where a vibrant Indian software product industry plays a critical role. Indian SMBs cannot realize productivity and performance gains from software that is designed for developed markets. This is because the business environment in India (and other emerging markets) is substantially different from that of developed markets. It is volatile, with frequent regulatory changes, and rife with institutional and infrastructural challenges. For instance, there were 340 updates to Indian tax laws last year. That’s more than one tax law update every business day! Therefore, SMBs need software products that can buffer them from such volatility and help overcome the challenges associated with operating in this unique and dynamic environment. This is possible only when products are designed specifically for the Indian SMBs – and this is best done by a strong indigenous software product industry.

Indian software product companies are better positioned than foreign firms to support the Indian SMB market. This is because,

  • They have lower cost structures which allow them to meet the stringent price-performance expectation of Indian SMBs.
  • Further, because of their familiarity with the operating environment, they can build effective channels to drive software awareness and adoption among Indian SMBs- remember that Indian SMBs are more like enterprise customers than individual buyers in that they expect suppliers to sell to them.

 

In summary, there is a symbiotic relationship between SMB growth and a robust software product industry in India. SMBs need the software product industry to power the next phase of their growth and make them globally competitive. At the same time, the Indian software product industry, having missed out on the individual productivity and communication software wave, can leverage the large SMB market in India to establish itself as a global leader in the SBAS space. In other words, software product industry is the fuel for the SMB engine and the SMB engine can drive the Indian software product industry towards SBAS leadership. By moving in lockstep and moving quickly, India can create a competitive SMB sector and a vibrant software product industry.