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Less Tax, Better Policies

Protecting user data, enhanced capital support to start-ups and changes in IT sector laws can transform India into a digitally empowered society
Rukmini Rao | Print Edition: June 14, 2020
Less Tax, Better Policies
Illustration by Raj Verma

It's a fight for survival now and I hope youngsters don't lose heart," says a leading angel investor, who has been spending a lot of time these days "trying to boost the morale" of start-up founders of his portfolio companies.

Last year, the government released a report on how India has the potential to create $1 trillion of economic value from the digital economy by 2025, up from the current $200 billion. Nearly 50 per cent is expected to come from new digital ecosystems in sectors such as financial services, agriculture, healthcare, logistics, e-governance and others.

The virus outbreak has, however, thrown a spanner in the country's growth story. Though $1 trillion looks like a distant dream, timely changes in policy and subsequent implementation can still do some damage control.

Data, the New Gold

According to the latest report published by the Internet and Mobile Association of India (IAMAI), India had 504 million active Internet users at the end of March 2020. The country added 30 million rural users compared to March 19, a growth largely fuelled by cheap data. Indians are generating a huge amount of data, which has led to a number of deals in the tech space. Among the big-ticket ones is the Reliance Jio-Facebook deal, where Facebook invested $5.7 billion (Rs 43,574 crore) in Jio platforms for a 9.99 per cent stake.

The deal has exposed shortcomings in India's data protection laws. Though both companies have not stated how they plan to leverage data on Indian customers, former Supreme Court judge, Justice B.N. Srikrishna, who headed the committee on data protection laws, has raised a red flag over the lack of a regulator to oversee privacy concerns emanating from such deals. Such a data deal happened "precisely because there is no law", Justice Srikrishna said in a webinar. Raising concerns around the lack of a redressal mechanism in case of a data breach, Justice Srikrishna said, "Without the Personal Data Protection Act coming into force, where is the regulator?"

Echoing his view, Rahul Matthan, Partner, Trilegal, said the country desperately needs privacy laws. "These deals will happen and without a regulator, we are relying on the two respective companies being good citizens and not violating the terms of their own privacy policy," he adds.

Another incident that brought data protection laws in focus is the compulsory download of the government's own contact-tracing app Aarogya Setu. Internet freedom groups slammed the move, after which the government softened its stand on the download.

India's Personal Data Protection Bill, 2019, introduced in the Lok Sabha in December last year, has been referred to a Parliamentary Standing Committee. The Bill aims at the establishment of a Data Protection Authority.

Digital Infrastructure

It is critical to build/scale up capacities such as data centres, broadband connectivity and adoption of 5G technology to support industries embracing cloud automation, artificial intelligence and machine learning, more than ever now. According to a KPMG report, less than a fourth of cell towers in the country are connected to the fibre laid. "Currently, most of the network connectivity in India is microwave-based, which accounts for 75-80 per cent of cell sites. For the network to be robust, there is need for 100 per cent fiberisation," the report said. Even the Confederation on Indian Industries (CII) has said India is still far behind in the global digital readiness index and a significant overhaul is needed. The CII has suggested increased budgetary allocations and the creation of a Broadband Infrastructure Fund.

Bolstering Start-ups

Covid-19 has hit all sectors hard, particularly start-ups. Entrepreneurs, venture capitalists and industry associations had already approached the government, pre-Covid, seeking help to tide over the crisis. Organisations, including the CII Start-Up Council, iSPIRT, IVCA, Indian Angel Network, venture investors such as Mohandas Pai of Aarin Capital, Accel, Blume, Chiratae, 3one4capital and start-up founders like Rahul Garg (Moglix), Sriharsha Majety (Swiggy) Aloke Bajpai (ixigo) and Amod Malviya (Udaan) had sought a slew of measures - fiscal support to save jobs, relaxation by authorities such as no fresh notices by the tax department and quicker refunds, among others.

Though the government announced certain reform measures, including a Fund of Funds with a corpus of Rs 10,000 crore to provide funding support to MSMEs and Rs 15,000-crore refinancing facility to SIDBI, there's no clarity if the same is applicable to start-ups.

Says Raman Roy, Co-founder, Indian Angel Network: "I think at this time easing policies that allow M&As is critical for the survival of start-ups. Just creating an option to take debt will not work."

"The government should clarify if start-ups automatically qualify for the sops announced for MSMEs, since there is no separate allocation for start-ups under the stimulus package," adds Dipti Lavya Swain, Corporate M&A Lawyer and Partner, HSA Advocates.

Harshavardhan, CEO, Lil'Goodness, says simplification of access to bank capital is a much-need reform. "In the current scenario, give interest moratoriums on working capital loans for start-ups through banks with simple procedures."

Mohandas Pai, Chairman, Aarin Capital, had said in an earlier interview that "the income tax regime is very hostile to start-ups". He had pointed out that while overseas investors paid lower long-term capital gains tax for unlisted start-ups, the tax burden on Indian counterparts was more than double.

In Step with IT, ITeS

The one industry that adopted itself quickly is IT/ITeS. IT companies equipped 90 per cent of their workforce to work from home in a matter of days, renegotiating contract terms and scouting for opportunities in the digital, cloud and automation business space. The government, too, responded quickly, relaxing rules around connectivity norms for virtual private networks (VPN) applicable to other service providers, which helped the Global Capacity Centres. Speaking on further concessions, Ashish Aggarwal, Senior Director and Head, Policy Advocacy, Nasscom, said: "We had suggested the extension of the SEZ policy for another five years since the tax holiday came to an end in March 2020. In the context of Covid-19, we have asked for an extension of at least one year."

As companies take a more long-term view around how businesses operate, the industry body is also working with the government to find a permanent solution to the Department of Telecommunications' restrictions on work from home for the ITeS industry. According to Nasscom's Aggarwal, once the large employee base of IT companies moves to the work-from-home mode on a more permanent basis, changes in labour laws and social security laws will be the need of the hour. To ensure social security for contract staff working remotely, "Option should be given to employers in the new labour codes, where one can opt for either the National Pension System or the Employee Pension Scheme," he adds.

@rukminirao

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