Budget could set course for Indian software product industry

Here are some topics that the budget could address and shape the industry of the future.

Sanjay Shah | February 28, 2015 | Updated 08:33 IST
Budget could set course for Indian software product industry

We all understand the importance of the Union Budget in shaping the industrial landscape of the country, but in case of the Indian software product industry it could be much more. Here are some topics that the budget could address and shape the industry of the future. iSPIRT has been at the forefront of providing the necessary industry inputs  to the government in its policy initiatives and below is a summary of elements addressed.

1. Digital SME

While significance of Small and Medium Enterprises (SME)  in the Indian economy is well understood, our SMEs today are behind the curve in terms of adoption of technology. Bringing them to use technology would be needed to improve 'ease of doing business' in India.

The GST regime , waiting for a rollout, is a great step in this direction. Open API  for Smart Registration and closure of an SME when it becomes unviable would help in promoting  the "Digital SME" programme. Efforts by non-profit organisations (iSPIRT volunteers) are driving use of open source, open interface, for developing decentralised, secure systems for easy and all pervasive adoption (mobile phone, the computing device of choice for India) in place of traditional monolithic systems.

Tax modernisation through introduction of GST with its automated (electronic) system, along with the unified payment interface  will enable the next generation SMEs that operate cashless in India. The phone app approach, to deliver business services to SME, would also help evolve an ecosystem of software product innovation in the country.

India needs to take a leap in "ease of doing business". The mobile based easy registration app will be the beginning of a "Digital SME" revolution.

2.Tax Rationalisation

Enable sale of software product through channel partners ,  on similar lines as internationally, by removing the need for TDS requirement on software product sale to end user, would provide the much needed level-playing field for the Indian software product industry. Treating software sale like sale of any other good and not as a sale resulting in royalty. Handling a chain of multiple TDS on each sale by an young Indian software product company is too complex and an impediment to growth. Multipoint TDS also reduces the work capital availability for the company.

Removal of ambiguity and potential duplicity on service tax and VAT is needed. Particularly, "service tax" becomes cumbersome when the software product company is trying to reach the end customer through a network of small dealers , having small turnover, who trade in software and hardware. Exemption from service tax for software (service), similar to that provided to sale of mobile phone service  through agents, would greatly enhance tradeability of software product. The duplicity in treating packaged software as goods and as service and the dual Tax burden of Service TAX and VAT is causing confusions and burden for Software product companies

3. List in India
Access to capital markets provides the vital option necessary for innovative start-ups to grow to become the tech giants of India. At times, early investors take confidence to investing in start-ups when they see that their potential portfolio companies have reasonable options to raise further or future funding. United States recognized this need early and today Nasdaq caters to wide variety of silicon valley companies. The NYSE lists household names like Coca-Cola, Wal-Mart, Citicorp, and General Electric, whereas the Nasdaq is home to many of the tech giants such as Microsoft, Cisco, Intel, Oracle and Facebook. There are fundamental differences in the way securities are listed and traded. Indian software product industry needs access to such capital, with little encumbrance on the company but adequate protection for retail investors. SEBI the main controller of capital markets and other government departments are working with iSPIRT to bring about changes that could facilitate Indian product companies to list in India, rather than re-domicile and move valuable intellectual property outside the country.

4. Seed fund-of-funds

The union budget of 2014 for the first time recognized Software Product Industry as a key growth area . The budget also made provision for a fund, to be set up by the government in India, though the earlier government had launched a INR 5 billion (US$83 million) India Inclusive Innovation fund, which wasn't specifically for startups. Strengthening such fund-of-funds  to encourage and enhance the indigenous product industry by the government would be necessary.

5. Challenge grants (iPrize)

India's path to development is more likely to be innovation, entrepreneur and free market driven vs top»down mandates. This dream is currently suffering. Indian innovators are not focused on enterprises needed for nation building, while large corporations lack a culture of deep R&D and meanwhile the existing procurement processes deter unique, groundbreaking innovations. The result is that groundbreaking innovations around the world often built by Indians very rarely are incubated in India and reach India decades after maturing elsewhere costing India's nation building the efficiency, the innovative energy and most of all, the economic engines that could be created on Indian soil. ? The I»Prize program has been formulated to address this gap; to switch the mindset of L1 (lowest cost) to I1 (Indian innovation).

6. Innovation Labs (called Tech Incubator 2.0)

The Technology Business Incubators, as organisations, extend and provide cost effective infrastructure, services and environment to innovative startup companies in order to scale and enhance the chances of success of high growth enterprises. Here are a few recommendations that could bring TBI to meet the needs to today's startups. Incubators should be recognised and notified as "Single Window Clearance"  point for starting and closing a business, set up by Incubatee companies. Frictionless regulatory environment for Startups would be the goal.

1. Detailed note from iSPIRT are circulated to concerned authorities from time to time. Actual note and their content is beyond the scope of this brief document.

2. Our 48 million SMEs, who contribute more than 45% of India's industrial output and more than a million jobs every year, form the back-bone of our economy. With our size of population, we expect the SME segment to grow and contribute significantly in the economy.

3. GSTN has already moved fast on adoption of a 100% digital platform for every size of business. Be it micro, small, large or giant.

4. API stands for Application Programming Inteface, new standards in building easily integrated applications. iSPIRT is assisting Deity in crafting an Open API Policy for the Govt.
5. National Payments Corporation of India and RBI are in the process of finalizing the Unified Payment Interface

6. Treating software sale income as royalty income under direct tax laws means TDS has to be deducted on sale of software products, which affects the ability to sell through channel partners (such as distributors, resellers, retailers, internet ecommerce sites and market places). Thus making it difficult for software product companies to sell through a chain of partners. The channel partner sells the same end-user-license (issued by the manufacturer/producer of the software product), a tradeable item, it shall be treated like sale of any other good.

7.  Often, the distribution network and channel partners for off the shelf packaged software, as well as hardware, are the same. The software product companies in order to out reach to larger markets will have channel partners who may be trading in software products both canned/packaged and digitally distributed software.

8. selling agent or a distributor of SIM cards or recharge coupons vouchers" (vide clause 29(f) of Notification 25/2012-ST dated 20.06.2012).

9. read more at http://pn.ispirt.in/budget-recognises-the-software-product-industry/

10. Fund-of-funds is a well-established indirect investment mechanism where the funds are invested into actual funds (venture capital funds, angel funds or accredited incubators) that manage funding to end companies (or portfolio). The Israel government sucessfully used this approach to bootstrap a hugely successful innovation industry in the country.

11  Under consideration of the Ministry of Corporate Affairs.

Sanjay Shah is CEO at Zapty, Inc.

'With inputs from iSpirt'

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