2019 In Review: The Policy Updates That Impacted The Indian Startup Ecosystem

This article is part of Inc42’s special year-end series — 2019 In Review — in which we will refresh your memory on the major developments in the Indian startup ecosystem from international collaborations, to government startup policy in India and their impact on various stakeholders — from entrepreneurs to investors. Find more stories from this series here.

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Big hits. Big misses. 2019 has been a mixed bag in terms of policy initiatives and implementation of these policies on the ground.

As Prime Minister Narendra Modi took oath for the second time in a row, President Ram Nath Kovind in the Joint Session of the Parliament announced the Modi 2.0 policy initiatives for startups and Indian businesses.  The president said that the government has set a goal of having 50K startups operating in India by 2024.

“We want India to be among the top 50 countries of the world and to achieve this, the process of simplification of rules will be further expedited in collaboration with the States. Also, the necessary amendments are also being brought in the companies law.” – President Ram Nath Kovind

Startup India programme too has achieved another landmark by recognising over 25K startups since its inception on January 16, 2016.

And, in sync with the Modi 1.0 initiatives, the central BJP government has been continuously working on policy initiatives which it might put into effect in the upcoming years. Among the biggest ones are angel tax abrogation, Prohibition of Electronic Cigarettes (Production, Manufacture, Import, Export, Transport, Sale, Distribution, Storage and Advertisement) Act, 2019, National Policy On Electronics, National Software Products Policy, and Personal Data Protection Bill (PDP Bill).

And, it’s only because of the policy initiatives and implementation that, India has risen from 81st rank to 52nd rank in the Global Innovation Index and Indian startups have flourished.

While the Prohibition of Electronic Cigarettes (Production, Manufacture, Import, Export, Transport, Sale, Distribution, Storage and Advertisement) Bill, 2019 has already been enacted by the Parliament and is a law now, the Personal Data Protection Bill (PDP Bill) has been introduced in the parliament.

If the introduction of the above-mentioned bills can be termed as a forward move, as there were no clarity before, the content of these bills is also being seen as regressive. For instance, there are no reported deaths due to e-cigarettes yet it has been banned, however, a million deaths in the country occur every year due to cigarettes, yet they are allowed to be sold by the government of India in the Indian market (the Indian government has stakes in the largest tobacco company ITC ltd).

Policy Impact On Indian Economy

The policy flip-flops have reflected immensely into the GDP and household income too. While the GDP, at 4.5% is at 26 quarters low, the consumer spending in India is the lowest in the last four decades. While Modi government’s demonetisation move and faulty GST are said to be the primary reason behind this economic slowdown, the proposed pan India NRC implementation coupled with Citizenship (Amendment) Act has already caused a turmoil in the country and will have its effect on the economy as well.

As reported by Business Standard, while Household Consumer Expenditure in India has been lowest in the last four decades, the country’s economy is currently growing 4.3% compared to 4.9% in the previous quarter. This is the lowest growth rate in the last 26 quarters.

Angel Tax Abrogation

Much of the criticism paid to finance minister Nirmala Sitharaman is largely due to her predecessors’ moves. To her credit, though, are the abrogation of angel tax and recent GST reforms.

Along with angel tax, the I-T orders and notices which have haunted startup founders in the past badly. Dozens of startup founders in the past in their interactions with Inc42 affirmed the fact that harassment by I-T AOs was one of the main reasons that led them to shut down their offices.

While the late Arun Jaitley, who was the former finance minister, showed little interest towards tax complaints, it took a long time to the former commerce minister Suresh Prabhu to minimise the tax harassments of startups under Section 56(2)(viib) of the I-T Act, Sitharaman in her short span as finance minister has rather responded quickly with what was called for.

 

DPIIT-recognised startups are now exempt from tax under Section 56(2)(viib) of the Income Tax Act when such a Startup receives any consideration for issue of shares which exceeds the Fair Market Value of such shares

“To mitigate the genuine difficulty of startups and their investors. It has been decided that Section 56(ii)(viib) shall not be applicable to DIPP registered startup.” – N Sitharaman

The government has constituted a dedicated cell under a member of CBDT for addressing the problems of startups. The Central Board of Direct Taxes has so far exempted 1,658 startups (November 2019) under Section 56 (2) (vii) of the Income Tax Act, 1961. “All notices will be disposed of within three months from the date of reply. No assessee will have do anything after three months once he has given the reply,” Nirmala Sitharaman had averred in August, this year.

The startup has to file a duly signed declaration in Form 2 to DPIIT {as per notification G.S.R. 127 (E)} to claim the exemption from the provisions of Section 56(2)(viib) of the Income Tax Act

Introducing Section 54EE in the Income Tax Act, 1961, exemption from tax has also been made on long-term capital gain (For up to INR 50 Lakhs) if such long-term capital gain is invested in a fund notified by central Government. The condition of minimum holding of 50% of share capital or voting rights in a startup is relaxed to 25%.

GST Reforms And Refunds Process

Filing GST forms and getting refunds have been tedious since the goods and services tax (GST) was announced on July 1, 2017. Despite hundreds of reforms carried out over the last two years, GST continues to haunt MSMEs and startups.

Besides GST, startups have also had to deal with the angel tax terror, which resulted in a steep decline in seed-stage funding in the Indian startup ecosystem. DataLabs by Inc42 data shows that the total capital inflow into Indian startups between 2014 till the first half of 2019 was more than $51 Bn across 4,554 deals which are growing YoY.

However, the number of startups funded at the seed stage plunged by 39.74% to 329 in 2018, when compared to the pre angel tax era of 2017, where around 546 seed-stage startups were fundGST registration if his turnover from the supply of goods or services. And 2019 was no different than last year. The count of startups funded at the seed stage in H1-2019 was 38.92% lower than the half-yearly average of 219 from 2014-2018.

The minimum turnover from the supply of goods GST registration limit has been doubled from previously INR 20 Lakhs to INR 40 Lakhs. Further, barring North-east states, the threshold limit on gross turnover in the previous financial year to avail of the composition scheme were increased from INR 1 Cr to INR 1. 5 Cr.

In a big relief to EV sector, the GST rate on electric vehicles was reduced from 12% to 5% and GST on chargers for e-vehicles was reduced to 12% from 18%. Further, those buying electric vehicles have been given additional income tax deduction of INR 1.5 lakh on the interest paid on loans taken to buy EVs.

Addressing the GST forms issues, Nirmala Sitharaman stated, “The number of forms is really being worked upon. I surely assure you that sooner the GST will come up with even more simplified with less number of forms. The refund process I must underline has almost become automatic. The refund should be going through a process of free flow. Even this Sunday, I am holding a meeting with GSTN people to make sure to identify where the glitches are, in terms of the flow of refunds. So that it does not affect people.”

Startup India Fund Of Funds Disbursal

The Government of India in June 2016 had set up a Fund of Funds for Startups (FFS) with a corpus of INR 10K Cr to provide a much-needed boost to the Indian startup ecosystem and enable access to domestic capital.

On Fund of Funds disbursal, the commerce ministry has notified the Parliament that as on November 21, 2019, SIDBI has committed INR 3123.20 Cr. to 47 SEBI registered Alternative Investment Funds (AIFs). These funds have raised a corpus fund of INR 25,728 Cr. INR 695.94 Cr has been drawn from the Fund of Funds for startups. And, a total of  INR 2,669.83 Cr has been invested into 279 startups.  The ministry informed that 2,85,890 jobs are reportedly created by 23,657 DPIIT recognized startups, as on 4th December 2019.

Personal Data Protection Bill

After a long hullabaloo on data privacy, the Indian government has finally introduced Personal Data Protection Bill in the Lok Sabha, Lower House of the Parliament. The Bill is now being sent to a Joint Parliamentary Committee for further examination bypassing the traditional route of sending such Bills to Standing Committee, as the Committee which is currently headed by a Congress MP Shashi Tharoor.

However, the Bill tabled in the Lower House has made some changes in the original draft prepared by Justice BN Srikrishna Committee. A chapter reduced, the new draft bill has dedicated one whole chapter to how personal data could be used without consent. The controversial Bill has raised several questions.

1. The bill treats personal data as a matter of trust and not as property as defined in GDPR.
2. It digresses from data protection by design and default, as established in GDPR.
3. Despite the fact the government, as well as public authorities, are the biggest data fiduciaries, ‘reasonable’ exemptions have been given to the state and authorities for the collection of personal data. Recently, we saw how ‘reasonable classification’ of Article 14 of the Indian constitution was used to amend the Citizenship Act which has created ruckus in many parts of the country. Section 35 of the PDP Bill, 2019 allows government authorities power to exercise surveillance against any citizen.
4. The PDP bill lets the government define critical personal data which will be essentially processed in India only. Sensitive personal data which could be health-related data, sex life etc can be transferred outside India but such sensitive personal data shall continue to be stored in India.
5. The burden of proof will be on fiduciaries that they have the consent of data principals.
6. Interestingly, the PDP has omitted ‘passwords’ from the data listed/recognised as sensitive personal data. The Srikrishna Committee had recognised passwords at the top of the sensitive data list.

Will Data Protection Authority which has been tasked to regulate the potential law have the capability to effectively implement the law, is also a matter of concern for many.

Justice BN Srikrishna is not apparently happy with the bill, tabled in the House. He said,

“They have removed the safeguards. That is most dangerous. The government can at any time access private data or government agency data on grounds of sovereignty or public order. This has dangerous implications.”

Meanwhile, the government has also constituted a Committee of Experts headed by Infosys cofounder Kris Gopalakrishnan on non-personal data uses.

The Policy Around Cryptocurrency: Ban Or Not?

The Inter-Ministerial Committee led by Subhash Chandra Garg, former secretary, Department of Economic Affairs (DEA) had submitted its report, earlier this year. The report recommended a complete ban on cryptocurrency in India.

The IMC had also submitted a draft Bill named Banning of Cryptocurrency & Regulation of Official Digital Currency Bill 2019 to the finance ministry. The committee was however agnostic about exploring the idea of RBI-backed digital currencies and has welcomed the ongoing innovations happening around the underlying technology, blockchain.

The Bill has not been introduced in the Parliament and hence has given fresh air to the crypto exchanges and startups who have hoped that the rule would be amended to promote regulation instead of a ban. However, due to the RBI notice which has banned banks from offering any services to crypto entities, dozens of crypto startups have already shut their shop since last year.

National Policy On Electronics

In February this year, the cabinet gave nod to the National Policy on Electronics 2019 which has made just some cosmetic changes into National Policy on Electronics 2012.

Extending the deadline of the NPE 2012 which aimed for a turnover of $400 Bn in domestic electronics manufacturing by involving a 100 Bn investment in Electronic System Design & Manufacturing (ESDM) and creating employment for 28 Mn people by 2020, the new NPE 2018 aims to achieve a turnover of $400 Bn by 2025. This will include targeted production of 1.0 Bn mobile handsets by 2025, valued at $190 Bn, including 600 Mn mobile handsets valued at $110 Bn for export.

Interestingly, while the draft does mention that 4.5 Lakh direct and indirect employment created in the last three years by 118 mobile manufacturing units, the NPE 2018 does not set any objectives, as far employment and investments are concerned.

Aimed to encourage industry-led R&D and Innovation in all sub-sectors of electronics, the draft NPE 2018 plans to create a comprehensive startup ecosystem in emerging technology areas such as 5G, IoT, artificial intelligence (AI), machine learning, etc, and their applications in areas such as defence, agriculture, health, smart cities and automation, with a special focus on solving real-life problems.

The draft NPE 2018 skips the NPE 2012 objectives that aimed to achieve a turnover of $55 Bn in very large scale integration (VLSI), embedded chip design and embedded software industry by 2020. The draft NPE 2018 also skips the 2012 objective of building a strong supply chain of raw materials, parts, and electronic components to raise the indigenous availability of these inputs from the-then 20-25% to 60% by 2020.

There is no update on the ESDM sector exports. The NPE 2012 aimed to increase exports from the-then $5.5 Bn to $60 Bn by 2020.

The draft NPE 2018 promises a lot and has laid out its strategies to achieve its ambitious vision, mission, and objectives. However, it doesn’t seem to have identified the loopholes in the NPE 2012 strategies or come up with a robust strategy of its own. Merely skipping the key objectives of NPE 2012 which also aimed the Indian electronics industry to be the global hub by 2020 specifying certain targets, won’t help.

National Policy On Software Products 

This year, the Indian government also released the National Policy on Software Products-2019 with a vision to create a robust Indian software product development ecosystem, thereby enabling IP driven holistic growth of the IT Industry.

With the policy, the government aimed to promote tech entrepreneurship in India and help make Indian software product startups to scale to become $70 Bn – $80 Bn market by 2025. The IT ministry also set up a MeitY Startup Hub as the coordination, facilitation and monitoring centre that will integrate all the incubation centres, startups and innovation-related activities of MeitY.

MeitY has also been mulling to create a Software Product Council which will work on implementing a software product mission. The council will include members of the government, academia and industry.

As part of the policy, the government will initially outlay INR 1,500 Cr to implement the programmes for software development and research, for over a period of seven years.

India’s State-Level Policies For Startups

On a smaller scale, yet many of the states took a slew of steps that helped shape the startup ecosystem in the state. Besides Tamil Nadu, Meghalaya approved the Meghalaya Startup Policy 2018 which aims to help budding entrepreneurs and create employment opportunities.

As part of the policy, the state government will develop a startup portal and app which will aggregate all information related to the policy, its benefits and the procedure to avail them. The government has also proposed to develop quality infrastructure across the state with all necessary facilities made available for entrepreneurs. Approved institutions will be eligible for a one-time grant of 75% of capital cost (cost of building, equipment, connectivity etc.) up to a maximum of INR 5 Cr to set up an incubator.

The Nagaland government too had issued a notification pertaining to Nagaland Startup Policy 2019. The policy aims to create a conducive atmosphere and opportunity for local entrepreneurs.

Issued by the Department of Industries and Commerce, the Nagaland Startup Policy 2019, like most of the other state startup policies shall be effective for a period of five years since the date of notification.

While Karnataka has released a new state IT policy, Madhya Pradesh has launched a new scheme for small businesses that focuses on attracting investment and encouraging job creation among MSMEs in the state. According to reports, under the scheme Madhya Pradesh MSME Protsahan Yojana, 2019, the government would provide 40% grant for setting up businesses in the state along with a provision of acquiring cheap land by providing 70% of employment to locals and representation of STs, SCs, and OBCs.

Maharashtra set up Mumbai FIntech Hub to bridge the gap between investors and fintech startups in the country with respect to funding. For the same, it has already brought on board over 50 marquee investors including venture capital firms, family offices, and international investors including Blume Ventures, Indian Angels Network, SAIF partners, Kae Capital and others to help startups make direct connections with the investor community.

Kerala, Karnataka, Maharashtra and few other states continued to make a number of international collaborations to promote startups, investments and innovation in the state.

The Ban On E-Cigarettes And Vapes

The Prohibition of Electronic Cigarettes (Production, Manufacture, Import, Export, Transport, Sale, Distribution, Storage, and Advertisement) Act, 2019 prohibits the production, trade, storage, and advertisement of electronic cigarettes.

According to the law, any person who contravenes this provision will be punishable with imprisonment of up to one year, or a fine of up to INR 100K, or both. If repeated the offence, the person will be punishable with an imprisonment of up to three years, along with a fine of up to INR 500K.

According to the law, the owners of existing stocks of e-cigarettes will have to declare and deposit these stocks at the nearest office of an authorised officer.  Such an authorised officer may be a police officer (at least at the level of a sub-inspector), or any other officer as notified by the central or state government.

Startup Policies That Failed To Get The Nod

Among the policies and guidelines which were expected to come into effect in 2019 but have failed to get the cabinet nod are ecommerce policy, Drone Regulations 2.0 and Intermediary Guidelines under the Information Technology Act, 2000.

Amid big ongoing war between local vendors and US giants Amazon and Flipkart, the government is now expected to come into effect early next year. Having released the draft earlier this year, the government will reportedly also include the recommendations to be made by Kris Gopalakrishnan committee.

The draft Information Technology (Intermediary Guidelines (Amendment) Rules) 2018 was released in December 2018. However, upon receiving wide criticism as well as humongous feedback on the draft, the fresh guidelines is now expected to be released in January 2020.

Drone Regulations 2.0 was supposed to be released in March, this year. The DGCA however, has failed to build the platform or Digital Sky, which is essential for the drone operations. The Digital Sky has been running in beta form for the last one year and is limited to very basic tasks such as registration.

There is no update from the DGCA on when Drone Regulations 2.0 will now be released.

Looking at the importance of AI, the MeitY had also constituted four Committees on AI:

• Committee on platforms and data on AI, led by PP Chakraborty, IIT Kharagpur
• Committee on Leveraging AI for identifying national missions in key sectors, led by Rajeev Sangal, IIT BHU
• Committee on mapping technological capabilities, led by R Chandrasekhar, NASSCOM,
• Committee on cybersecurity, safety, legal and ethical issues, led by Rajat Moona, IIT Bhilai

All four committees have submitted their reports to the ministry. If implemented, this opens a huge market for Indian startups who are leading the AI game in the Indian market.