Startups Policy Analysis

Rewind 2019: The slaying of the angel tax demon, spotlight on data in a roller-coaster year for tech-focused policy

Rewind 2019: The slaying of the angel tax demon, spotlight on data in a roller-coaster year for tech-focused policy
Photo Credit: VCCircle
26 Dec, 2019

After a long drawn period of persuasion and incremental measures by policymakers, in 2019, India’s startups were finally able to rid themselves of the angel tax demon. Startups were able to drum up enough noise around the challenges faced by them on account of the so-called angel tax for the matter to become critical to the political agenda ahead of the general elections in May. 

Listen: Is the angel tax problem now an open and shut case?

Apart from angel tax, 2019 was also the year when elections directly and indirectly influenced policy measures. A delay in the auction of 5G spectrum, a draft ecommerce policy that wasn’t, and cabinet approval for tabling the personal data protection bill were among the highlights of the roller-coaster ride on technology policies this year.

Much like the rest of the world, large technology companies found themselves under government scrutiny for the spread of misinformation, fake news and finally, an attempt to spy on a select group of numbers through messenger app WhatsApp. In case of the latter, the data breach by Israeli company NSO stalled the launch of WhatsApp Pay, its UPI-based peer-to-peer payment system that has been stuck at the beta phase of testing for close to two years now. Twitter and Facebook representatives were summoned by a parliamentary panel ahead of the general elections for measures to control the spread of misinformation.

The mantra “data is the new oil’ gained significance as it echoed across policy measures for fintechs, ecommerce and other large businesses.

Even as the government took time making up its mind on what to regulate and how, industry lobbies and associations managed to get a patient hearing for their grievances. Whether it was the Confederation of All India Traders Association protesting against predatory pricing and unfair practices by large ecommerce players such as Amazon and Flipkart or the National Restaurant Association of India logging out of discounted offerings by food technology players Zomato or Swiggy, well funded technology startups took notice and had to respond to tough questions on matters such as level playing fields and discount-led business models. 

The government had to maintain a fine balance on India’s trade policies internationally and keeping traders and industry associations at home happy for the elections.

Apart from the ministries, India’s central bank had its hands full balancing the economy and regulating financial technology companies. The Reserve Bank of India brought out its vision document for the next two years and commissioned a panel led by Nandan Nilekani to study the state of financial technology companies in India. The panel provided a set of guidelines for growing digital transactions ten-fold by 2021 including 24x7 NEFT facilities for money transfer, which was implemented recently. 

Here is a rundown of policy measures which had an impact on the technology world through the year:

Angel Tax: After over 80 startups received tax notices from the Central Board of Direct Taxes towards the end of 2018, the movement to address the scourge gained steam. Multiple discussions with representatives of venture capital firms, startup representatives and those from the Department for Promotion of Industry and Internal Trade (DPIIT) later, a notification in February promised speedy resolution of all matters related to the angel tax notices.

  • The notification laid down the procedure for seeking exemptions by the startups. However, it also prevented startups from investing in equity and securities, and investing in any company including subsidiaries, which saw another round of consultations with stakeholders for clarifications.
  • The union budget in July also made a mention of section 56(2) (viib) under the Income Tax Act, 1961, commonly referred to as the angel tax, which taxes early stage investment in startups on par with the corporate taxation rate of 30%. The finance minister said that investors and startups filing timely returns will not be subjected to scrutiny on valuations and share premium paid during the funding round.
  • In June, the angel tax reared its head again due to prevailing confusion on the applicability of exemptions to startups which were already going through the process of appeal with CBDT. 
  • Finally in August, a set of clarifications by the ministry of finance put to rest the procedure to be followed by assessment officers of the tax department and retrospective applicability of the relief granted to startups.

Draft national ecommerce policy: The draft national ecommerce policy did not see the light of day again this year. The government unveiled a data localisation-heavy draft for the national ecommerce policy in February. An older version of the draft, released in September 2018, was scrapped after opposition from vendors and online sellers associations. Around the same time, Press Note 2 issued by the government prohibiting foreign direct investments into inventory based ecommerce platforms came into effect. Press Note 2 also took strong cognizance of predatory discounting and step down subsidiaries created by large online marketplaces.

The response to the February draft bordered on the extreme as neither the online marketplaces such as Flipkart, Amazon, nor the ministry of electronics and information technology took a favourable view, albeit for different reasons.

  • In June, newly appointed minister of commerce Piyush Goyal said that the data aspect of ecommerce businesses would be looked into by MeitY. This was indicative of an internal tussle between the ministries, according to multiple reports. 
  • In August the department of consumer affairs issued a draft framework for the new consumer protection act, including a set of guidelines for ecommerce consumers.
  • In September, secretary of the Department for Promotion of Industry andInternal Trade Ramesh Abhishek said that the draft was being dropped and that the department would work on a new regulatory framework during an interview. 
  • Later in response to a parliamentary question, the minister of commerce said that the draft national ecommerce policy would be ready by the middle of 2020.

Personal Data Protection Bill: After the 213-page draft personal data protection bill, based on the recommendations of the BN Srikrishna committee, made an appearance in July 2018, the bill got the cabinet’s approval a year later for introduction to parliament in December 2019 with massive changes. 

  • Some of the notable departures in the bill, which has been referred to a parliamentary standing committee, include the power given to the central government to exempt any department or agency from the proposed Act for reasons of national security or law enforcement, selection criteria for terming a business ‘significant data fiduciary’ and creation of verified social media accounts.
  • The new draft of the bill was not presented in the public domain ahead of the cabinet approval. It was only after the bill was introduced in the parliament did the government release a draft.
  • Despite forming a separate committee to look into the treatment of non-personal and business data, the new draft gives leeway to government departments to demand anonymised business data for implementation of policies and schemes.
  • The bill is now expected to be tabled during the budget session of the parliament.

Amendment to PMLA for digital KYC: Aadhaar based digital KYC made a comeback after the ministry of finance notified a new amendment to the Prevention of Money laundering Act in August. This allows customers to use Aadhaar based verification voluntarily with telcos and banks though it did not include non-regulated fintech entities in the process. Aadhaar based digital KYC verification was previously done away with through a Supreme Court judgement in September 2018.

Draft Consumer Protection Act: A new set of guidelines drafted in 2019 is set to replace the Consumer Protection Act of 1986. The section of the draft guidelines released in August for ecommerce entities takes a stringent view of the relationship between the sellers and the marketplace, and requires the platforms to make it easier to trace seller identity. Stakeholder comments on the draft guidelines were to be submitted by December 2.

Fillip for fintech: Apart from opening up the sector to ‘innovative’ startup ideas, the Reserve Bank of India formulated guidelines for testing innovative financial products in a regulatory sandbox. The sandbox guidelines left out cryptocurrency products.

  • A report submitted to RBI by an inter-ministerial committee also recommended banning all cryptocurrency related products in India though the central bank could possibly float digital rupee as legal tender.
  • Apart from RBI, the Securities and Exchange Board of India (SEBI) as well as the Insurance Regulatory and Development Authority of India (IRDAI) formulated draft guidelines for innovative sandbox for fintech companies to test out their products. 
  • RBI also mulled regulating payment gateways and aggregators through a discussion paper, a move likely to impact the wallet businesses of the e-commerce marketplaces.
  • The central bank walked a tightrope between regulation and promoting innovation for startups in the sector, mandating data localisation for Payment System Operators. 
  • The regulator also mulled opening up innovation in the financial sector, taking cognizance of the ‘monopoly’ wielded by National Payment Corporation of India when it came to innovative payment products. To its credit, digital payments touched new highs during the year based on transactions through Unified Payment Interface (UPI) developed by the NPCI which allows easy peer to peer transactions as well as payments.

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