RBI’s STPI Notification Circular A Death Knell For Indian IT Startups and SMEs?

Indian IT industry attributes to 8% of GDP every year and 25% to exports. More than 100 Indian tech companies have more than $1 billion market capitalization. 40% of the IT startups in Asia happen to be in India, mostly Bangalore. Innovation has taken a leap in India and so has the angel investors and Venture capitalist rushing in to fund them. Eyeing the same, Obama tweeted; “India is not simply emerging, it has emerged” and the world stock markets went green.

But the government’s circular dated 13th September, 2013 vide notification No. RBI/2013-14/254 A.P. (DIR Series) Circular No.43, which is effective from October 1, 2013 has done its share of dampening the spirits of all the Indian tech companies.

What was this RBI circular about?

This circular states that the exporter of software products/services must get their each and every export invoices certified from STPI i.e. Software Technology Park of India, irrespective of the value of invoice. The Government has also erased the previously existing export threshold limit of USD 25,000 which means STPI will charge for every certification regardless of the value. This is an unwelcome move from RBI.

Prior to this regulation, the software companies enjoyed a tax holiday schemes so they registered under STPI. But eventually when the tax holiday blanket was ripped off, the normal tax norms applied due to which many new startup tech companies chose not to register with STPI. Now due to this circular, the exporter or the tech companies must get registered with STPI to resume exporting.

The circular is sure to cremate the IT startups and Small & Medium Enterprises if the government doesn’t take the hint. The repercussions of this circular have been poorly evaluated by the government. The issues that have propped up since the issuance of the circular are as follows:-

1. By mandating exporters to register with STPI, not only will the waiting period extend but also shoot up the cost. Since there is no threshold limit, even an invoice of $1 will have to be certified in par with $100,000 invoice-which only piles up work for STPI and waiting period of exporters.

2. Many startup software firms, still on rocky grounds raise invoices which are somewhere between $100- $1000 which either happen as a single transaction or a series of tiny transactions. It will be a costly affair for them to get these certified from STPI as most of the contracts are consented to over emails.

3. Other software exporters functioning in “Software as a service” model will be thrown in jeopardy as most of their transactions are below $10 (sometimes as low as 99 cents). Procuring customer details for such micro-payments is next to impossible.

4. STPI is entitled to a certain certification fees for every little transaction which ensures the government’s revenue but in turn the exporter’s cost sky rockets leading to fewer customers and assignments which will affect the Indian economy adversely. Also the procedural formalities and the documentation will take up more time and energy in abiding by the rules than actually completing work assignments.

5. Since most of new age communications happen online and stored in cloud, obtaining data is cumbersome and sometimes a herculean task for those exporters who earn from micro payments and third party payment processors.

6. Also reconciling the BRS is not an easy feat with innumerable transactions occurring in a normal business day. The voluminous transactions of micro value will only add up to the exporter’s burden.

This move by the RBI is an unfriendly one for want of some major amendments. Given that the RBI wants to keep an eye on every incoming foreign exchange, this measure however seems to drown the emerging IT startups.

The IT ministry and RBI must immediately rethink the circular’s intentions before the economy holds a silent vigil for the deceased startup and SMEs.