Tech is the Best Way

Regulatory Damage Faced By Indian Startups

Flipkart becomes a profitable business on which the income tax department can levy tax and penalty. And levy tax and penalty it did. Flipkart had filed a loss of Rs 796 crore ($116 million). The revenue authorities claimed it had made a profit to the tune of Rs 408 crore ($59.5 million). And a tax demand of Rs 137 crore ($20 million) was placed on Flipkart.

Flipkart fought the order, after which the tax demand was reduced to Rs 110 crore ($16 million). Both the income tax department and Flipkart made subsequent appeals against the order to the Income Tax Appellate Tribunal, which eventually threw out the income tax department’s case, saying that its theory of a marketing intangible asset and Flipkart’s profitability were “without any basis”.

Even as Flipkart and rivals like Amazon who would have been similarly affected heaved a sigh of relief, e-commerce players were in for another shocker. In late July, in response to a Right To Information (RTI) query, the Reserve Bank of India (RBI) decreed that e-commerce players were not allowed to collect cash through their logistics partners. Curiously, the law granting RBI this power has been on the books for nearly a decade. It took an RTI for the RBI to wake up to this and interpret it. With seemingly little concern for businesses and the market, especially given that cash on delivery forms a huge part of payments for e-commerce companies.





The e-commerce market in India is exploding, with a 2015 UBS projection claiming it would be worth $50 billion by 2020. However, with every curveball thrown at e-commerce players by whimsical authorities, this potential decreases. Or the timeline for its realisation increases. Nothing good.

This regulatory capriciousness isn’t limited to just Flipkart and e-commerce either. Sure, India may have recently moved up 30 spots on the World Bank’s latest ease of doing business index, but the fact remains that Indian authorities still retain some tendencies of the pre-liberalisation license raj era. From agriculture to payments, telecom to medical devices and medicines, it has almost become a reflex action for authorities to overreach with regulation whenever presented with a new or complex situation. Businesses and consumers are left to bear the brunt.

Respect my authority


Let’s be clear, there’s common sense regulation, and then there’s overreach. A thin line separates them. A thin, increasingly blurred line. The best and latest example of this is the recent standoff between the Telecom Regulatory Authority of India (Trai) and US-based tech giant Apple.

It started way back in 2016 when TRAI’s realised its do not disturb (DND) registry was failing to check internet calling. To combat this, it released its own DND app—which blocks and reports unwanted calls and texts. It was listed on Android’s Play store. Apple refused to allow it in its own app store as it didn’t meet Apple’s high privacy standards. Trai’s app wanted unfettered access to users’ calls and SMS logs. Apple wasn’t having any of it.

Finally, to force Apple’s hand, Trai released the Telecom Commercial Communications Customer Preference Regulations, 2018. The new regulations direct telecom operators to derecognise devices that do not make provisions for Trai’s DND app. Effectively, if Apple didn’t play ball, its mobile devices would be banned from the country. At this point, Trai effectively transitioned from regulation to overreach. This assertion was supported by the Indian Cellular Association which pointed out that Trai, which is meant to regulate telecom providers and licensees, was overstepping its jurisdiction in trying to control which devices could access its network.

WhatsApp's troubles


In the last few weeks, in response to calls to control the spread of fake news, the government has asked messenger application WhatsApp to control the spread of the menace. In response, WhatsApp has added some new features to indicate messages are forwarded

Sure, Trai’s motivation may be well-intentioned—it wants to maintain the quality of services for Indian cellphone users. But Apple’s stance is based on an equally important principle—user privacy. Trai’s inability, or even refusal, to understand this nuance is symptomatic of the license raj tendencies of old. What’s needed is for various stakeholders to meet, strike up dialogue and come to a common sense middle ground that addresses the complexities of the situation.

In fact, for its part, Apple has indicated that it has seamlessly integrated features that allow for reporting spam calls and SMSes in its upcoming iOS 12, while not compromising on user privacy. Trai still isn’t happy. Despite Apple complying with the spirit of Trai’s DND requirement, and one would argue in a way that has greater respect for users. Sure, Apple may have only come back to the table under the duress of Trai’s threats, but if Trai was willing to concede Apple’s valid arguments about user privacy, there’s a good chance that things would never have reached this impasse in the first place.However, Trai isn’t the only authority guilty of acting with good intentions but without adequate dialogue with stakeholders. In the case of Trai, though, it is likely to get its way still. But sometimes, this approach can lead to regulation being rendered impotent. Or even detrimental to those it’s supposed to protect.

NP(P)A


When the National Pharmaceutical Pricing Authority (NPPA) announced it would implement a price cap on medical devices such as stents, knee implants, and even essential drugs, there was great fanfare. The move was seen as pro-people; a step towards affordable healthcare. But that was in 2016-2017.

The reality in the present day is far more sobering—the benefits NPPA intended for patients have not reached them. An IQVIA-IMS Health study, commissioned by AdvaMed, found that capping the prices of stents hasn’t benefited the patient. This is because the cost of the medical procedure itself spiralled over the last three years as hospitals sought to make up for what they were losing due to price control. Certain high-end devices were even pulled from the Indian market by manufacturers, limiting patients’ access to high-quality healthcare. “There’s always a looming cloud. Price control hasn’t had the desired impact on cost of care,” says a representative of an American industry body.

To make matters worse, global medical device association AdvaMed filed a petition with the US Trade Representative to withdraw trade benefits that the US accords to Indian industries. AdvaMed accused India of unfair trade practices for its price control of medical devices. Realising India was headed towards a potential trade war with the US, government think tank Niti Aayog proposed a new price control policy that sought to cap margins rather than prices themselves. Importantly, Niti Aayog presented multiple potential options and asked the medical device sector for feedback. A significant climbdown from the way the government went about capping medical device prices the first time around. Clearly, simplistic regulation can backfire spectacularly. And we’re seeing the same thing yet again with the central agriculture ministry’s attempts to ban popular herbicide glyphosate

Weeding out glyphosate


Weeding is back-breaking labour and, in this era of labour shortage in agriculture, farmers appreciate any solution to escape it. Enter Monsanto’s HT Cotton, a genetically modified cotton seed that has three stacked traits—two Bt genes that confer resistance to bollworms, and the HT trait, which allows the plant to survive the application of the non-selective herbicide glyphosate, which Monsanto markets under the brand name Roundup but is also available as generic brands. HT cotton is available on global markets but has not been approved for release in India.

That has not stopped farmers, who see a key need being addressed by the variety. The government’s Field Inspection and Scientific Evaluation Committee, set up to assess India’s illegal cotton market, found around 15% of India’s cotton area is planted with HT Cotton. That’s 0.70% of India’s total cropped area, according to The Ken‘s analysis. Farmers can then spray glyphosate (a “probable carcinogen” according to the World Health Organisation’s International Agency for Research on Cancer) on the crops to get rid of weeds. The cotton plant survives.

To deal with HT cotton, the central agriculture ministry asked all 12 states where cotton is grown to remove glyphosate from the list of permissible substances pesticide sellers can sell, says a longtime observer of the industry. Only Tamil Nadu, which has significant tea cultivation, was excluded. Telangana is now considering a ban for 60 days in August and September, says A.V. Dhuri, vice-president at Mumbai-based Excel Crop Care Ltd. That’s peak time for weeds. And there are no good replacements in the Indian market for glyphosate, which also has more generic uses like clearing fields before planting and is also used in the horticulture sector. Glyphosate was the third most consumed herbicide in India in 2015-16, according to the latest data available.

“Trying to stop the use of glyphosate is absolutely incorrect,” Dhuri says. “This will mean the other [non-cotton] farmers will have to suffer in the absence of glyphosate.” Issues like the glyphosate ban, though, are trivial when compared to our next object of interest—India’s much-vaunted Goods and Services Tax (GST).

Pass it on


In November 2017, the National Anti-profiteering Authority (NAA) was born. Created to help ensure the success of GST, its essential job is to see that prices come down after a GST rate cut. To this end, the NAA has been pulling up companies, asking them to explain their price and tax calculations. The latest to be hauled up are Jubilant Foodworks (which runs Dominos and Dunkin’ Donuts), telecom operator Airtel, and Gurgaon-based airline IndiGo. The government means well, say indirect tax experts. There’s just one problem—no one seems to understand NAA’s methodology.

“There is no particular order. The government can call anyone. The trend shows that it has been the companies with a larger consumer interface,” says a tax expert at a Big Four accounting firm, asking not to be named. In addition, there are no guidelines which lay down a methodology for companies on how to pass on the benefit of reduction in tax rates. With no methodology, businesses are doing whatever suits them. And how is the anti-profiteering authority evaluating the cases? Again, however it suits them, explains another tax expert at a Big Four accounting firm, who spoke on the condition of anonymity.

“The price of a product is not just a function of taxes. The cost of raw materials, inflation and competition also count,” he explains, adding that the expectation that the price of every product will reflect a complete tax reduction isn’t realistic. It’s impossible to apportion the tax manually on every raw material that went into the making of something, says the tax expert. “The intentions of the government are good, but the execution is problematic,” he adds. While the industry bodies like the Confederation of Indian Industry (CII) have been lobbying for a clear methodology in the GST Act, their requests have fallen on deaf ears. Protecting consumer interests, which is ostensibly what the NAA was set up to do, is important.

This ad hoc system of putting companies on notice despite no set parameters for compliance is a recipe for disaster. As is getting a fully functioning system under an old-school regulator’s diktat.

Billing blues


One of India’s oldest online bill aggregators, BillDesk, learnt this the hard way. The Mumbai-based company, which started operations 18 years ago, is the undoubted king of India’s digital payments space. With revenues of almost $150 million in FY17, and a valuation in excess of $1 billion, BillDesk seemed invincible. Until quasi payments regulator National Payments Corporation of India (NPCI) stepped in.

BillDesk, which had been carefully building bilateral agreements with businesses, banks and utility providers for nearly two decades, found itself in a pickle after the NPCI launched its own Bharat BillPay System (BBPS)—a single interoperable system to aggregate bills—in 2016. Here’s the catch, all billers need to be hooked up to BBPS so that all bills are accessible in NPCI’s centralised system. To access these billers, many of whom were previously BillDesk clients, BillDesk would need to apply for an RBI licence to be on the BBPS platform.

However, on the BBPS platform, BillDesk’s competitive advantages were effectively neutralised. BBPS mandates uniform levels of service and pricing among all aggregators, robbing BillDesk of key differentiators it had fine-tuned over years. “You can’t have a one-size-fits-all approach to billing,” a senior executive in the payments industry who did not wish to be named said.

BillDesk, once impervious to competition, is now slugging it out with newer players hungry for a slice of BillDesk’s pie. And just like that, a business that was painstakingly built to dominate its market stands potentially undone. The regulation was all it took.

So there you have it, regulation, a tool meant to protect the interests of all stakeholders, can do more harm than good when it’s applied without foresight, dialogue, and careful implementation. In a time when authorities react to situations with sweeping regulations rather than sensible ones, who will regulate the regulators?
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