India's Love Affair with Licenses

10362Have you heard the saying one step forward, two steps back? That’s how I feel when it comes to public policy in India. One day they release a new policy that seems to be a game changer and positively impacts certain industries. Then the next day they release another set of policies that totally kills or curtails other industries. It’s like the left hand has no idea what the right hand is doing, in the end it’s just masturbating.

A year ago, the one step forward was the concept paper around electronic payments. The Reserve Bank of India (RBI) introduced the Unified Payments Interface (UPI) which would connect all the banks and make it very simple for people to send money to others and generally make e-commerce much easier. The good news is that last month it was launched and it’s gaining traction as more and more banks integrate to the UPI platform. UPI is really just like a Paytm wallet, so instead of having a Paytm wallet you would get a “Payment Address” issued by your bank and then make payments or receive money directly into the bank account.

UPI is not completely new, it’s an advanced version of the Immediate Payment Service (IMPS). The basic flow is that when you visit the checkout screen of an e-commerce company you would enter in a unique “Payment Address” such as 9820012345@AxisBank. This would then route this transaction to the National Payments Corporation of India (NCPI) and it would automagically go to the correct bank. If the bank is Axis Bank, you would open the Axis Bank app and then authorize the transaction in the app. There would be no need for a one time password (OTP) as the Axis app would required a MPIN (mobile PIN) or potentially your fingerprint scan from your Aadhaar enrollment. Magic.

If you are interested in the technical features of UPI, I suggest you download and read the UPI specification document. When you start to read it, you quickly realize how this technology could leap-frog the e-payment systems that are currently in use in the US and Europe.

If UPI was the one step forward, then the newly introduced draft bill called the Geospatial Information Regulation Bill, 2016, (the Geospatial Bill) is two steps back. The Geospatial Bill was released by the Ministry of Home Affairs and when you read it, you realize it’s more like two thousand steps back. Take for example, if on a map you accidentally misrepresent the borders of India, it can be punishable with a fine ranging from Rs. 10 lacs (USD $15k) to Rs. 100 CR (USD $15 million) and even crazier is the potential imprisonment of up to seven years.

Oh, but there is much more. You have to apply for a license via the Security Vetting Authority (SVA), which sounds fucking ominous like something the US Government would have created after 9/11. So who or what is the SVA? According to the draft bill:

The Security Vetting Authority shall consist of an officer of the rank of Joint Secretary to the Government of India or above as Chairman and two members, one, a technical expert and the other, a national security expert.

That just sounds like code for – be prepared to pony up some cash so we can “move your file” through the process. This licensing process is a throwback to the good old days of the License Raj in India. And, don’t get me started on how this will effect EVERY phone app that asks for your location or shows you a map. As I said, one step forward and two thousand steps back.

Some sensible people have come together to rally against the current form of the Geospatial Bill, please visit SaveTheMap.

US and India Taxation

18949788.cmsDear e-commerce expat,

So you moved to India to join the e-commerce boom, you get to deliver packages during the day and tweet selfies all night. My only advice to you is get your financial house in order. In the weeks and months before you moved to India, I’m sure several people asked you “do you have to pay taxes in both countries?” The short is no, the long answer is – it’s complicated.

Why is it complicated? Because if you are a U.S. citizen and moving to India, you are essentially stuck between two countries that are absolutely obsessed with milking you for every dime that is owed to them. It’s justifiable, but let’s rewind and understand how we got here and go over the basics of each countries tax regime.

The U.S. national debt is at over $18 trillion dollars and many of the largest corporations like Apple, Microsoft and Cisco Systems have kept their profits offshore and refuse to repatriate (fancy word for bring) the funds to the US and pay taxes.

The Internal Revenue Service (IRS) is the government agency that collects the taxes. The tax year is based on the calendar year (January 1 to December 31, 2013) and for individuals, the taxes are due on April 15, 2014 based on the example. They refer to the different rates of taxation as “tax brackets”. The IRS is sometimes referred to as Uncle Sam. If you are a U.S. citizen or resident alien, your worldwide income is subject to U.S. income tax, regardless of where you reside.

In 2010, the US passed the Foreign Account Tax Compliance Act (FATCA). This made it mandatory that all non-US financial institutions automatically report if they have accounts for US citizens and report that information back to the US authorities. But, why let the institutions have all the fun? Individuals still need to file Form 114 – Report of Foreign Bank and Financial Accounts (FBAR). An FBAR filing is required if all foreign financial accounts exceed $10,000. In addition, a Form 8938 – Statement of Specified Foreign Financial Assets is required if you have assets over $200,000 during the year. The amounts vary, depending on whether you are single, married or filing seperately.

In India, the issue is with a cash based economy and corruption. When people pay for services in cash, the government has no way to track it and thus people avoid paying taxes. With corruption, much of the money that is meant for government programs for the poor gets siphoned off and put into off-shore bank accounts.

The Income Tax Authority is the government agency that collect the taxes, it’s part of the Ministry of Finance. The financial tax year is based on April 1, 2013 to March 31, 2014 for example. Individual taxes are due on July 31, 2014 based on the example. They refer to the different rates of taxation as “tax slabs”.

In 2015, the Indian government passed the Black Money (Undisclosed Foreign Income and Assets) Act. It’s commonly referred to as the “Black Money Act” and the intent and spirit of the law was to go after politicians and large businesses that for years had stashed their money in foreign countries. The deadline to declare ANY and ALL foreign assets was September 30, 2015 and the results were less than stellar. Many of the people that declared their assets were working professionals and not the intended target of politicians and large businesses.

It’s Complicated
The US and India do have a Double Tax Avoidance Agreement (DTAA) in place and for the most part works. So if you make the equivalent of USD 100,000 in India, then India will tax you at 30% and the US will not double tax you because of the DTAA that is in place. However, if you make the equivalent of USD 500,000 in India, then India will tax you at 34% (30% + an additional 10% surcharge on 30% + an education tax of 3% on the entire tax amount). In the US, since the highest tax bracket is 39.6% you will have to pay the delta of 5.6% to Uncle Sam.

Suppose you have a 401k retirement plan which allows you to generate income within the account tax free and pay taxes at the time of distribution. Unfortunately, according to the DTAA between India and the US, India does not recognize the account as a pension so you will have to pay taxes on the income generated in the account to the Indian government. 😦

Another example, suppose you buy an equity mutual fund in India and after 13 months you sell it. In India, there is no long-term capital gains on equity mutual funds – awesome right? Wrong, since you hold a US passport you will have to pay long-term capital gains in the US based on the US tax bracket you are in.

So technically, there is no double taxation but you will get taxed at the highest rate whether it’s in India or the US. DTAA should really stand for Double Trouble And Anguish.

An Example
Suppose you earn Rs. 78 lakhs for April 1, 2014 to March 31, 2015 for the work you have done in India. That is Rs. 6.5 lakhs a month and at the current exchange rate comes to USD 10,000 a month. In India you would fall under the 30% tax slab and in the US you would fall under the 28% tax bracket. You will first have to file your US taxes which are due on April 15, 2015. Since you earned USD 90,000 over the 9 months you fall under the Foreign Earned Income Exclusion which means the US government won’t tax you on anything. You will need to look at Form 2555 and Form 1116 for Tax Credits to see which makes more sense for you.

Then when you file your Indian taxes on July 31, 2015 you will report the Rs. 78 lakhs on your ITR (income tax return). You will have to show the long-term capital gains on your Indian taxes in Schedule TR which is for taxes paid outside India. And of course you will need to fill out the Schedule FA for foreign assets. If on February 10, 2015 you have a short-term capital gains of Rs. 5 lakhs, your tax will be Rs. 1.5 lakhs which is 30%. Then when you file your US taxes for calendar year 2015, you will have to show the gains and the credits will be listed on Form 1116.

Yeah, it’s almost better to be just a delivery person in India.

Fighting Your Inner Fear

fearJust 12 months ago, the venture capital funding environment in India was white hot. Anything and everything was getting funded. FOMO (fear of missing out) was everywhere, VCs didn’t want to miss the next Flipkart or Ola, so they opened up their checkbooks and just wrote check after check after check.

Then about 6 months ago, the markets started to turn and you would hear VCs talk about “unit economics” and asking startups about their path to profitability. These conversations were a bit awkward for those that were already in fund raising mode because overnight their decks had to change from “be present in every city at any cost” to “scale into new cities if the metrics make sense”.

Now, we are at a point where previously funded startups are having a very tough time raising a follow-on round. And, fear has set in. Fear is what holds most people back. Fear of speaking in front of 200 people, fear of asking a question at a meeting or fear of making a decision because of the implications, etc…

I believe your ability to manage your fear is what distinguishes successful people and separates the winners from the rest.

Many of the autobiographies I have read or the 100’s of startup podcasts I listen to, rarely talk about it. Instead, it’s always about a person’s connection, their college degree, their domain knowledge, their ability to identify a great market, etc… However, in any of these situations you will always run into roadblocks and at times you feel your startup’s progress is in jeopardy and then fear starts to creep in.

Over the past month I’ve fielded several calls from entrepreneurs who fear the current fund raising environment will kill their startup. They are not sure what to do, so I ask them what they are doing? The more they talk, the more it sounds like fear has set in and they are just doing busy work and hoping things will turn around.

That is absolutely the last thing you want to do. You might have what seems like an endless list of “shit that can go wrong”, forget that list and focus on the issues at hand. Such as get your app out there, focus on marketing, talk to your top 10 customers and understand their needs, etc… You should be fighting your inner fear head-on and doing things that are outside your comfort zone. That’s what makes someone successful vs. someone that is always talking about woulda, shoulda, coulda.

The Car Industries Innovator's Dilemma

car-brands2015 was a banner year for automotive sales in the United States. It was officially the best year ever (let me repeat EVER) for them by selling 17.471 million new cars and beating the previous record of 17.402 million cars set back in 2000. Strong demand, cheap gas and sub-prime like lending practices helped achieve this sales record. Now the bad news, this sales trajectory most likely will not continue for years and years.

Car companies have a great opportunity to take the profits from the past several years and invest in new markets. But, will they? In Clay Christen’s book – The Innovator’s Dilemma, he says:

successful companies put too much emphasis on customers’ current needs, and fail to adopt new technology or business models that will meet their customers’ unstated or future needs.

Remember Kodak? They invented the digital camera but never monetized it. They were busy making so much money from the physical camera rolls and the paper that pictures were printed on to think about the future. That attitude did not work out so well for Kodak.

The question is, will car companies innovate or go down the path of Kodak. The car companies business model is getting attacked on multiple fronts from various startups and technology:

  • ride sharing apps – why own a car, when you can share a ride with someone who is going in the same direction as you. With an app, the idea of carpooling with someone is made much easier and simpler.
  • taxi hailing apps – why own a car, when you can use an app to summon a car to take you to a particular destination
  • electric cars – why own a fossil fuel burning car that is horrible for the environment when you can have an electric car. (Granted the electricity still might come from a coal burning plant but over time solar energy might be the source.)
  • self driving cars – why own a car when you can summon a self driving car to pick you up and drop you to your destination. Apartment buildings might buy these for their residents and allow everyone to share.
  • 3D printed parts – Why go to a local dealer or repair shop when you can 3D print the plastic switch that needs to be fixed.

I’m a hugh car fan, but I know that most people just don’t give a damn about their car. For 99% of the the population a car is used to get from point A to point B and for 95% of the time is just a hunk of steel that sits idle. The rise in these new business models that are attacking the car industry are to address the 99% of the population.

The car companies have the money and distribution to change things around. But, it all depends if their management teams have the ability to break-free from their past and get past the innovators dilemma.


On-Demand: Technology or Service Delivery?

a-little-bit-ofWho would have guessed that in 2009 the idea of hailing a taxi via a mobile app would spark a revolution. That is exactly what Uber has single-handedly done and kicked off what is now termed the “on-demand economy”. In the process, Uber has been estimated to be worth over $50 billion and continues to grow into new markets.

Because of Uber, there are a host of on demand services from delivering groceries, restaurant meals, laundry, home repair, car repair, etc… The list is long and keeps growing by the day. It’s still early days in India and the intense competition in these various verticals has led to a minimum of 10 startups in each category. Which explains why venture capitalists are still funding these “on-demand” startups because no one really knows who will come out on top. Since India is such a large and diverse country, I’m willing to bet that each vertical will end up with 2-3 large players in each vertical category.

Over the past several years I’ve been advising many startups on their product/market fit and technology stack. (Pro tip, to sound smart add stack to anything and people will think you are well versed in that area. Food stack, technology stack, retail stack, etc…). Many of the startups I’ve interacted with for the “on-demand” space are divided into 3 groups:

  1. A team of computer geeks who are looking to provide a solution to a problem
  2. A team that has domain knowledge of the space but lacking any technology strategy
  3. A team that has neither the domain knowledge nor the technology skills, these ideas usually forever remain in PowerPoint

The first group seems to have gotten all the love and media attention. How many times have you read the following headline “3 IITians launch an Uber like service for X”. Initially, I used to enjoy advising those startups because we had so much to talk about in regards to the technology stack. But, when the topic turned to service delivery, business metrics and customer engagement the response was pretty much the same – oh, we’ll just hire some business development and project managers. That should have been my first clue that they were going down the wrong path. For them, the technology was more important than the consumer.

Over the past year, I’ve had the opportunity to work with several startups that fall into the second category. They have the domain knowledge of their particular space but need some hand-holding when it comes to technology. The more that I engaged with these startups the more I realized that they would be more successful because for them it was about maintaining their brand at all costs. Which meant making sure the customer was the most important piece of the equation, not the technology stack which is really just an enabler.

Many of the heavily funded “on-demand” startups built large marketing and technology teams but failed to monitor, measure and understand what the customer experience was. I can’t tell you how many times I’ve heard from colleagues that they used a restaurant delivery app and the food was delivered late, food was cold or something was missing. If you can’t get the basics right, it doesn’t matter how much awesomesauce technology you have running on Amazon Web Services because it’s not a technology problem, it’s all about the service delivery.

What happened VW?

vw-dieselgateAbout 4 1/2 years ago I penned an article talking about how the Volkswagen (VW) Group was firing on all cylinders in India. After revealing to US authorities it had been intentionally circumventing emissions standards, all that progress is coming crashing down and it could take down the VW group with it. That’s not hyperbole, what the VW Group has committed is a serious breach of trust. So what happened?

It all started with some scientists from West Virginia University who were testing random vehicles for emissions. They noticed the cars from the VW Group always seemed to spew more emissions in actual driving conditions then when stationary at an emissions testing facility. The numbers were not 5% or 10% off but an order of magnitude that was 15-35 times more then the VW Group said the cars would emit. It finally came to a head on September 15, 2015 and the US Environmental Protection Agency (EPA) got involved by issuing a notice of violation. Surprisingly, the VW Group admitted it was intentionally beating the emissions test by using software to detect if a car was being testing for emissions and then changing various parameters to the get emissions levels much lower.

Although, VW admitted it was at fault it tried to shield itself saying it was “rogue coders” who did it not anyone from the management team. HAHA. The investigation is on-going and no one really knows what happened but I can tell you some “rogue coders” would not be able to pull this off by themselves. Either that or VW is one of the most dysfunctional companies on the planet. VW was on a mission to be the largest car maker in the world and I’m sure the mandate from the CEO was to go big at all costs or go home.

The VW Group should be barred from selling cars in the US for 2-3 years to really make a point that you cannot intentionally circumvent the law for economic gain. This incident is different from GM where people died. That was a design flaw that was covered up for years and they didn’t intentionally set out to design a faulty ignition switch. If VW gets a slap on the wrist I think it will empower more companies to roll the dice and see if they can getaway. For such a reputable company like VW to go down this path is pure sadness for any car person, they have some amazing name plates like Porsche, Lamborghini and Bugatti to name a few.

As far as India is concerned, the cars will probably get the required fix to make the cars compliant for emission standards. But, then that means they probably won’t be as fuel efficient which will open up a whole host of lawsuits for fraud. As far as banning VW cars, I don’t see that as an option as the country really needs those jobs and the tax revenue it generates. Whatever the case may be, their reputation has been damaged and will take a long time to rebuild that trust with consumers.

Dear Ola & Uber, Welcome to the License Raj

Bits-Bytes-CarEveryone from the Bay Area to Bangalore is talking about whether we are in a technology funding bubble or not. I think that misses the bigger question in India of whether the Indian government might have an effect on it. I woke up this morning and saw an article that Vijay Chibber the secretary of the Ministry of Road Transport and Highways, has stated that companies like Ola and Uber must be registered with the state government like any other taxi operator. Vijay refers to Section 93 of the Motor Vehicles Act which states that the state governments have jurisdiction.

Ola has raised just under Rs. 6,660 crore in funding and employs thousands of people and that is most likely going to come to a screeching halt if the government has its way. Registering with the government is not the issue but existing taxi’s are registered and it’s pretty clear no one likes the existing system. How many times have people been refused a ride from a taxi driver? How many times has the taxi driver driven like he was in an F1 race? How many times have you stepped into a taxi and the floor board has rotted and you can see through? Yup, I’m sure all of us have faced this issue.

This issue goes back to my disconnect with Modi. He will travel all around the world and meet with enthusiastic entrepreneurs like Facebook’s Mark Zuckerberg and Tesla’s Elon Musk but back at home…

Well back at home, we are back to square one with the “license raj” of yesteryear. The central government has punted on the issue and has let each state government frame the guidelines for the taxi app aggregators like Ola and Uber. This just means more work for Ola and Uber in dealing with each state government – oh, what joy for them! And, in states like Maharashtra they may impose a cap on the number of taxi’s that an operator can have, because that’s how we roll in the license raj era. VC funding meet Indian Government regulators, you may have met your match.