Budget expectations 2021

Technology sector

Direct tax

Digital tax

•  Equalisation Levy (EQL) provisions have been introduced with effect from 1 April 2020. However, there are various ambiguities such as availability of tax credit of EQL to non-residents in the home country, definition of “digital facility”, applicability on intra-group services, and dichotomy between the date of applicability of provisions and date of applicability of exemption provisions. Accordingly, it is expected that the government would come up with clarifications on the ambiguities.
• Significant Economic Presence (SEP) provisions will be applicable from 1 April 2021. Considering the evident overlap between SEP provisions, withholding tax provisions, and EQL provisions, the government should provide clarifications on the expected interplay between these provisions. Further, even the SEP thresholds should be notified by the government soon or alternatively, the SEP provisions should be deferred until the provisions are clear and thresholds fixed.

Cloud computing

• Cloud-based transactions are essentially in the nature of services and ordinarily do not allow the user any right to the infrastructure. Applicability of TDS on cloud payments has emerged as a hotbed of litigation. Further, with COVID-19, the use of cloud services has become popular.
• Considering that payments for cloud services are not in the nature of royalty/FTS, it is expected that the government should provide clarification on the applicability of TDS provisions on cloud-based transactions. 

E-commerce

• E-commerce players incur heavy AMP expenditure for promoting their products. However, the tax authorities have been treating such expenses as brand-building expenditure and as capital in nature, even though the benefits of such expenditure are temporary and short lived.
• Hence, it is expected that the government would come up with a clarification on the treatment of AMP expenses to end to speculations.

Indirect tax

Valuation under customs and transfer pricing for transactions between related parties.

• Both customs and transfer pricing laws require taxpayers to establish arm's-length principles on transactions undertaken between related parties. The main objective under the respective laws is to provide safeguard measures and ensure that taxable values on which respective taxes are levied are correct.
• There is a need for a common platform that would provide a “middle-path” of arm’s length price that is equally acceptable under customs law and transfer pricing.

Issues with GST refund paid on capital goods when used in export/zero-rated supplies

• GST refund paid on capital goods where the same is used in export/zero-rated supplies is not available under the GST regime. Capital goods form a large part of investment for businesses and a situation of restricting refunds only to inputs and input services and not to capital goods leads to spike in pricing, cash crunch, and blockage of working capital.
• Therefore, refund of input tax credit on capital goods should be permitted through an amendment to the provision.

Media sector

Direct tax

Inclusion of media sector within the meaning of “industrial undertaking”

• The benefit of carry forward of losses and unabsorbed depreciation is inter-alia allowed in cases of amalgamation of a company that owns an “industrial undertaking”. Further, the term “industrial undertaking” does not include the media sector as the sector requires huge investments in digitisation, technology set-up, and a distribution network. Further, the pandemic has adversely impacted the media sector. Consolidation of the media/entertainment industry will help in rapid growth and generate substantial employment opportunities and faster digitisation.
• Accordingly, it is expected that section 72A of the Income-tax Act, 1961 (the Act) would be amended to also include the media/broadcasting and entertainment industry, within the definition of “Industrial undertaking”, to extend the benefit of carry forward of losses and unabsorbed depreciation in case of amalgamation of companies in these sectors.

Taxation for global events held in India.

• India has a huge untapped potential to host global events due to ambiguities in the taxation regime.
• It is recommended that the government consider setting up a simplified taxation regime for the events industry (including sports events) to provide clarity and attract bigger global events in India.

Deduction of expenditure on film produced on digital platforms.

• Rule 9A and 9B permit deduction of expenditure incurred on film production and acquisition of film distribution rights, respectively based on when the copyrights/distribution rights in films are exploited or depending on the date of release of the film. However, these provisions do not specifically cover films showcased on digital platforms. With increasing popularity of digital content, without clear provisions on deduction of production expenses by digital platforms, there could be high risk of litigation.
• The government should specifically extend this rule to cover the deduction of expenditure on films produced for digital platforms.

Indirect tax

Refund of inverted duty for producer/production companies.

• In the erstwhile tax regime, permanent transfer of copyright was considered as deemed sales and therefore, chargeable to VAT, while the same was not taxable under service tax laws. Under GST, both permanent and temporary transfer of copyright is taxable at 12 percent. Services by an author, music composer, etc., which were earlier exempt from service tax, are now taxable under reverse charges in the hands of the producer. Further, the producer is required to pay GST at 18 percent on such services. Provisions pertaining to refund of inverted GST duty provides that the term “Net ITC” includes Input Tax Credit (ITC) on input procurement only. Therefore, GST paid on procurement of input services is excluded from the scope of claiming refund due to an inverted duty structure.
• It is recommended that the refund provisions may be amended to the extent to include input services within the definition of “Net ITC” so that producers are able to claim the refund of accumulated credit on account of inverted duty.

Export of advertisement services 

• There is no specific provision on the place of supply for advertisements. The issue becomes debatable when services are provided to a non-resident. For e.g., advertisement services for billboards to a non-resident Indian.
• It is recommended that suitable clarifications on the taxability of advertisement services based on the recipient’s location be issued by the government.

Taxability of post-production services.

• Taxability of post-production services of editing, dubbing, special effects on video, audio clips by production houses should be determined based on the location of the recipient and not where such services are performed. The place of supply of post-production services has been a matter of debate. Accordingly, suitable clarification on taxability of the given services should be issued by the government.

Telecom sector

Direct taxes

Characterisation of telecom services (including broadband, leased-line services) as “royalty”

• Domestic as well as cross-border payments for a wide array of telecommunication services are under litigation on account of retrospective amendment in the definition of the royalty-vide Finance Act, 2012. The amendment brings within the purview of royalty, transmission by satellite, cable, optic fibre, etc.
• Payments made by telecom companies for telecom services are to be considered as royalty by tax authorities resulting in protracted litigation not only on characterisation but also on the aspect of retrospective tax withholding.
• It is recommended to avoid increasing the cost of telecom services for Indian consumers. Definition of the term “royalty” should be amended to exclude telephony, internet bandwidth, and other similar services. 

Inclusion of the telecom sector within the meaning of “Industrial undertaking”

• The benefit of carry forward of losses and unabsorbed depreciation is inter-alia allowed in cases of amalgamation of a company owning an “industrial undertaking”. Further, the term “industrial undertaking” does not include the telecom sector. Increased digital services adoption has necessitated further investments in the telecom infrastructure sector. Telecom companies and those in related infrastructure services are looking to restructure their operations to monetise existing assets.
• Accordingly, it is expected that section 72A of the Act would be amended to also include the telecom industry, within the definition of “industrial undertaking”, to extend the benefit of carry forward of losses and unabsorbed depreciation in case of amalgamation of companies in these sectors.

Indirect tax

Reduction in BCD rate on telecommunication equipment

• Presently, BCD on the import of telecommunication networking equipment is 20 percent. Further, BCD is non creditable and is added to the cost to telecom companies. Hence, it is recommended that the government could consider reducing the BCD rate on telecom equipment to 10 percent.

Input credit loss on major procurements

• The telecom industry is the second-largest consumer of petroleum products (primarily diesel), which have been kept outside the purview of GST and continue to be taxed under the erstwhile regime. The indirect tax cost on major procurements such as petroleum products and towers become a cost to telcos. It is recommended that petroleum products should be brought under the GST ambit so that telcos are able to avail input tax credit.