Budget 2024 Expectations: Technology, Media & Telecommunications

Peeyush Vaish,Partner and TMT Industry leader for Deloitte India and Madhava Yathigiri, Partner, Deloitte India

Expectations

Transfer Pricing

Expectation #1: Streamline the Advance Pricing Agreement (APA), Mutual Agreement Procedure (MAP) regulations

• As of March 2023, about 1,659 APA applications have been filed, with 516 APA applications conclusions. To resolve backlog of more than 1,100 applications and manage the load of new applications expected to be filed, the government should increase the bandwidth of the APA workforce.
• Most APA applications that culminated into agreements, pertain to the service sector. A majority of these, in turn, are captive companies involved in software development and Business Process Outsourcing (BPO). Some of these companies are also involved in engineering design services, research and development, and Knowledge Process Outsourcing (KPO). In relation to these, the following recommendations should be taken into consideration:

1. For subsequent applications, the government should release a standard readiness questionnaire; on the basis of which, APAs may be speedily concluded with CBDT.
2. For applications already filed and pending with APA authorities, a list of standard data points should be released. Based on those data points, pending APAs may be concluded speedily.

• Fixed timelines should be prescribed for the closure of APAs for transactions where a significant number of APAs are already concluded (such as provision of ITeS and software development services).
• A Permanent Establishment (“PE”) of an Indian company, located outside India, is subject to transfer pricing provisions in the country where the PE is located. In the event of any dispute with the foreign country’s tax authority, such PE may have recourse to Mutual Agreement Procedure restoration as provided in the treaties between India and another country. To provide forward looking tax certainty to such PEs, the scope of APA provisions should also be widened to include recourse to bilateral APAs between India and another country where the PE is located.
• Single-owner Limited Liability Companies (incorporated under the US laws) is enabled to claim the treaty benefits for the purpose of APA/ MAP applications.

Expectation #2: Royalty payments for use of technological capabilities, know-how by Indian companies engaged in manufacturing and distribution business of foreign technology products/services

• Indian companies engaged in the manufacturing and distribution of foreign technology products/services, usually pay royalty for using technological capabilities, know-how, etc., to the owner of propriety technologies. Such technological capabilities and know-how are essential to conduct business in India. As part of the arrangements, often, the technology proprietor is issued equity or other forms of remuneration by the Indian company, as consideration for receiving the technology. To attract further investments in technology and encourage investments in the technology sector, guidance/notification should be issued to field officers on mechanisms to review such transactions.

Expectation #3: Ensure consistency in compliance requirements for income tax return and transfer pricing compliance requirements for non-resident taxpayers

• The Finance Act of 2020 granted exemption to non-residents under section 115A from furnishing a return of income in India in respect of specific income, such as royalty, fee for technical services, and interest, dividend, provided appropriate tax is withheld under the Indian Income-tax Act, 1961, on such income at the time of payment. However, similar relief was not granted in respect of such income to non-residents for TP compliance obligations, namely, furnishing Accountant's Report in Form No. 3CEB and maintenance of TP documentation. The Indian government should amend section 92E of the Act, to provide exemption to non-residents, similar to section 115A.

Direct Tax

Expectation#1: Provide clarity on the meaning of the term “Online Game”

• In a digital era, it is common to see online platforms luring customers by offering promotional schemes, such as spin the wheel or scratch card, on completing a prescribed number of transactions. The intention is to market a product/service offering and not participate in a typical game with the intention to win.
• Clarity should be provided by way of a circular capturing activities referred as “online game.” Else, all sectors offering and running marketing and promotional schemes/contests online, might get severely affected with the burden of discharging withholding tax obligation under Section 194BA.

Expectation #2: Provide clarity on taxation of telecom services in the hands of non-resident telecom operators

• Indian telecom operators make payment to foreign telecom operators for various telecom services. These payments were alleged by the Indian Revenue Authorities, as payments for using equipment/process and therefore, held as taxable, being in the nature of royalty.
• In a recent ruling of Vodafone Idea Ltd., Karnataka High Court held that payments made to foreign telecom operators for inter-connectivity use and bandwidth charges are not in the nature of royalty, as no right-to-use equipment is being provided by foreign telecom operators. A similar view has been pronounced in a plethora of rulings.
• Clarity is brought out in Income-tax Act, 1961 that payment for telecom services is not chargeable to income tax as they do not entail payment for using equipment/process.

Expectation #3: Increase in scope of provisions dealing with carry forward of losses and unabsorbed depreciation

• Benefit of carry forward of losses and unabsorbed depreciation is not available in case of amalgamation of companies not owning an “industrial undertaking”. The term “industrial undertaking” is defined to mean any undertaking engaged in the manufacturing or processing of goods, manufacturing of computer software, the business of generation or distribution of electricity or any other form of energy, the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services, mining or the construction of ships, aircraft, and railway systems.
• Consolidating entities within an industry helps in rapid growth and generation of substantial employment opportunities. This will in turn help make India a competitive country for foreign investment. To promote such consolidation, the benefit under Section 72A to carry forward loss and depreciation on amalgamation, should be extended to include other capital-intensive sectors. These sectors include media/broadcasting and entertainment, and infrastructure/capital-intensive service sectors, such as telecom infrastructure service provider and direct-to-home operators.

Indirect Tax

Expectation #1: Export benefit for testing activities undertaken in India

• Many multi-national companies have set up subsidiaries in India towards undertaking testing activities, which requires Indian entities to import goods on free of cost basis from the service recipient. Given that the testing activities are in respect of goods made available by the service recipient, the place of supply will be in India under section 13(3)(a) of IGST Act.
• GST @ 18 percent on such services is impacting cost arbitrage to carry out such activities from India. It is pertinent that the said services are consumed/ utilised by the service recipient located outside India.
• The industry expects that the said provision is amended to exclude testing activities from its ambit so as to provide relief to the industry and to encourage testing activities to be carried out from India. Similar relief was provided to MRO and pharma sector in the past.

Expectation #2: Exemption on GST TCS obligations on e-commerce operators on facilitation of zero-rated supplies (exports)

• E-commerce has transformed the way business is done in India. The e-commerce industry has been directly affecting MSMEs in India. It has generated a favourable cascading effect on other industries.
• At present, per section 52 of the CGST Act, an e-commerce operator is required to collect GST TCS @ 0.5 percent of the net value of taxable supplies made through it by other suppliers where the consideration with respect to such supplies is to be collected by the operator. Taxable supplies do not include exempt of NIL-rated supplies but includes zero-rated supplies. Given this, essentially, even when there is no GST liability payable on zero-rated supplies under an LUT, e-commerce operators are required to collect GST TCS in the absence of any separate GST collection by suppliers. The supplier is required to subsequently claim a cash refund of such GST TCS collected by the e-commerce operator. This results in cash flow issue for exporters and an increase in compliances for e-commerce operators and suppliers engaged in exports.
• The government should come forward with suitable amendments to exempt GST TCS obligations on e-commerce operators on facilitation of zero-rated supplies, to help with the cash flow issue for exporters and facilitate the ease of compliances.

Expectation #3: Investment-driven growth in the emerging space sector to support “Make in India”

• Production Linked Incentive (PLI) schemes are designed to incentivise domestic production and attract investment by providing financial incentives to manufacturers based on their output.
•  The Indian private space sector, which is in a nascent stage, requires tax and policy support to boost manufacturing and spur research and development.
• PLI schemes for space tech start-ups are needed to help boost local manufacturing and encourage capability building within the country.

Expectation #4: Aligning classification and eligibility for concession under Notification No. 57/2017 dated 30 June 2017 for telecom products and equipment

• Notification No. 57/2017 grants concession to various telecom products and equipment. The benefit of concessional duty in some cases is granted based on technology-related descriptions. To ensure that such technology-related descriptions are better understood by various stakeholders, the Central Board of Indirect Taxes (CBIC), in consultation with the Department of Telecommunication (DoT), issued a circular in 2023, specifying the identification of the products/equipment.
• However, the industry continues to face coverage and eligibility-related interpretation issues, highlighting a need to suitably amend or issue clarification to address such issues. Let us look at a few examples.

1. According to the notification, Voice Over Internet Protocol (VOIP) phones falling under HSN 8517 62 90/8517 69 90 are excluded from the purview of concessional duty benefit. However, there are judicial precedents where VOIP phones have been classified under different tariff entry i.e., 8517 18. This causes undue hardship to the industry. Hence, the reference to VOIP should be removed from the specified entry in the said notification.
2. Carrier ethernet switches are ineligible for benefit of concessional duty. Typically, the difference between carrier ethernet switches and non-carrier ethernet switches is determined by their features and use. Several times, a non-carrier ethernet switch is treated by customs field formation as a carrier ethernet switch, thereby making it ineligible for concessional duty benefit. To address the said issue, CBIC should consider a certificate issued by a renowned agency/committee (such as the Telecommunication Engineering Committee) as a document based on which benefit under the notification shall be granted to non-carrier ethernet switches.
3. Multiple Input/Multiple Output (MIMO)/Long Term Evolution (LTE) products, according to the notification, are ineligible for benefit of concessional duty. Typically, MIMO/LTE-based technology is used in several IT equipment/telecom. The list provided in the circular is illustrative and inclusive in nature. As the list of MIMO/LTE products is not exhaustive, this may lead to disputes on concessional benefit. Hence, CBIC should issue an exhaustive list to eliminate the scope for any dispute of interpretational nature.

Personal Tax

Expectation #1

TCS on overseas remittance for participating in employees’ stock option plan should be discontinued if taxes are already deducted under section 192.

Expectation #2

The employer should be permitted to claim foreign tax credit at time of withholding taxes under section 192, on salary income.