Pre-budget 2017 expectations
Technology, Media & Telecommunications sector
Tax deductibility of Spectrum fees
Finance Act 2016 provides for amortization of spectrum fee for auction of airwaves in equal instalments over the period for which the right to use spectrum remains in force. The said section is applicable from AY 2017-18, i.e., FY 2016-17. The question arises on the appropriate tax treatment for spectrum fees paid in earlier years i.e. prior to March 2016.
In order to put to rest any controversy, it may be provided that the law has prospective application only and will not apply to acquisition of spectrum up to 31 March 2016. Additionally or alternatively, it may be provided that the spectrum is an intangible asset on which depreciation is available under section 32 and therefore telecom operators who have opted for such tax treatment are in conformity with the provisions of the law.
Tax withholding on distributors’ margin on sale of SIM cards and prepaid vouchers
Telecom companies sell prepaid cards/vouchers to Distributors at a discount who in turn sell to retailers for onward sale to subscribers. As per the current practice followed, no tax is deducted at source as telecom companies do not make any payment to the distributors as payment is received from them net of applicable discount which is very nominal and further as the discount is not in the nature of commission as arrangement with distributors is on Principal to Principal basis. On the contrary, the tax authorities allege that the distributors are agents and treat the discount as commission and apply TDS @10%.
It is recommended that no TDS should be applicable to such discount or the burden be reduced to 1% as against 10% as currently applied.
Characterization of telecom services as ‘Royalty’
It has been upheld in a number of decisions that telecommunication services are standard services and therefore cannot be treated as Royalty under the provisions of the Act and the tax treaties entered into by India with various countries. The Finance Act, 2012, retrospectively amended the definition of ‘Royalty’ to include within its purview, transmission by satellite, cable, optic fibre, or similar technology. It has also been clarified that payments in respect of all rights, properties and information are in the nature of Royalty irrespective of any actual possession or control or direct use of the same. It should be clarified that such services do not qualify as Royalty and amendments made by finance Act 2012 be amended retrospectively.
Definition of industrial undertaking in Section 72A of the Act should be amended to include Tower infrastructure companies to allow set off and carry forward of losses of tower companies. This will help in consolidation in the sector and reach economies of scale.
Accelerated Depreciation should be provided on IT and Telecom Hardware Products
It is recommended that depreciation on computers and computer software should be retained at the current rate of 60% on computers. Further, Telecom Hardware products have also same or shorter life as computers and therefore it is recommended that rate of depreciation in relation to computers, and IT & Telecom Hardware products should also be enhanced.
Benefit of Investment Allowance under section 32AC should be extended to other sectors including telecom infrastructure service providers
Currently this investment allowance is meant for a company engaged in the business of manufacture of an article or a thing. Other sectors like developing and building an infrastructure facility, telecom infrastructure service providers, creation of broadband facility etc. are equally important and the investment allowance should be allowed to such companies to enable them to plough back the cash for further investments in the sector which is important when Government is making significant efforts to push the digital payments and other e-initiatives.
CENVAT Credit on input services
Telecom Towers, shelter, electric generator are necessary items of a passive telecom infrastructure which are erected on solid concrete civil foundation. Construction of civil foundation at telecom site is a legitimate business expense and it is an essential part of passive telecom infrastructure which requires substantial investment. Accordingly, inclusion of construction of civil foundation work, in the context of setting up or installation of telecom tower, in the definition of “input service” in Rule 2(l) of CENVAT Credit Rules for CENVAT purposes.
CENVAT Credit of diesel
CENVAT on diesel was earlier denied as it was heavily subsidized by the government and the government did not want to give dual benefits of subsidy and CENVAT to diesel consumers. However, over the last one year, the government subsidy in diesel has almost been fully eliminated. Therefore, the only rationale for not granting the CENVAT credit on diesel is no more in existence. Inclusion of diesel in the definition of “inputs” in Rule 2(k) of CENVAT Credit Rules for CENVAT purposes.
Service Tax Applicability
• The service tax credit should be allowed under Rule 6(3) of STR, 1994 in case of waiver of recovery of service fees for any business reasons;
• The service provider would need to pay service tax on raising the invoice though he has not received service tax/fee amount from clients;
• The non-grant of service tax credit under Rule 6(3) of STR, 1994 in genuine cases would result into loss to the service provider and affects the cash flow of the service provider.
Tax holiday for multiplex
To grant a tax holiday similar to Section 80-IB for setting-up new multiplex or for conversion of single screens to multiplex whereby contributing to improvement in India’s screen density ratio.
Deduction for cost of production / acquisition for film producers / distributors
• The entire cost of production should be allowed in the year of film release irrespective of the date of release
• To clarify for determination of “distribution of film on commercial basis” should consider any of revenue streams such as music, digital, satellite
Clarity on utilisation of SEZ Re-investment Reserve Account
There is an ambiguity as to whether the SEZ reserve can be utilised in the year of creation itself. Further, there is also an ambiguity on whether the SEZ reserve is required to be utilised for acquiring P&M within the same unit or can be utilised for any other SEZ unit/ other unit.
Clarification is required on the year of utilisation of the SEZ reserve and whether the utilisation may be in the same unit or other units.
Incentive for research and development
Section 35(2)(AB) be amended to include ‘Information technology” along with biotechnology so that there is clarity that the weighted deduction would be available to an assessee engaged in production of computer software and business of information technology so that all R&D activities are enabled for weighted deduction.
SEZ tax incentives sunset clause should be extended
In a developing economy like India, exports play a critical role for its development and thereby employment generation. To make a success out of “Make in India” and “Digital India” initiatives, growth in SEZ, which attracts investments and generates foreign exchange is critical will place India on global competitive edge.
At this stage of economy, fresh investment in SEZs should be encouraged and hence the sunset clause for phasing out benefits to SEZ should be deferred for the time being.
80JJAA - wages to new regular workmen
80JJAA was amended vide Finance Act 2016 to widen the incentives for wages paid to new regular workmen. However, amongst others, the deduction will not be available in respect of an employee whose total emoluments are more than Rs. 25,000 per month.
This threshold, keeping in mind the industry standards of salary, could be revisited and increased.
Is a tax credit of Equalisation Levy available to foreign company
The impact of equalisation levy would be on the recipient foreign company as 6% of the consideration for services is to be withheld by the Indian payer. If the home country does not give credit for equalization levy, this could lead to double taxation.
The Government may examine the possibility of entering into reciprocal agreements for credit with countries that impose a similar levy.
Set off of Unabsorbed Depreciation, Accumulated Losses In amalgamation
Section 72A of Act prescribes c/f and set off of accumulated loss and unabsorbed depreciation in case of an amalgamation of a company owning an industrial undertaking with another company.
A clarification should be inserted that the definition of “manufacturing of computer software” under section 10A shall be read into section 72A to avoid any litigation.
New Penalty provisions should be rationalised where taxes have been deducted
The new penalty provisions effective from FY 2016-17 onwards provides for penalty of 50%/ 200% of tax payable on under-reported/ misreported income. Currently, clause (c) of Explanation 4 to section 271 of the Act provides that for the purpose of computation of tax sought to have been evaded, advance tax/ SAT/ TDS/ TCS paid shall be reduced. However, there is no similar provision u/s 270A and hence penalty is leviable on the entire tax payable on under-reported/ misreported income without credit of taxes already paid. Necessary amendments are hence required.
Requirement to file tax return by foreign companies on Royalty/ FTS income and exempted income
In addition to the interest and dividend income, section 115A(5) benefits should be extended to cover Royalty/ FTS incomes as well.
Further, income exempt on account of availing treaty benefits (such as capital gains, FTS – make available, etc.) should also be exempted from return filing obligations. A clear provision should be brought into the statute to reduce the compliance burden of the foreign companies.
Considering the proposed implementation of Goods & Services Tax in India wherein all assesses are required to undertake compliances in electronic form, broadband connectivity in far deeper places in India will be very critical for a successful implementation of GST. Any incentive in this area will help the Government in not only achieving a more digitalisation but also in higher compliances from the businesses across the country.
The Government may also consider ending the inverted duty structure by reducing tax rates on inputs or refunding accumulated tax credits in sectors such as the electronics manufacturing sector.
Effect of delay in GST implementation on the Union Budget
As the government moves a step closer to GST, the service tax rate be may be increased from 15% to 18% considering the proposed GST rates for services.
All service tax exporters can expect for release of all pending service tax refunds within 31.03.2017. There could also be pruning of certain exemptions under central excise and service tax to widen the tax base and certain measures for ease of doing business. Lastly the budget could see a clear road map for GST implementation being spelt out by the Government.
Anti-profiteering measures under GST
It is expected that the union budget provides broad outline on Anti-Profiteering concept and its mechanism. Such measures should also bear in mind that it might hamper ease of doing business, contradictions to current transfer pricing rules etc.