Pre-budget 2018 expectations

Technology, Media & Telecommunications

Introduction

The market size of the M&E sector in India is estimated to be USD 20.5 billion (INR 1,370.63 billion) in 2016. M&E is one of the sectors which is part of the government’s ‘Make in India’ initiative. The main key sub-sectors under M&E include broadcast, print, films, sports, radio and other segments.

Broadcast is a very large sector as the country has more than 180 million television households and approximately 900 television channels (including news and current affairs). India has the second largest television market globally.

Indian film industry is largest in the world in terms of number of films produced - approximately 2,000 films every year in over 20 languages.

Challenges/Issues of the Sector

• Industrial undertakings are allowed to carry forward tax losses in case of merger or amalgamation under Section 72A of the Income-tax Act, 1961. As broadcasting is not included in industrial undertaking, the benefit of tax losses is not available in cases of consolidation and this is a deterrent for the broadcasting sector
• The scope of safe harbour transactions has been enlarged in 2017 to provide certainty to taxpayers. Transactions such as provision of software development services for IT/ ITeS sector are part of the safe harbour regime. However, transactions specific to media and entertainment sector are not included under the safe harbour regime
• Broadcasting is capital intensive and requires financing at a lower cost. India is in the final stage of digitization which requires huge investment. Currently, broadcasting is not granted infrastructure status by the government
• India has a screen density of 6 per million people which is significantly lower than other countries such as USA (126 per million) and China (30 per million). The requirements for obtaining a cinema license were drafted back in 1952 and have not been updated. About 15 to 20 approvals are required various local bodies / regulatory authorities for obtaining a cinema license

Expectations from Union Budget 2018

• Government should consider including broadcasting under industrial undertaking for purposes of Section 72A of the Act. This amendment would facilitate consolidation within the broadcasting sector
• Include the transaction of distribution of content by an Indian company under the safe harbour regime. International transaction would be content distribution by an Indian company, which has been provided by a foreign company (associated enterprise). This would provide relief to the media and entertainment players in obtaining tax certainty. Also, it would entail saving of time of tax authorities for tax assessments
• Single window clearance mechanism should introduced for setting up screens. The government should also consider providing tax holiday similar to section 80IB of the Act for setting up new multiplexes or for conversion of single screen to multiplexes
• Services by way of admission to exhibition of cinematograph films is subject to GST at 18% or 28%, depending on the price of the ticket. In addition to GST levied by state and central government, the right to levy and collect tax has also been given to local authorities and this right continues even after implementation of GST. It should be ensured by the state governments that local bodies do not levy additional tax on exhibition of films and if levied, a corresponding reduction in GST rate should be given
• Currently, the rate of GST on exploitation of films or television content is 12% whereas the rate of GST on services by artists, technicians and other major services procured is 18%. This results in an inverted duty structure. The rate on goods and services procured should either be reduced or a mechanism for refund of accumulated credit should be provided
• In case of renting of immovable properties such as cinema halls, the place of supply is where such property is situated and hence, central GST and state GST applies on the same. However, the properties are taken on rent by exhibitors. This results in loss of credit in states where exhibitors do not have registered place of business. Appropriate amendments are required to ensure that such credits are not lost
• Sponsorship of sports events by corporates should be considered as CSR expenditure under the Companies Act, 2013. A framework can be introduced providing guidelines when sponsorships would qualify as CSR. This would facilitate flow of funds into the sector
• The GST legislation provides for collection of tax at source (‘TCS’) by e-commerce players on payments made to the suppliers. While implementation of TCS was deferred during GST roll out in July 2017, it could be sought to be implemented in the upcoming Budget. This would extensively inflate the administrative and compliance cost
• With virtual and cryptocurrencies currencies such as bitcoins gaining popularity in digital transactions, clarity would be required on taxability of bitcoins under GST and thereby whether they classify as goods, services or money / currency
• In-bond transfer of goods by one person to another while the goods are warehoused is subjected to IGST. This has subjected the goods to double taxation, leading to additional tax burden to bond-to-bond sales effected by Export Oriented Units. Hence relief would be required in this regard
• As per SEZ Regulations, supply of Information Technology Agreement products and notified zero duty telecom or electronic goods by an SEZ unit to DTA, is considered for fulfilment of Net Foreign Exchange criteria of SEZ units. While ITA products are generally zero rated under Customs, duty of 15% has been imposed on mobile phones on the contention that they are not covered under ITA. There is lack of clarity on whether mobile phones cleared from SEZ units would be eligible for NFE benefit  and qualifying as deemed export in case of domestic supplies

Public Sector/Public Finance

Introduction

Budget 2018 provides an important opportunity for the government to undertake fiscal reforms. With elections to Gujarat and Himachal Pradesh now behind us, there is a window of opportunity for the government to put fiscal situation on a sound footing. The 2019-20 Budget will be presented in an environment of Parliamentary elections and therefore, has the risk of being populist. However, it is hoped that the forthcoming Budget will help achieve fiscal consolidation while releasing adequate resources for accelerating growth.

Challenges/Issues of the Sector

• Fiscal consolidation is crucial for public finances. According to the Medium Term Fiscal Plan, the government has to reduce its fiscal deficit-GDP ratio to 3% and revenue deficit to 1.6% from the prevailing levels of 3.2% and 1.9% respectively
• The 14^th Finance Commission recommended amendment of the Fiscal Responsibility Act to create a Fiscal Council to monitor progress of rule based fiscal policy, analyse realism of projections and estimate cost of various policy announcements

Expectations from Union Budget 2018

• The Budget should announce formation of Fiscal Council to monitor progress of rule based fiscal policy
• The Budget should mandate tax authorities to progress with the recommendations of the Tax Administration Reforms Commission. The report contains tax administration reforms including changes in structure, improvement in taxpayers service, enhanced use of information and communication technology, exchange of information with other agencies, revenue forecasting, predictive analysis and research for tax governance
• Enhanced focus on generating resources and improved governance through strategic disinvestment, beginning with Air India
• Rationalization of revenue expenditures by pruning subsidies and transfers in fertilizer subsidies 

Conclusive Remarks

Budget 2018 comes at an important time. Now that the economy is showing signs of revival, the Budget should accelerate the growth process. Containing the deficits and enhancing outlays on social and physical infrastructure should be the key to achieve this.