Budget 2025 Expectations: Technology, Media & Telecommunications

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

Expectations

Tax concessions for data centres

• Many multinational companies are setting up data centres in India, which are crucial in enabling digital services. These data centres provide data processing and storage capabilities, which have become increasingly important with the rise of mobile internet and cloud computing applications.

• Considering the critical role played by data centres in enabling digital services and also in supporting the “Digital India” vision of the Government, certain tax breaks for this industry may be considered—for instance, a tax holiday for a certain number of years or a concessional tax rate of 15 percent (akin to the concession provided under Section 115BAB to the manufacturing sector until 2024).

• Similar incentives provided to the software sector in the past significantly boosted investments and created large-scale employment opportunities. Tax concessions for the data centre industry will open the gates for foreign investments, boost employment in India and pave a new growth trajectory. In addition, the increase in the number of data centres in India would also indirectly support the efforts of the government to host Indian data within data centres located in India.

Increase in scope of the benefit of carry forward of losses on amalgamation:

• The benefit of carry forward of losses and unabsorbed depreciation is available in the case of amalgamation of companies due to an “industrial undertaking.”

• The term “industrial undertaking” is defined to mean any undertaking engaged (a) in the manufacturing or processing of goods, (b) in the manufacturing of computer software, (c) the business of generation or distribution of electricity or any other form of energy, (d) the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, a network of trunking, broadband network and internet services (e) mining, (f) the construction of ships, aircraft and railway systems.

• The benefit under Section 72A to carry forward loss and depreciation on amalgamation should be extended to include other sectors to encourage synergistic consolidations.

• Consolidating entities within an industry helps in rapid growth and generation of substantial employment opportunities. This will help make India a competitive country for foreign investment.

Clarification regarding the taxation of income of non-resident telecom operators:

• Indian companies pay overseas operators for interconnectivity and bandwidth charges. Indian tax authorities have historically categorised these as royalties, thereby considering them to be taxable under Indian tax laws.

• Certain appellate authorities (including the Karnataka High Court in the case of Vodafone Idea Limited) have upheld the view of taxpayers that these do not constitute royalties as no right to use equipment is provided by non-resident telecom operators.

• However, tax authorities continued to litigate on this issue. Given the tendency of tax authorities to litigate despite judicial precedence, clarity on this issue (whether or not these payments are royalties) will reduce protracted litigation.

• This clarity will benefit the non-resident telecom operators by reducing their tax litigation in India and promoting tax certainty on a crucial industry issue.

Clarity on taxation of software revenues of non-resident software sellers:

• Taxability of software revenues of non-resident sellers has been subject to litigation. Tax authorities have held that such revenue is royalty and thereby taxable in India. However, non-resident software sellers have asserted that software revenues are business income as they merely provide a limited user right without access to the source code. Hence, such revenue should not taxable in India in the absence of a Permanent Establishment (PE).

• The Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. In 2021 ruled in favour of the software sellers. However, tax authorities continue to dispute the taxability of software revenues by differentiating facts from the ruling (especially in cases of software as a service revenue), illustratively in the cases of Amazon Web Services Inc. and GoTo Technologies.

• Further, the tax authorities also sought to review the Supreme Court's ruling in certain dismissed cases.

• Accordingly, the government must consider clarifying this issue to end continued litigation on the taxability of non-resident software sellers. The clarification should emphasize the need for tax authorities to determine the taxability of the software revenues based on the rights parted with, irrespective of the business model. The industry may greatly benefit from the certainty this clarification may provide.

• Separately, there is a broader definition of royalty under the domestic tax laws vis-à-vis the tax treaties (where the domestic tax law covers all license fees as royalties and treaties seek to tax software revenues as royalties only on transfer of copyright). Tax authorities have sought to tax software revenues by classifying them as royalty due to the broad definition(without considering the correct intent of the treaty provisions). Aligning these two definitions (per the tax treaties) can reduce litigation on this count.

Indirect Tax /TMT

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 directly affected MSMEs in India and has had a favourable cascading effect on other industries.

• Presently, per section 52 of the CGST Act, an e-commerce operator is required to collect GST TCS @ 1 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 exclude exempt, NIL rated supplies but include zero-rated supplies. Given this, essentially, even when there is no GST liability payable on zero-rated supplies under a LUT, the e-commerce operators are required to collect GST TCS without any separate GST collection by the 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 issues for exporters and increasing compliances for both the 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 issues for exporters as well as facilitate ease of compliance.

Enhancing GST exemptions to strengthen the satellite launch sector

• The Indian space sector has emerged as a beacon of technological advancements and innovation. To provide impetus to the satellite launch sector, the CBIC, in July 2023, extended the GST exemption on satellite launch services provided by any person, including private organisations. The exemption was earlier available only to specified service providers, i.e., the Indian Space Research Organisation (ISRO), Antrix Corporation and New Space India Limited (NSIL). The exemption was intended to encourage start-ups and create a level playing field by helping private organisations offer competitive rates and financially relieve players.

• While the industry welcomed this exemption on output service, extending it to the satellite manufacturing sector for other critical components, such as satellites, ground systems and launch vehicles on the input side, would benefit the value chain. The exemption reduces GST on output activity but leaves input tax credit costs on goods and services procured for satellite launch services unaddressed, increasing the overall non-recoverable costs.
  The government should consider granting similar exemptions for procuring essential goods and services, including capital goods, used for satellite launch services. This would help lower GST input tax credit costs and ensure the intended benefits are realised throughout the supply chain.

Legislative clarity on the taxability of permanent transfer of Intellectual Property Rights (IPR)/Intangibles

• Under GST law, permanent transfer of IPR/Intangibles is categorised as a supply of goods but lacks clarity for cross-border transactions involving such transfers.

• The permanent transfer of IPR/Intangibles from India to a person outside India may qualify as an export of goods. However, Section 2(5) of the IGST Act defines “export of goods” as requiring the physical movement of goods out of India. For IPR/Intangibles, physical movement is often not feasible, leading to disputes over the export benefit despite the transaction qualifying as an export of goods.

• Similarly, a permanent transfer of IPR/Intangibles from a foreign entity to a person in India qualifies as an import of goods. Section 5(1) of the IGST Act links the levy of IGST on imports to the Customs Tariff Act, which applies only to the physical clearance of goods. Though qualifying as goods, digital transfers of IPR/Intangibles are not subject to Customs duty, leading to GST demands under the reverse charge mechanism.

• The government should consider introducing enabling provisions to address this issue. One option could be notifying the “permanent transfer of IPRs/Intangibles” as notified goods for GST levy in the hands of the recipient in India under the reverse charge mechanism for cross-border supplies.

• For exports, the requirement for physical movement outside India should be substituted with proof of title transfer through an agreement to ensure compliance.

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. In some cases, the benefit of concessional duty is granted based on technology-related descriptions. To ensure that various stakeholders better understand such technology-related descriptions, 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 still faces interpretation issues related to coverage and eligibility. There is a need to suitably amend or issue clarifications to address the issues. For example:

- Per 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 entries, i.e., 8517 18. This has been causing undue hardship to the industry. Hence, the reference to VOIP should be removed from the specified entry in the said notification.

- Carrier Ethernet (CE) switches are ineligible for the benefit of concessional duty. Typically, the difference between carrier and non-carrier Ethernet switches is determined based on the features and usage. Several times, Customs field formation also treats a non-CE switch as a CE 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 can be granted to non-CE switches.

• Per the notification, multiple Input/Multiple Output (MIMO)/Long Term Evolution (LTE) products are ineligible for the benefit of concessional duty. MIMO/LTE-based technology is typically used in IT equipment, telecom, etc. The list provided in the circular is illustrative and inclusive in nature. As the list of MIMO/LTE products is not exhaustive, this may also lead to disputes on concessional benefits. Hence, CBIC should issue an exhaustive list so that there is no scope for dispute of an interpretational nature.

Transfer Pricing /TMT: Expectations

Streamline the Advance Pricing Agreement (APA) and Mutual Agreement Procedure (MAP) regulations:

• With a view to resolving backlog and managing the load of new applications expected to be filed, the government should increase the bandwidth of the APA workforce.

Most APA applications, which 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 services and Knowledge Process Outsourcing (KPO). In this context, the following recommendations can be considered:
o For future applications, the government should release a standard readiness questionnaire on which APAs can speedily conclude with CBDT.
o For applications already filed and currently pending with APA authorities, a list of standard data points should be released based on which pending APAs may be concluded speedily.

• Prescribe fixed timelines for closing APAs for transactions where a significant number of APAs have already been concluded (such as the provision of ITeS and software development services).

• Currently, an Indian company’s PE located outside India is subject to TP provisions in the country where the PE is located. In any dispute with the foreign country’s tax authority, such PE may have recourse MAP restoration as provided in the treaties between India and the other country. To provide forward-looking tax certainty for such PEs, the scope of the APA provisions should be widened to include recourse to bilateral APAs between India and the other countries where the PE is located.

• Enable Single-owner Limited Liability Companies (incorporated under the US laws) to claim the treaty benefits for APA/MAP applications.

Provide taxpayers with an adequate timeframe for responding to show-cause notices by prescribing a due date for the issue of show-cause notices during assessment proceedings

• In many instances, field officers issue show cause notices very close to the due date for completion of assessments. In such cases, taxpayers have a very short timeframe to respond to the show-cause notice. A due date should be provided in the Income-tax Act, by which field officers would be required to issue such show cause notices so that there is adequate time for the proper conclusion of proceedings.

Streamline Master File requirements required to be filed under Rule 10DA with The Organisation for Economic Co-operation and Development (‘OECD’) standards

• With the introduction of BEPS Action Plan 13, countries worldwide adopted the three-tier documentation as a norm. Countries across the world have implemented Master File requirements and kept them in line with the recommendations made by the OECD. India, too, has predominantly adopted Master File in line with OECD’s recommendations, albeit with certain modifications/additional data points. The requirements of the Master File under Rule 10DA should be aligned with OECD standards, which would provide significant ease for MNEs in maintaining one consistent global Master File. Further, to ease the compliance burden, the requirement to file it in Form 3CEAA should be done away with, as filling out the Form is quite complex. Alternatively, taxpayers should be allowed to upload the documents in Word/Excel to show compliance with Master File regulations.