Income Tax 07 Feb,2020
1695 Views
Budget 2020 – Impact on Non-residents
Mihir VoraSenior Manager with Deloitte Haskins and Sells LLP
Hema LohiyaPartner, Deloitte Haskins & Sells LLP

M&E is one of the industries identified by the government under its 'Make in India' initiative.

The Indian broadcasting (being a part of M&E industry) is also recognised as one of the sunrise sectors with a rapid growth curve. Indian M&E industry is expected to expand at a CAGR of 13.5 percent over 2019-24 period and is expected to grow to INR 3,070 billion (US$ 43.93 billion) by 20241. India's media consumption has grown at a CAGR of 9 percent during 2012-18, almost nine times that of the US and two times that of China2.

Indian M&E industry is on a growth trajectory considering the rising demand and increasing advertising revenues. Over the last decade, the industry has undergone a transformation and is now predominantly driven by increasing digitisation, higher internet usage and decline in data charges.

There are certain key challenges faced by the M&E industry, which are discussed below:

1. Lack of low-cost funding/tax effective consolidation options

2. Need for more government incentives/policy initiatives

3. Low screen density ratio

4. Complex tax regime

5. Additional burden on account of equalization levy

6. Others

Union Budget 2020 being around the corner and considering the issues faced by the industry, the wishlist of the media and entertainment industry from the Budget is as under:

  •  Consolidations in broadcasting sector

Currently, the benefits of carry forward of losses is not available in the case of amalgamation in the broadcast sector, since it does not fall within the definition of "industrial undertaking".

In order to encourage rapid growth and to make India a competitive country for foreign investment in broadcasting sector, the benefit of carry forward loss and depreciation on amalgamation, should be extended to the broadcasting sector by including the said sector in the definition of industrial undertaking eligible to claim such carry forward of losses.

  •  Policy measure to combat low screen density

Despite producing amongst the most number of movies in the world, India has less than 25 percent of the number of screens as compared to China or US3. India being an untapped market with only eight screens per million population4, there is an opportunity for colossal growth by tapping its complete potential. India's screen count remains low primarily due to lack of cinema penetration in non-metro cities (i.e. tier-II, tier-III and tier-IV markets).

It is recommended that the government should provide tax incentives in the form of tax holiday, subsidies, etc. for setting up multiplexes. Also, the government should draw/come up with policies providing tax and other incentives for conversion of single screen to multiplex.

The current tax regime is complex and some of the measures that can be considered are as under:

  •  Simplified tax regime for events

India has a huge potential to host global events. The same however is untapped 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). Also, similar to the single window clearance for foreign filmmakers in India, the government should consider providing single window clearance for the events industry as well. This would not only give a boost to the industry, but also generate employment and encourage tourism.

  •  Clarifications with relation to Significant Economic Presence (SEP)

The concept of SEP in the source rule was introduced by the Finance Act, 2016. The Act provides that SEP in India (irrespective of the physical activities of the non-resident in India) will also constitute a business connection i.e., a taxable presence in India. The SEP will be triggered on transactions of goods, services or property (including downloading of data or software) entered into by a non-resident in India, through digital means, exceeding a monetary threshold (to be prescribed) or systematic and continuous soliciting of business or interaction with a specified number of users (to be prescribed).

Residents of countries with which India has a tax treaty may not be affected by the SEP provisions since the expanded definition has not yet been incorporated in India's bilateral tax treaties.

Pursuant to the SEP provisions, apps/websites operating from outside India may create a taxable presence in India based on the number of Indian users or Indian sourced revenue, irrespective of such company having any sort of physical presence/local entity in India (a departure from existing generally accepted principles).

In view of the above, the following are the recommendations in this regard:

  •  The thresholds should be prescribed by considering various data points gathered by it about coverage of SEP, businesses sought to be covered and the impact that it may have on businesses.

  •  There should be rules5 prescribed for attribution of profits in case of SEP in India.

  •  It should be clarified that any revenue which is otherwise chargeable under any other specific provision of Act will remain outside the realm of SEP provisions.

  •  Further, annual threshold of INR 10 million per payer may be prescribed, i.e. withholding tax provisions to apply only if estimated aggregate payments by a payer exceeds INR 10 million during the year.

  •  Clarifications in connection with provisions of Section 269SU of the Act

As per the provisions of Section 269SU of the Act, 'every person', carrying on business whose sales/turnover/gross receipts exceeds INR 50 crores in the previous financial year is required to provide facility for accepting payment through prescribed electronic modes in addition to the facility being currently provided.

The Central Board of Direct Taxes vide Notification No. 105/2019 dated 30 December 2019 has prescribed the following electronic modes:

(i) Debit Card powered by RuPay;

(ii) Unified Payments Interface (UPI) (BHIM-UPI); and

(iii) Unified Payments Interface Quick Response Code (UPI QR Code) (BHIM-UPI QR Code).

Further, penalty of INR 5,000 per day for non-compliance of provisions of Section 269SU would be leviable from 1 February 2020.

However, there are certain practical challenges being faced in connection with implementation of Section 269SU of the Act and key suggestions in the matter are discussed below:

  Practical challenges Suggestion
 

  •  Limit of INR 40,000 per transaction and INR 40,000 per day payment through BHIM facility

  •  Accordingly, the prescribed payment method is redundant for companies engaged in B2B businesses wherein the invoice values are high

  •  A clarification should be provided that it is not mandatory to provide the aforesaid facilities in case the clients/customers are corporates, invoice values are higher than INR 40,000 and they are making payment through other electronic modes.

  •  Rather, it should be clarified that Section 269SU of the Act does not apply to B2B transactions.

 

  •  There are companies wherein all the customers are outside India and hence there is no scope of payment being made in cash and providing the aforesaid means of payment would be burdensome for such companies

  •  A clarification should be provided that it is not mandatory to provide the aforesaid facilities in case the clients/customers are non-residents and are making payment through other electronic modes

 

  •  In case the sales/turnover/gross receipts exceeds INR 50 crores during the financial year ended 31 March 2020, the provisions would be applicable from 1 April 2020. This may cause unnecessary hardship to the taxpayer

  •  In such cases, reasonable time of (say, 30 - 60 days) should be provided to install and operationalize the facility for accepting payment through prescribed electronic modes

  •  Abolishing equalization levy

India had also introduced an equalization levy of 6 percent to tax payments made to non-residents by Indian residents/Indian Permanent Establishment (PE) of non-residents in relation to online advertising and other notified services.

Practically, this cost is being borne indirectly by customers in India. Start-ups and SMEs majorly rely on digital advertising platforms (mostly owned by foreign players) to reach potential customers and such levy has increased the cost of advertising for these companies. Also, there is additional compliance burden on these companies for equalization levy. Further, the provisions of tax treaties relating to foreign tax credit is not available in relation to the said levy.

It is therefore recommended that equalization levy should be withdrawn. Alternatively, equalization levy can be characterised as an income tax levy so as to enable the foreign entity to claim credit of the same in their home jurisdiction.

Others

  •  Abolishing the dividend distribution tax (DDT)

Currently, an Indian company is required to pay DDT of 20.56 percent on the declaration of dividend, which is correspondingly exempt in the hands of the shareholder (Indian or foreign). The rationale for introducing DDT was ease of administrative convenience for collection of taxes.

Further, an additional tax of 10 percent (plus applicable surcharge and cess) on a gross basis is levied on dividend exceeding INR 10 lakh received by resident individuals, partnership firms, private Trusts, etc.

Certain issues arising on account of levy of DDT that need some clarity in this Budget are:

  •  Foreign shareholders are unable to claim benefit of tax paid in the form of DDT in their home country (since it is paid directly by company and is not in the nature of withholding tax);

  •  Foreign shareholders are unable to claim benefit of tax rate specified in the relevant tax treaties;

  •  There is economic double taxation since the dividend is being taxed in the hands of the company as well as shareholders (earning dividend exceeding INR 10 lakh).

In order to give the requisite push to the staggering economy and provide a boost to investments in the M&E sector, it is recommended that DDT should be abolished and dividend should be taxable in the hands of shareholders.

  •  Rationalising TDS provisions

Presently, there is a continuous litigation due to interpretation issues in applicable rate of TDS on certain payments such as print cost, dubbing, bandwidth and broadcasting charges, etc. It is recommended that a clarification be issued to clarify that TDS on such payments is to be deducted at 2 percent under Section 194C of the Act.

The Finance Minister had recently slashed the corporate tax rate to 22 percent6(effective tax rate of 25.17 percent including surcharge of 10 percent and cess of 4 percent) from 30 percent (plus applicable surcharge and cess) for existing companies, which is a welcome move for boosting investments in India. Now, we need to watch whether the Finance Minister will consider these demands from the industry in the upcoming Budget, as another step towards achieving its aspirational goal of becoming US$ 5 trillion economy by FY 2024 and improving the ease of doing business in India.


Information for the editor for reference purposes only

Hema Lohiya is Partner, Deepa Bakhru is Senior Manager and Ankita Chowdhry is Manager with Deloitte Haskins and Sells LLP

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1.  IBEF report on Media and Entertainment (October 2019) https://www.ibef.org/industry/media-entertainment-india.aspx

2.  Confederation of Indian industry - https://www.ciiblog.in/industry/dawn-of-indian-media-entertainment-industry/

3.  FICCI report - March 2019

4.  Deloitte publication on Technology media and Telecommunication - India Predictions 2019

5.  Currently under draft stage

6.  On fulfilling certain prescribed conditions