Budget 2012: Ernst & Young Analysis of Direct & Indirect Tax proposals in M&E

17 Mar,2012

Ernst and Young shared with MxMIndia its analysis of what the Union Budget 2012’s tax proposals mean for the Indian media and entertainment sector:

 

Foreword

Union Budget 2012-13 was keenly awaited by the Indian businesses and Foreign Investors/ businesses alike largely to see if the Finance Minister (FM’) chalks out a credible path for the reforms process which seemed to have been halted. The FM has announced several steps for agriculture, infrastructure and capital markets, and their impact on the economy will need to be analysed.

 

On the direct tax front, there are several surprises in form of various amendments proposed, some of which were particularly not anticipated in view of the report submitted by the Standing Committee on Finance (SCF’) of the Parliament on the Direct Taxes Code 2010 provisions on 9 March 2012.

 

On the indirect taxes front, most of the amendments were largely anticipated. In fact, the film industry received a centenary year gift in form of exemption from service tax. Rate of excise duty has been increased from 10.3% to 12.36% from 17 March 2012 while similar increase in service tax is effective from 1 April 2012.

 

Some of the key tax measures announced by the FM are as follows:

  • Direct Taxes Code (DTC’) to be enacted after giving due considerations to the report of the SCF
  • Goods and Service Tax (GST’) Network, the IT backbone for GST, to become operational by August 2012
  • Advance Pricing Agreements (APA’) and General Anti Avoidance Rule (GAAR’) provisions proposed as amendments to the domestic income tax law
  • Permanent Account Number – income tax identification number – to be used as a common identifier for direct tax and indirect tax purposes to ensure transparency and check on tax evasion
  • Setting up a study team to examine the possibility of a common tax code for service tax and central excise

 

The FM also announced a five pronged strategy to tackle the malaise of generation and circulation of black money and its illegitimate transfer outside India. Government has taken a number of proactive steps to implement this strategy. As a result:

  • 82 Tax Treaties and 17 Tax Information Exchange Agreements have been finalised and information regarding bank accounts and assets held by Indians abroad has started flowing in. In some cases prosecution will be initiated
  • Dedicated exchange of information cell for speedy exchange of tax information with treaty countries is fully functional in Central Board of Direct Taxes
  • India became the 33 rd signatory of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters
  • Directorate of Income Tax Criminal Investigation has been established within the tax administrative set up

In this tax alert, we have summarized some of the key amendments proposed in the Budget 2012 which may have an impact on the M&E Industry. For detailed summary of the Union Budget, please refer to the Ernst & Young India Budget Plus 2012.

 

Direct Taxes

While outlining the direct tax proposals, the FM mentioned that his proposals for the financial year 2012-13 mark further progress in the direction of movement towards the proposals outlined in DTC. Key proposals are summarized as under:

 

No changes are proposed in the corporate tax rate.

It is now proposed to clarify by way of a deeming fiction that share or interest in a company or entity registered or incorporated outside India shall be situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. This clarification will be applicable with retrospective effect from 1 April 1962 (ie assessment year 1962-63). This proposal has the effect of neutralising the recent ruling of Hon’ble Supreme Court in case of Vodafone from a retrospective effect.

Considering the conflicting decisions of various courts in respect of income in nature of royalty’ and to restate the legislative intent, it is proposed to amend the definition of royalty retrospectively from 1 June 1976, in following manner:

  • Transfer of all or any right for use or right to use a computer software (including granting of a licence) is in the nature of royalty’ irrespective of the medium through which such right is transferred.
  • Royalty includes consideration for any right, property or information whether or not possessed by the payer, directly used by the payer or located in India.
  • The term process’ in the royalty definition to include transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret.
  • This proposal could lead to characterisation of payments towards use of computer software, information, databases, transponder, uplinking facilities, leased lines, etc as royalty under the domestic income tax law with a retrospective effect.
  • Presently, income of a Venture Capital Fund (VCF’) or Venture Capital Company (VCC’) derived from investment in a domestic company ie Venture Capital Undertaking (VCU’), is exempt from taxation, provided the VCU is engaged only in nine specified businesses. The investor in VCF/ VCC is taxable upon distribution being made by the VCF/ VCC on a deferred basis. In order to avoid multiplicity of conditions in different regulations for the same entities, the sectoral restriction on business of VCU is proposed to be removed, and the income is now proposed to be taxed in the hands of the investor in VCF/ VCC on an accrual basis and be subject to withholding tax. The investments in M&E sector through VCF/ VCC route will now be eligible under the provisions, which was earlier not possible.
  • It is now proposed that when a company in which public are not substantially interested, receives a consideration for issue of shares from an Indian resident in excess of face value of its shares, the aggregate consideration received for such shares in excess of the fair market value of the shares will be chargeable to tax in the hands of such company. This provision could lead to structuring and commercial challenges in case of a joint venture with a non-resident participation or foreign investments in Indian companies in form of private equity or such other route with lower than 100% interest.
  • Presently, there are no specific requirements under the domestic income tax law to grant tax treaty benefits to a non-resident taxpayer on the basis of Tax Residency Certificate (TRC’). It is now proposed to make submission of TRC containing prescribed particulars, as a necessary but not sufficient condition for availing benefits of the tax treaty.
  • Presently, income received by non-citizen and non-resident sports persons from participation in any game or sport, advertising or contribution of article in any newspaper etc and income of non-resident sports association or institution for guarantee money payable to such institution in relation to any game or sport played in India is subject to tax at the rate of 10% of the gross receipts. It is now proposed to increase the tax rate from 10% to 20% on gross receipts.
    It is further proposed to tax income arising to a non-citizen, non-resident entertainer (such as theatre, radio or television artists and musicians) from performance in India at the rate of 20% of gross receipts, which was earlier taxable at the rate of 30%.
    Consequential amendment is also proposed in the withholding tax provisions to provide for withholding of tax at the rate of 20% from income payable to non-resident, non-citizen entertainers, sportspersons, sports associations etc and will be applicable with effect from 1 July 2012.

 

  • It is now proposed to widen the scope of compliance of withholding tax provisions for payments to non-residents by clarifying that the obligation to withhold tax on payments to non-residents applies and extends to all persons, resident or non-resident whether or not the non-resident person has a residence or place of business or business connection in India or any other presence in any manner whatsoever in India. This proposal intends to cast an obligation on the non-resident irrespective of such person’s territorial nexus with India.
  • Under the existing provisions of domestic income tax law, as a one-time’ concessional measure, dividends received by a resident company in India from its foreign subsidiary was taxable at the rate of 15% for financial year 2011-12. It is now proposed to extend the applicability of this provision by one more year ie for the financial year 2012-13.
  • It is now proposed to remove the cascading effect of dividend distribution tax (DDT’) from multi-tier structure. Dividends distributed by a holding company will not be subject to DDT to the extent of amount of dividends received from the subsidiaries by such holding company in the same financial year, effective from 1 July 2012.
  • To offer better assurance on transfer pricing methods and certainty and unanimity of approach, it proposed to introduce APA regulations with effect from 1 July 2012.
  • It is now proposed to amend the definition of international transactions’ for the purpose of transfer pricing provisions with retrospective effect from financial year 2001-02. It is also proposed to extend the transfer pricing regulations (including procedural and penalty provisions) to specified domestic transactions entered into between domestic related parties or by an undertaking with other undertakings of the same entity. These provisions will apply only in respect of specified domestic transactions exceeding INR 50 million.
  • To codify the doctrine of substance over form’, it is proposed to introduce GAAR provisions to determine tax consequences by taking into account real intention of the parties, effect of transactions and purpose of an arrangement.
  • As an anti-avoidance measure, it is now proposed to grant additional power to the Tax Officer to declare an arrangement to be an impermissible avoidance arrangement under certain circumstances and refer such cases to the higher level authority (ie Commissioner of Income-tax). The onus is on the taxpayer to establish that the arrangement was not executed with a view to avoid taxes.
  • Under the existing provisions of domestic income tax law, every person is required to furnish a tax return if his income during the financial year exceeds the maximum amount which is not chargeable to tax. It is now proposed to amend the provisions for filing the tax return in India to make it mandatory for every resident having any asset (including financial interest in any entity) located outside India or signing authority in any account located outside India irrespective of the fact whether the resident taxpayer has taxable income or not. This amendment will take effect retrospectively from 1 April 2012 (ie assessment year 2012-13).
  • It is now proposed that the Alternate Minimum Tax (AMT’) provisions (introduced for Limited Liability Partnerships in the Budget 2011) should be extended to include certain specified persons (other than a company) and such persons be made liable to pay AMT at the rate of 18.5% (Effective Tax Rate of 20.00%) when their adjusted total income exceeds INR 2 million.
  • It is now proposed to increase the exemption limit for carrying out tax audit of a person carrying on business from INR 6 million to INR 10 million; and a person carrying on profession from INR 1.5 million to INR 2.5 million.

 

Indirect Taxes

Goods and Services Tax (‘GST’)

  • The Finance Minister (FM’) has assured that drafting of the model GST legislation for Centre and State GST is under progress along with State Governments.
  • Structure of GST Network (GSTN’) has been approved by the Empowered Committee of State Finance Minsters. GSTN, implementing common PAN based registrations, returns filing, payment processing, will be operational by August 2012.

 

Service Tax

  • Effective rate of service tax has been enhanced from 10.3% to 12.36% wef 1 April 2012.
  • Time limit for issuance of invoice under Point of Taxation Rules is proposed to be increased from 14 days of provision of service to 30 days of provision of service.
  • Continuous supply of service will include services provided on a recurrent basis under Point of Taxation rules.
  • Settlement commission provision introduced.
  • No monetary limit specified for service tax adjustments if the adjustments are not on account of interpretation of law, taxation, valuation, classification etc.
  • Receipt of consideration for export of services aligned with the time prescribed by RBI (including extended period allowed), for determining date of payment of tax.
  • Disputes on refund/ rebate in case of service export will now be referred to Revision Authority instead of Tribunal.
  • Commissioner is empowered to conduct special audit by engaging a Chartered Accountant or a Cost Accountant in certain circumstances.

 

Negative List under service tax

  • The Finance Minister has proposed change in manner of levy of service tax by taxing services on negative list basis. Services mentioned in negative list or in exemption notification shall not be liable to service tax.
  • New definitions in the context of negative list based taxation introduced inter alia including negative list, taxable territory, services, renting, money, actionable claim, interest, person.
  • Under the earlier draft concept papers, advertisement in print was proposed to be covered under service tax net. However, negative list legislation continues to keep print industry outside the tax net.
  • Exemption is proposed on temporary transfer or permitting the use of copyright in cinematograph films in addition to currently exempted copyrights in original literary, dramatic, musical or artistic works. Copyright in sound recording shall continue to be taxable.
  • Exemption to copyright in cinematograph films likely to cover television programmes, theatrical or non-theatrical films etc.
  • Services by performing artists in folk or classical art forms of music, dance or theatre is proposed to be exempted.
  • Services provided to a recognised sports body by another recognised sports bodies or individual as player, coach referee, umpire etc for a tournament organised by such recognised sports body is proposed to be exempted from service tax. Further, sponsorships for tournaments organised by specified sports bodies is also proposed to be exempted from service tax.
  • Under earlier draft concept papers, admission into premises (including theatres, amusement parks etc) was proposed to be chargeable to service tax. However, admission to entertainment events or amusement facilities is proposed to be included in negative list and hence, not liable to service tax.
  • Selling of advertisement space and time on media other than radio or television has been considered to be a service under the negative list. Thus, it would need to analyse if advertisements in electronic medium (such as internet, telecommunication etc) or in outdoors will attract service tax.
  • Services of betting, gambling or lottery are included in the negative list and hence, shall be exempted from service tax.
  • The proposed negative list concept intends to define service’ for the first time under the service tax legislation. Service’ has been very broadly defined and includes declared services’. Such declared services’ deems temporary transfer of any Intellectual Property Right, works contract, construction, IT software, non compete, hiring, leasing or licensing of goods without right to use etc as services.

 

Draft Place of Provision of Services Rules (‘POS Rules’)

  • Proposal to replace existing framework of identifying jurisdiction for levy of service tax through Export of Services Rules, 2005 and Taxation of Services (Provided from Outside India) Rules, 2006 with a common Place of Provision of Services Rules.
  • Guidance note on POS Rules has been issued to determine taxable territory’ for appropriate levy and collection of service tax. These Rules aim to identify a more consistent and efficient mechanism to collect service tax.
  • Generally, place of provision of services to be the location of service receiver’.

 

Cenvat credit

  • Interest on wrong credit to apply only when the credit is utilised.

 

Excise duty

  • Effective rate of excise duty enhanced from 10.3% to 12.36%, 5.15% to 6.18% and 1.03% to 2.06%.

 

Customs duty

  • Effective rate of customs duty enhanced from 26.85% to 28.85.

 

Central Sales Tax (‘CST’)

  • CST rate against declaration forms has been retained at 2%.

 

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. In India, it is located in 14 offices across 10 cities.

You may refer to original document also at http://www.ey.com/Publication/vwLUAssets/Media-Tax-Alert/$FILE/Media-Tax-Alert.pdf

 

 

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