Offer investment incentives in Budget 2020: Deloitte

Offer investment incentives in Budget 2020: Deloitte

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By Hemant Joshi

Media

Formulate clear guidelines for granting tax exemptions or a moderate level of taxation for international sporting events held in India to provide a much needed clarity and attract bigger international sporting events in India.

Grant tax holiday benefits for the earnings to encourage the M&E industry to invest in export and licensing activities.

Consider a clarification that the equalisation levy is on income allowing access to tax treaty for claiming credit. Further, a clarification that equalisation levy ought to be levied with respect to online or digital advertising having a territorial nexus with India should also be considered.

Telecom

Offer investment incentives, either by way of accelerated depreciation or through additional allowance for capital investments, to attract foreign telecom gear manufacturing companies to set up their manufacturing facilities in India. This will support the government’s initiative for job creation and boost small and medium enterprises in the sector.

Provide incentive plans and relaxation from tax/regulatory fee for initial years on 5G acquisition to ease the pain of financial outgo in post-5G scenario.   

Relook at spectrum charges and other levies that the telecom companies face and potentially offer one-time amnesty schemes for past dues. 

Clarify effect of certain amendments introduced by Finance Act 2012. For example, royalty definitions are not applicable to payments made for Interconnection Usage Charges (IUC). A clarification that payments made for bandwidth arrangements are pure service arrangements is needed. This will go a long way in reducing litigation pending in various courts.

Introduce litigation settlement scheme, similar to Sabka Vishwas - Legacy Dispute Resolution Scheme to settle the long pending disputes.

Extend deduction of 200 percent of expenditure incurred on R&D in telecom to bring in new technologies. It should also be extended beyond 2021. 

Introduce special provisions to tax the profits earned by distributors in the interest of both telecom companies and the revenue authorities. The airtime sold by telecom companies through distributors is on a principal-to-principal basis and has been a matter of extensive litigation. Further, to improve the tax base and collections in tax, such revenues may be subject to tax deduction of 1 percent at source. It is not difficult to calculate the expected increased cash in tax flows for the government looking at the revenues of telecom companies.

Abolish Dividend Distribution Tax (DDT) and make dividends taxable in the hands of shareholder so that foreign investors can be eligible for credit of tax in their home countries, thereby improving the return on their investment. 

To address the situation of companies being unable to claim Minimum Alternate Tax (MAT) credit due to lapse of the 15-year-time window, necessary amendments should be made in the law by removing the time period within which set off of MAT credit shall be claimed.  

Technology

Direct tax and regulatory perspective

The recent reduction in the corporate tax rates for domestic companies and newly incorporated manufacturing companies was a welcome measure. It is recommended to provide the same benefit to Limited Liability Partnerships (LLP) to ensure parity.

Tax holiday available to Special Economic Zone (SEZ) units, under section 10AA of the Income-tax Act, 1961 (Act), has been successful in fostering economic development and has benefitted the IT sector in a substantial way. Despite the reduction in corporate tax rates, phasing out income-tax holiday benefits for SEZ units can adversely affect India’s position as the favourite IT destination in the world. Hence, it is recommended to continue the deduction available under section 10AA of the Act (which will be otherwise not available for units set up after March 2020).

In the age of emerging startups, to promote investments in startups, tax exemption should be provided to investors on capital gains tax arising on exit from startups. Furthermore, various clarifications have been provided in relation to relaxation from angel tax for startups, but the tax authorities’ on ground implementation may not be in tune with these clarifications and needs to be monitored.

Section 35(2AB) of the Act allows claim of deduction of 150 percent of the expenditure (both revenue as well as capital) incurred by an in-house recognised R&D unit. Such enhanced deduction is available for R&D units recognised on or before 31 March 2020. Considering that new age startups incur heavy expenditure on R&D activities, the government should consider extending this benefit.

Section 79 of the Act, which governs the carry forward of tax losses of corporates, in case of change in the shareholding, was amended to provide relaxation to eligible startups. Section 78 of the Act governs the carry forward of losses of a LLP, which states that a change in an LLP’s constitution will result in the lapse of losses proportionate to the share of the retired or deceased partner. To provide an impetus to startups incorporated as LLPs, section 78 of the Act should be amended to extend the relaxation/benefit for carry forward and set-off of tax losses (in line with section 79).

Cloud based transactions are essentially in the nature of services and ordinarily do not allow the user any right to the infrastructure. Applicability of Tax Deducted at Source (TDS) on such outbound cloud payments has emerged as a hotbed of litigation. Indian cloud service providers are yet to stabilise and the Indian IT industry largely relies on overseas cloud service providers. Hence, a clarification on the applicability of TDS on such payments is required.

Section 56(2)(x) of the Act taxes the difference between the consideration paid for an asset and the Fair Market Value (FMV) of such asset, if the asset is received for a consideration which is less than the FMV by an amount exceeding INR 50,000. In case of conversion of a company into LLP, the LLP pays no consideration for the assets of the company. To avoid litigation, due clarification should be provided stating that the provisions of section 56(2)(x) of the Act will not be applicable in the case of conversion of company into LLP.

From a Base Erosion and Profit Shifting perspective, the introduction of the Significant Economic Presence (SEP) concept, to tax the digital economy, has imposed challenges before the industry as there is uncertainty around the nature/extent of criteria/thresholds that will be introduced. It is expected that the budget introduces clearly defined criteria/thresholds for constituting SEP in India and enables availability of credit of equalisation levy for foreign companies in their home country.

Treatment of Advertising, Marketing and Promotion (AMP) expenditure incurred by companies in the e-commerce/service industry, as brand building/capital in nature by the tax authorities, has led to significant litigation. The benefits from such expenses are temporary and short-lived. Introduction of provisions clarifying the tax treatment of AMP expenditure will provide much needed relief to the industry.

Considering the lack of clarity regarding classification of services rendered using technology, i.e., standard facilities (e.g., broadband, leased line, etc.) as opposed to technical services and treatment of software payments as royalty, the government can consider issuing necessary clarifications for reducing tax litigation.

Various companies invest in subsidiaries/Joint Ventures (JV) for strategic purposes and not with the sole intention of earning dividends. Per Central Board of Direct Taxes (CBDT) circular, disallowance under section 14A of the Act will be made even in case where no exempt income is earned. This is against the principle of non-taxation of notional income. It is recommended that an explanation be inserted or clarification be issued to provide that no disallowance shall be made in case no exempt income has been earned during the year.

Per the erstwhile provisions of section 2(19AA)(iii) of the Act, the assets and liabilities of an undertaking proposed to be transferred by a demerged company are required to be transferred at book values appearing immediately before the demerger. The provisions were relaxed to provide that such provisions shall not apply where the resulting company, which has adopted Ind AS, records the assets and liabilities of the undertaking at a value different from the book value of the demerged company. The above provisions were amended prospectively with effect from assessment year 2020-21. Considering that Ind AS were applicable with effect from 1 April 2016, it is recommended to provide a clarificatory provision for application of the relaxation effective from the date when Ind AS were applicable.

Currently, an Indian company is allowed to extend a loan to a non-resident, being its Wholly Owned Subsidiary (WOS) or a JV. Further, an Indian company contemplating to grant loan to a non-resident entity, not being its WOS or a JV, is required to seek RBI’s approval. To facilitate circulation of currency for business purposes and enable Indian companies to earn foreign exchange, the exchange regulations should be amended to allow Indian companies to grant loans to non-resident group entities (not being WOS or JV), subject to meeting certain thresholds/measures to protect India’s interests.

Indirect tax perspective

With over 75 percent of the IT services being exported, the various export incentives offered have resulted in the industry growth from USD 119 billion in 2014 to USD 167 billion in 2018. However, the US trade representatives disputed the export schemes offered to Indian exporters such as Export Oriented Units (EOU), SEZ, and Merchandise Exports from India Scheme (MEIS) to be in violation of the World Trade Organisation (WTO) rules in October 2019. It is alleged that the schemes offer an unfair competitive advantage to the Indian exporters, and therefore, the WTO panel is seeking withdrawal of the schemes within six months. While the ruling is currently not enforceable and is before the appellate panel, the government is planning to do away with the incentives disputed to be in violation of the WTO guidelines. 

Further, Remission of Duties or Taxes on Export Product Scheme (RoDTEP) has already been announced in place of MEIS. Similarly, with the Integrated Goods and Services Tax (IGST) exemptions to EOUs due to end in March 2020, it is expected that the government will align incentives if any, with the WTO guidelines. Hence, the fate of the Software Technology Park of India (STPI) units is unclear. It is expected that the budget will provide clarity on the fate of the schemes and offer incentives in line with WTO guidelines.

The withdrawal of the clarificatory circular on the interpretation of “intermediary” definition, in December 2019, has added an additional layer of confusion with regard to the taxability of support services. Due to the prevailing ambiguous taxation laws, foreign investors are seeking to set up shop outside India. It is expected that a suitable amendment to the definition of “intermediary” will be made to provide clarity on the taxability of the provision of support services to overseas entities.

On the procedural front, restriction of Input Tax Credit (ITC) to 110 percent of eligible ITC appearing in GSTR-2A return (based on the invoices uploaded by vendors) is blocking working capital and creating additional compliance burden due to the need for reconciling details per invoice and GSTR-2A. In addition, due to the implementation of the e-invoicing mechanism from April 2020, the industry is concerned about the modifications that need to be made to the existing billing software(s). Therefore, the budget should provide clarification/amendment to enable the claim of ITC, based on the legitimate invoice copies available with the business and provide adequate time to the industry to adhere to the continuously changing requirements of the law such as migrating from issuance of physical invoices to e-invoicing system.

(The author is Partner, Deloitte India )