Budget 2015: The digital dream to facilitate the next phase of growth of IT & Telecom

The contribution of tTelecom and Information Technology (IT) sectors to India’s growth story cannot be overemphasised. These two sectors have been among the biggest contributors to employment generation, export, infrastructure development, and have collectively brought India on the global platform. Both these sectors are at the very core of the Modi-led government’s ‘Digital India’ and ‘Make in India’ campaigns.

Despite such impeccable credentials, the telecom and IT sectors are looking forward to the government’s support in creating a conducive fiscal and regulatory policy environment to fuel the next phase of growth. The retro amendments introduced in 2012 expanded the scope of royalty under domestic tax laws to bring all kinds of telecom and software payments under the income tax net. In addition to imposing withholding tax on domestic telecom and software transactions, the amendments have given a shot in the arms to the tax authorities to deny treaty benefits to cross border transactions despite the judiciary’s view to the contrary in several cases. A bulk of the telecom payments are for standard services where the customer is not interested in the technology or process used by the operators to provide such services. Likewise, a majority of the software transactions under dispute pertain to sale of packaged software, which, as per several judicial pronouncements and international practices, cannot be considered as royalty towards exploitation of intellectual property.

While the FM’s last Budget speech partially assuaged the industry concerns on retro amendments by positive directional statements, the specific issue of retrospective expansion of royalty definition still remains unaddressed. The telecom and IT industry expect the government to re-visit these amendments in the context of telecom and software transactions so as to align these with prevalent international practices. A clarification that treaty provisions should not be denied by importing the domestic law provisions while interpreting treaties would be welcome. It would also be worthwhile to exclude standard telecom services from the definition of ‘process’ to avoid withholding tax burden.

Another major concern for the telecom industry is the levy of withholding tax on discounts to distributors/dealers on sale of recharge coupons. While the dispute on classification of commercial arrangement as being principle-to-principle versus principle-to-agent is yet to be resolved with several thousand crores locked in litigation, a long-term resolution protecting the interest of industry and government is the need of the hour. Perhaps, one plausible view would be to consider such transactions as sale of telecommunications services via recharge coupons, which appropriately reflects the commercial arrangement between operators and distributors. This view has also found support from the Karnataka High Court in a recent ruling, and could be considered by the government to appropriately clarify and put the controversy to rest.

Imposition of Minimum Alternate tax (MAT) on Special Economic Zone (SEZ) units by Finance Act 2011 has effectively diluted the tax incentives available to SEZ units, bulk of which are in the IT sector. For the revival of the SEZs, restoration of the MAT and DDT exemption to SEZ units is imperative. Weighted tax deduction should be extended to the IT sector as well to incentivise training and skill development in line with the government’s focus on skill development as an engine of economic growth.

The industry expects the government to operationalise the key transfer pricing policy changes introduced in the 2014 Budget such as the APA roll back provisions, use of multiple year data and concept of range instead of arithmetic mean. These measures would go a long way in reducing transfer pricing litigation which has been a bugbear for the IT industry. The safe harbour provisions do not appear to have generated any positive traction within the industry, and hence require a re-look so as to meet the stated purpose of minimising litigation.

Telecom and IT sectors have been demanding a resolution since sometime now on the ambiguity on treatment of packaged software as ‘goods’ or ‘services’, resulting in levy of both VAT and service tax. One hopes that this Budget can lend clarity on this issue.

The industry is also hopeful that a suitable clarification should be issued to expressly allow credit of duties and taxes paid on procurement of all infrastructural support equipment/goods to telecom service providers/tower companies. Credit is currently denied on the premise that towers, shelters and such other facilities neither qualify as capital goods nor as inputs for providing output services.

The Narendra Modi-led government came into power with a promise to the business community of a non-adversarial tax regime. The government has thus far shown that it means business. It is now time to walk the talk and take the Budget 2015 as the opportunity to announce required policy and fiscal measures. This could ensure that ‘Make in India’ and ‘Digital India’ campaigns facilitate the next phase of growth of these sectors.

(About the author: This article has been contributed by Naveen Aggarwal, Partner and North Tax Head, KPMG in India.)

(P.S. The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in India.)