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Tax and regulatory - Issues and developments

Introduction

The Indian Media and Entertainment (M&E) industry is a sunrise sector for the economy and is growing at a rapid pace. Rising income and evolving lifestyles, backed by increasing digitisation and higher internet usage, pave way for tremendous growth for almost all segments of this industry.

However, industry players face nebulous and vexatious taxation issues. Considering the positive global investor sentiments, the Indian demographics and the probability of high growth, the industry was hoping for resolution to some of the tax issues faced by it. Some of the key expectations were elimination of dual levy of tax (service tax and value added tax) on acquisition of copyright on content, clarity on applicability of Tax Deduction at Source (TDS) provisions on various expenses (programme production cost, placement fees, satellite transponder payments, discount on set-top boxes, etc.), extending benefits of set-off and carry forward of tax losses/unabsorbed depreciation on mergers, etc.

The Union Budget 2016 which was tabled by the Finance Minister (‘FM’) on 29 February 2016, was built on a transformative agenda with nine distinct pillars and intense focus on development of rural, agricultural, social sectors, including skill development, and rationalisation of tax policies. Although no tax exemptions/benefits have been made available specifically to the M&E sector, the incentives to boost growth/employment generation and simplification/rationalisation of taxation, with a focus on reducing litigation and providing certainty in taxation, should bring some respite. The government has also recently issued a couple of circulars with a view to resolve some of the ambiguities which have emerged in the tax laws. This signals a positive approach of the government to enable ease of doing business in India and instills confidence in investors. The industry can hope that in the near future, various other tax issues being faced by the M&E sector can also be put to rest.

Key tax challenges

• Dual levy of VAT and service tax on copyrights.
• TDS issues in respect of various payments made by M&E industry players (such as transponder charges, royalty payments, discount given to distributors by DTH companies on sale of STBs / RCVs, etc.).
• Treatment of expenses for acquisition of content.
• Transfer pricing difficulties for benchmarking related party transactions.
• Taxation of foreign telecasting companies / other players (such as transponder hire companies, etc.) supporting the M&E industry in India.

Key Budget 2016 proposals

• In line with OECD’s Base Erosion and Profit Shifting (BEPS) recommendations, Equalisation levy of 6 per cent proposed to be introduced by way of deduction from payments to non-residents from Indian residents/Indian PEs of non-residents in relation to online advertising and other services as may be notified. Such income of the non-resident proposed to be exempt under the Income-tax act.
• Various withholding tax provisions are rationalised by increasing the threshold limit for commission, brokerage, contractual payments, etc. and reducing the TDS rates on commission/brokerage to 5 per cent.
• Non-residents would not be liable to a higher initial withholding tax rate of 20 per cent on non-furnishing of PAN, if the conditions to be prescribed are fulfilled.
• The government has proposed to impose a new levy by way of KKC with effect from 1 June 2016, on all or any of the taxable services at the rate of 0.5per cent of the value of taxable services. The said levy is for the purposes of the Union for financing and promoting initiatives to improve agriculture or for any other purpose relating thereto.
• Introduction of Country-by-Country (CbyC) norms for TP documentation from FY 2016-17. These norms are based on recommendations issued by the OECD’s BEPS Action Plan 13.

For further details of the key tax and regulatory issues/recent developments relating to the M&E industry, please refer the tax chapter of the Report.

 
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