Deloitte Discussion: What can the TMT Sector Expect from the Budget 2021

India is one of the fastest-growing digital markets in the world, and the pandemic has propelled the sector forward. With the upcoming Union Budget of 2021, it is expected that the government may implement favourable policies to support Digital India. This sector requires investments to improve provisions, policies, and infrastructure. Budget 2021 expectations from TMT are as stated below-

 

Technology Sector

Here are the key budget expectations for the technology sector

Direct Tax

●     Digital Tax -

The Equalisation Levy (EQL) provisions, introduced on 1st April 2020, have various ambiguities including the definition of ‘digital facility’ and applicability of intra-group services. It is hoped that the government will provide clarifications for these ambiguities.

Significant Economic Provisions (SEP) will be applicable from 1st April 2021. It is expected that there will be an overlap in both provisions. The government should clarify the expected interplay between the provisions.

The government should identify the SEP thresholds or postpone SEP provisions till the provision is clear and fixed,

●     Cloud Computing

Cloud services have gained popularity in the wake of the pandemic. As the payments for cloud services do not provide royalty/ FTS, the government should issue clarifications of the application of the TDS provisions on cloud-based infrastructure.

●     eCommerce

The heavy AMP expenditure paid by eCommerce players for promotions of their products is temporary. However, tax authorities treat them as capital in nature and brand-building expenditure. The government should elaborate on the treatment of AMP expenses.

 

Indirect Tax

●     Customs and Transfer Pricing

Customs and transfer pricing laws require an establishment of principles for the transactions by taxpayers between related parties. This is to ensure that taxable values on which tax must be levied are correct. A common platform is needed to provide a middle-path that is acceptable under both customs and transfer pricing.

●     GST Refund Paid on Capital Goods

Capital goods form a large part of the investments made by businesses. If refunds are only applicable on inputs and input services, excluding capital goods, this will lead to rising prices, cash crunches, and blockage of working capital.

 

Media Sector

Here are the expectations from the budget 2021 in the media sector

Direct Tax

●     Inclusion in “Industrial Undertaking”

The media sector is not included under “industrial undertaking” owing to its requirements for huge investments. The pandemic has also affected the media sector. Consolidating the media industry will help in rapid growth, digitisation, and better employment opportunities.

It is expected that section 72A of the Income-tax Act will be amended to include the media sector under “industrial undertaking”.

●     Taxation for Global Events in India

The government should set up a simple taxation regime for the events industry to improve the involvement of India in holding global events.

●     Deduct Expenditure on a film produced on digital platforms

Under rules 9A and 9B, deduction of expenditure gained on film production and acquisition of film distribution rights is permitted, based on when the rights were exploited or when the film was released. However, this does not include films produced on digital platforms. The government should include the films made on digital platforms under these rules.

 

Indirect Tax

●     Export of Advertisement Services

Under GST, permanent and temporary transfer of copyright is taxable at 12 percent, and services by authors, composers, etc, which were exempt earlier, are now taxable under reverse charges with the producers. The producer is required to pay an 18 percent tax on these services.

Under the refund of inverted GST duty, the term “Net ITC” only includes Input Tax Credit (ITC) on input procurement. The recommendation suggests that the provision should be amended to include input services under “Net ITC”.

●     Refund of Inverted GST Duty

As there is no specific provision on the place of supply for advertisements, an issue arises when the services are extended to a non-resident.

The government should clarify the taxability of advertisement services based on the person’s location.

●     Taxability of Post-Production Services

Post-production services such as editing, special effects, etc, must be taxed based on the person’s location and not where the services are performed. The government should issue a clarification on the taxability of such services.

 

Telecom Sector

For the telecom sector, the key budget expectations for 2021 are as follows

Direct Tax

●     Characterise Telecom Services as Royalty

In the definition of the royalty-vide Finance Act 2012, domestic and cross-border payments for telecom services are under litigation on account of the retrospective amendment.

The government should avoid increasing costs of telecom services for Indians and the definition of “royalty” excludes telephones, internet bandwidth, and similar services.

●     Inclusion in “Industrial Undertaking”

“Industrial undertaking” does not include telecom services due to its need for investments for increased digital services. To monetize existing assets, telecom and related infrastructure companies are looking to restructure their operations.

It is expected that section 72A of the Income-tax Act will be amended to include the telecom sector under “industrial undertaking”.

Indirect Tax

●     Reduce BCD Rate on Telecom Equipment

There is a 20 percent BCD on the import of telecom networking equipment. BCD is not creditable and gets added to the cost of telecom services. Hence, the government should consider reducing the BCD rate to 10 percent.

●     Input Credit Loss on Major Procurements

The indirect tax of major procurements, such as petroleum products and towers must be paid by telcos, which are the second-largest consumer of petroleum products. Petroleum products must be accounted for under GST to avail input tax credit.

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