pre-budget memorandum 2013-14 budget... · pre-budget memorandum ... benefit for local language...

2013-14

PRE-BUDGET MEMORANDUM

© Internet & Mobile Association of India (IAMAI), 2010 All rights reserved. No part of this documentt may be reproduced, either in part or in full, without the prior permission of Internet & Mobile Association of India

© Internet and Mobile Association of India 2013 1

Contents

Introduction 2

Part One : Direct Tax 5

a. Preferential corporate tax treatment for the high technologyinternet and Mobile Value Added Services sectors 6

b. Tax Exemptions for long-term Scientific Research and Development 7

c. Fiscal Benefits for Low cost High Speed Access 7

d. Fiscal Benefit for Local Language ContentProliferation 8

e. Product Development, Bandwidth Charges and Software License Expenses to be treated as Revenue Expenditure 9

f. Maintaining preferential tax treatment for long-termcapital gains for VCFs 10

Part Two : Indirect Tax 11

a. Export status of the “Online Information and data baseaccess retrieval services” accessed outside India to be restored back to the position which existed before the Place of Provision of Service [POPs] Rules, 2012 12

b. Service tax applicability on Service rendered by

Ad Networks 14

c. Service Tax on Unused/Unclaimed cash amount on

expiry of Prepaid cards 14


Introduction :

It is laudable that the Government is taking steps to increase internet and

broadband penetration in India. One of the major impediments for growth of

Internet has been the infrastructure and Government is precisely addressing this

fact, when it announced to form a Special Purpose Vehicle (SPV), to roll out five

lakh route km of optical fibre network to connect all gram panchayats in the

country.

Also, in order to boost Internet adoption in 2.5 lakh villages, Department of Telecom's (DoT) has proposed to offer a slew of freebies to attract the villagers. The proposal to provide three broadband connections to every gram panchayat free of charge for three years along with free installation of computer and printer; three telephone connections and one cable TV connection without any charge will go a long way in increasing the internet penetration in the country. All these will promote access to internet through PC and mobile.

In fact, the Minister Mr. Kapil Sibal reiterated his commitment to complete the National Optical Fibre Network (NOFN) by December 2013, saying that “the resultant possibilities for empowerment were limitless.”

However, access doesn't necessarily mean adoption. We strongly believe that the current and new innovative content and services in the private sector is the key to adoption, especially utility services such as health, education, employment related information, financial information, agri related information.

We therefore also believe that some fiscal incentives to the consumers and entrepreneurs would be a critical step towards a more widespread adoption and use of Internet and data by creating an environment for entrepreneurship and innovation.

Since 1991 the stated aim and practice of the government has been to deregulate, de-license and adopt open competition. But closer looks at the three sectors that have succeeded most in these intervening years tell a different story. The three sectors that have done well and have contributed to the prosperity and

1 TRAI Recommendations on National Broadband Plan 2 September 22, 2010, The Hindu Business Line

development of the country have been IT & IT enabled Services, Telecom and Infrastructure. In all three, the intervention of the government in form of tax incentives, consumer price regulation and shared cost respectively has been the key driver. The common thread has been fiscal incentive to propel the industry to a take off stage.

In case of Internet/connectivity and data adoption, too, some form or the other of fiscal incentives would be required to take the industry and users to a take off stage. It is with this belief that we submit the following fiscal proposals to the Government of India in the following chapters.

India's mobile and internet achievements are a study in contrast. There are approximately 121 million internet users in the country. However, net additions in broadband subscribers are merely 0.2 to 0.3 million per month compared to around 15-18 million mobile connections. Although the laws of arithmetic will ensure the gap narrows overtime as mobile telephony reaches levels of saturation, the benefits and externalities associated with greater internet and broadband penetration are far too significant to wait for the market to deliver these outcomes.

IAMAI believes that the government has taken positive steps through its policy enunciations in the NTP 2011. The National Broadband Plan aims to provide Broadband Connectivity across the length and breadth of the country by 2014 through a combination of wireless and OFC/wireline connectivity. NTP 2011 also envisages providing affordable and reliable broadband on demand by the year 2015; to achieve 175 million broadband connections by the year 2017; and 600 million by the year 2020 at minimum 2 Mbps download speed and making available higher speeds of at least 100 Mbps on demand. However, much of the success in adoption will depend on key fiscal incentives.

Also, in order to achieve this, as the NTP 2011 rightly points out, there is an urgent need to develop an eco-system for broadband in close coordination with stakeholders and various ministries to ensure availability of media for last mile access, aggregation layer, core network of adequate capacity, cost effective Customer Premise Equipment (CPE) and environment for development of relevant applications. IAMAI has been long advocating such a strategy.

Potential of Internet


IAMAI is of the view that merely pushing for availability is not enough. Simultaneously, there is a need to design various policies to promote development of local content and applications as well as the need to play an advocacy role. With other components in place, availability of broadband is likely to be much more effective, akin to a force multiplier.

Following are some of the proposed initiatives that can help foster faster

adoption and reach of internet and broadband across the length and breadth

of the country. A majority of these issues can be addressed by suitable policy

initiatives and direct and indirect tax benefits.


Part One: Direct Taxes

© Internet and Mobile Association of India 2013

a) Preferential corporate tax treatment for the high

technology Internet and Mobile Value Added

Services sectors

Issue:

Recommendation:

The best case study of tax incentive helping a fledgling industry grow and reach

global proportion with thereby making India a knowledge superpower is the IT

and IT enabled service industry. It is generally accepted that the industry would

not have reached the stage where it is today but for exemption of Income Tax

under sections 10 (A).

Today Internet and Mobile Value Added Services are what IT and ITeS used to be 10 years back. The Internet technologies is an emerging sector where India has an opportunity to take the lead; they are in a position to create global companies such as Amazon, Google and eBay; they are operating in India helping Indians with their services and making Indians efficient and productive.

These sectors have however, never so far been either recognised or given any fiscal benefits. An emerging sector/s requires fiscal and tax benefits to achieve its full potential. What the government did for 15 years for the IT Services sector India would not have seen giants like Infosys and Wipro emerge.

· It is our recommendation that the following organizations be exempt

from Income Tax for five years under section 10(A) of Income Tax Act:

service providers on Internet and mobile; companies providing Internet

and broadband connectivity in rural areas, mobile content providers

Mobile Value Added Services platforms, technology and solutions

providers, and transaction providers on the Internet and mobile devices

· Modern day IT and software is increasingly being defined by online

technology providers and an exemption for five years will provide an

opportunity to create in India global companies. The revenue loss to the


exchequer would be more than made up by the overall social and

economic contribution of these companies as has been clearly seen in

the case of software and services.

The Government of India had earlier granted tax shelter to companies dedicating

themselves to the cause of long-term scientific research and development under

section 80IB (8A). This benefit was enjoyed by many technology companies.

However, this benefit was terminated in 2007 at time when Internet companies

had not yet started significant scientific research and development.

However, in the last two years, the Internet services and Mobile Value Added

Services companies have started undertaking cutting edge scientific research to

provide better services to the Indian users. It is also well known that technology

research at present comprise primarily research related to Internet access and

services.

• In order to encourage investments in research relating to Internet and

MVAS services, the provision of granting 100% deduction under

section 80IB (8A) should be extended for five years for the named

industry segments.

ICT for development comes to nothing unless the last man in the queue is

provided with access to cost effective ICT based services to deal with his/her

daily life needs through major ICT platforms like the Internet. Also the talk of last

b) Tax Exemptions for long-term Scientific Research

and Development

c) Fiscal Benefits for Low cost High Speed Access

Issue:

Recommendations:

Issue:


mile connectivity at the grassroots is less meaningful in the absence of whether

adequate provisions are made to access the same. Hence, the quintessential

need to take care of low cost access while making provisions for ICT based citizen

services delivery within the larger framework of Internet Governance.

• IAMAI recommends conditional cash transfers (CCTs) to eligible

households in the form of coupons either to be used for purchase of CPE

(capital grants) or access to broadband services and internet services

(allowances) at cybercafés.

• For broadband penetration across India, there is a need for a service

which is priced no more than `200.00 per month. The experience of

cable TV and mobile phones demonstrate that a price point of around

`200.00 can trigger brisk demand side expansion of internet services in

India. Although not sacrosanct, ̀ 200.00 is also indicative of the amount

majority of households would be willing to pay for internet services.

Government being a major producer and user of digital content and application

must promote creation of digital content in regional languages. At present,

English language dominates and this needs to change for internet to become

relevant to the masses. Mobile handset applications in local languages will

further drive adoption of internet and broadband in rural areas. The next giant

leap from approximately 100 million internet users to 300 million would be

primarily driven by local content in local language.

Recommendations:

Issue:

d) Fiscal Benefit for Local Language Content

Proliferation


Recommendations:

Issue:

• Waive income tax for entrepreneurs and companies that provide

services primarily in local languages on internet. One of the main initial

targets of this incentive initially would be the local language newspapers

and magazines on the internet. Such incentives will help these

companies grow, thereby leading to overall development of the

ecosystem and consumer benefits.

• Benefits/incentive to manufacturers of digital hardware to have fonts/

virtual keyboards in ALL Indian languages on their hardware/digital

devices.

• Incentive to Software/VAS Products/Services which offer their

content/offerings in Indian languages.

• Tax moratorium to data centers in India by which hosting becomes a lot

cheaper in India.

Lower costs will enable content providers to develop/offer relevant and localised

content/services and this will help in the overall growth of the digital economy;

enabling success of government's E-governance & M-Governance and Financial

inclusion initiatives.

Internet Services and Mobile Value Added Services companies invest highly in

people and technology. This is due to the inherent nature of the industry as well

as due to the fast changing technology scenario. The government however,

disallows such spending as “expenses” treating them as items of long enduring

nature.

e) Product Development, Bandwidth Charges and

Software License Expenses to be treated as

Revenue Expenditure:


Recommendation:

Issue:

Recommendation:

•

development, bandwidth charges and software licenses as revenue

expenditure.• 100% deduction may be allowed in these items in the year that these

expenses are incurred.

Internet and Mobile Value Added Services Industry unlike any other industry

does not get any kind of financial support from any of the financial institutions.

Venture Capital is the only way for them to raise funds and VC investments are

critical for nurturing and growing the Indian Internet Industry.

This industry will not get benefitted if Long Term capital gains tax is made the

same as short term tax, as a result there will be no incentive for VCs to invest in

India, and their money will flow into Israel, Eastern Europe and UK.

• We would request the Finance Ministry to maintain preferential tax

treatment for long-term Capital gains for the Venture Capitalists in the

absence of which Indian companies will be starved of the start up capital

they need to grow and innovate.

A separate guideline may be issued bringing costs of product

f) Maintaining preferential tax treatment for long-

term capital gains for VCFs



Part Two: Indirect Taxes

© Internet and Mobile Association of India 2013

The Union Finance Minister had announced the implementation of

a new system for taxation of services known as the 'Negative List'

while presenting the last budget. We were delighted to note that

the internet and mobile advertising were added to the short

negative list of service tax and were provided exemption. We

would like to express our gratitude to the Ministry of Finance for

beneficial consideration to the digital advertisement industry.

However, the industry also has noted some anomalies and need

some clarifications on the following items of service tax.

a. Export status of the “Online Information and

data base access retrieval services” accessed

outside India to be restored back to the position

which existed before the Place of Provision of

Services [POPs] Rules, 2012

Issue:With the introduction of POPS from July 1st 2012, the Export of Services Rules,

2005 have been rescinded, and the provisions relating to export of services are

laid down in Rule 6A of the Service Tax Rules, 1994. As per the said Rule 6A, the

provision of a service shall be treated as export of service when: “The place of

provision of the service is outside India”.

The place of provision of service is determined with reference to the POPS. Rule 9

of POPS provides that in the case of 'online information and database access or

retrieval services', the place of provision of service shall be the location of the

service provider. Thus, 'online information and data base access retrievable

services' provided by service providers located in India are treated as provided in

India and are not considered as export even where the service recipients are


located outside India and make payment in foreign exchange. Prior to July 1st,

2012, 'online information and database access or retrieval services' classified

under sub-clause (zh) of erstwhile section 65 (105) of the Finance Act, 1994 were

covered under Rule 3(1)(iii) of the Export of Services Rules. Thus, such services

were considered to be exported if they were provided to recipients located

outside India and payment for such services was received in convertible foreign

exchange.

Hence, from July 1st, 2012 our members are placed in a disadvantageous

position, since online data service providers in India would be required to charge

service tax on such services to all their customers, irrespective of their customer's

location. Thus, service tax will be required to be paid even where the services are

provided to recipients located outside India and payment is received in foreign

exchange. Largely such overseas customers are subject to domestic tax in their

own tax jurisdiction and therefore do not pay such Indian service tax as charged,

and the Indian service providers are forced to gross it up & pay from their own

pocket thus resulting in further anomaly. Furthermore service tax is based on the

principles of consumption based taxation, which is also the adopted principle

worldwide and therefore the services should be taxed in the jurisdiction of its

consumption only.

• It is requested that the position regarding Export of 'online information

and database access or retrieval services', may please be rectified by

making necessary amendments in the Place of Provision of Services

Rules, 2012, so as to restore the position which existed before July 1st,

2012 for Internet service providers. This industry is in a nascent stage

and such fiscal support is important for its development.

• It is further requested that in case the Government faces challenge in

fully reversing the tax position as regards Export of Online information

and database access or retrieval service then exemption be granted to

corporate & other customers, being registered outside India, whose

identity and location can be established thereby matching the principle

of consumption based taxation.

Recommendations:


b. Service tax applicability on Services rendered by

Ad Networks

c. Service Tax on Unused/Unclaimed cash amount

on expiry of Prepaid cards

Issue:

Recommendations:

Issue:

The clause (g) of Section 66D of the Finance Act, 1994 specifies that selling of

space or time for advertisement other than advertisement broadcast by radio or

television as non-is exempt from service tax. The relevant extract of clause (g) of

Section 66D of the said Act reads as follows: “selling of space or time slots for

advertisements other than advertisements broadcast by radio or television;”

The revenue models of an Ad Network would be a CPM (cost per 1000

impressions), CPC (cost per click), CPL (cost per lead), CPS (cost per search) etc.

Even though all these models are based on the use of space on the internet or

mobile to deliver the impressions or clicks or leads or searches or video content

etc. since the term “selling of space or time slots” for advertisements are not

elaborately defined, we would like to understand if ad network would be

considered as “a sale of space”, to be eligible to enjoy the benefits of the

exemption under clause (g) of Section 66D.

This is a critical issue because if the industry does not charge service tax on

invoices raised on the clients assuming that the industry is covered under the

negative list, it may not be able to collect and pass on the taxes later to the

government.

• We would like to request for a clarification specifying if the Ad Networks

are covered under the negative list of the Service Tax.

Before the Negative List, services in relation to charge cards/ prepaid cards were

covered under the credit card, debit card, charge card or other payment card

services. Under the old regime issuance of card was covered under the above

entry. All these prepaid cards are issued free of charge.

The amount remaining unutilised on the expiry of the card cannot be considered

towards any service rendered, but is merely a write back of a liability / unclaimed

cash amount of the customer. Intimation is sent to the customer regarding the

expiry of his card in compliance with the RBI regulations. In cases where the card

of the customer expires with outstanding cash balance on the card, the liability

towards the customer ceases and hence such amount is written back.

However, under the new regime, service has been defined to include any activity

carried out by a person for another for consideration, and includes a declared

service, but shall not include an activity which constitutes merely a transaction in

money or actionable claim.

• The IAMAI is therefore desirous to seek a clarification on the taxability to

service tax in relation to the unutilized amounts on the prepaid cards on

their expiry.

Recommendations:


About IAMAI:

The Internet and Mobile Association of India [IAMAI] is a young and vibrant industry association with ambitions of representing the entire gamut of digital businesses in India. It was established in 2004 by the leading online publishers, but in the last eight years has come to effectively address the challenges facing the digital and online industry including mobile content and services, online publishing, mobile advertising, online advertising, ecommerce and mobile and digital payments among others.

Eight years after its establishment, the association is still the only professional industry body representing the online and mobile VAS industry in India.

The association is registered under the Societies Act 1896 and is regulated by the Charity Commissioner of Maharashtra. With a membership of 130 plus Indian and MNC companies, offices in Delhi and Mumbai and a permanent and professional staff, the association is well placed to work towards charting a growth path for the digital industry in India.

Published by: Dr Subho Ray (President), on behalf of Internet and Mobile Association of India.

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