Association of Competitive Telecom Operators Pre - Budget proposals for Union Budget (2014-15)

1. Association of Competitive Telecom Operators Pre - Budget proposals for Union Budget (2014-15) to Ministry of Finance (Department of Revenue) 9th June 2014 New Delhi.

2. Collaborating for Competitiveness Introduction • ACTO is an industry association, registered under Societies Registration Act, 1860. • Our members provide enterprise data services to multi-sited corporations, Indian BPO/KPO, outsourcing and ITES sector operating global networks under appropriate telecom licenses accorded by Government of India. • ACTO is committed to further India’s pro-competitive policies and to partner closely with Ministry of Communications & Information Technology, Ministry of Finance and other Ministries , Government Bodies to enhance the stakeholder’s engagement with the specific needs of the enterprise segment. • Our members:

3. Collaborating for Competitiveness Rationalization of Taxes • Current Scenario: • The telecom sector continues to grapple with an multiple levies and high revenue sharing license fee i.e. nearly 28-30 %, which is highest among any other sectors in India and many other neighboring countries. • The earlier license fee was increased from 6% to 8% in 2012. The 8% includes 5% USO levy and 3% Administrative Fee. USO Fund continues to be under utilized and has built up a corpus of about Rs. 28,000 Crore. The 5% USO levy needs to be reduced to 1% - 3%, which is comparable to international best practices. • Presently, Telecom licensees are subject to the double-assessment of license fees because input costs, such as charges for port charges , local loops charges and bandwidth cost which themselves already reflect the license fee, are not deductible from the gross revenue (GR) to work out the adjusted gross revenue (AGR) on which the license fee is calculated. • National Telecom Policy (NTP-12) is also supporting for review of rationalizing the taxes- “To rationalise taxes, duties and levies affecting the sector and work towards providing a stable fiscal regime to stimulate investments and making services more affordable”. • Request : • We would urge the Government to consider rationalizing levies and taxes in the Telecom Sector to improve the viability, encourage investments and affordability of telecom services.

4. Collaborating for Competitiveness Recommendations on Direct Taxes • Retrospective amendment in the definition of “Royalty” under section 9 of the Income Tax Act, 1961. • The Finance Bill 2012 brought in a retrospective amendment to the definition of the term ‘Royalty’ by introducing Explanation 6 to Sec 9(1) (vi) of the Income Tax Act, 1961 whereby the term ‘process’ used in the existing definition of Royalty is elaborated to include transmission by satellite, cable, optical fibre or by any other similar technology. It has resulted in inclusion of telecom charges for Bandwidth charges ( IPLC), interconnectivity charges etc. within purview of royalty. • We strongly recommend this retrospective amendment should be withdrawn. • Services in the nature of provision of connectivity/bandwidth are merely standard services provided. As per international tax practices and OECD Commentary, payments for such standard services should NOT be treated as 'Royalty’. A clarification should be provided that standard services such as telephone/mobile charges, bandwidth charges and interconnectivity charges would be outside the ambit of royalty. • Contd……

5. Collaborating for Competitiveness Recommendations on Direct Taxes • Amendments brought in section 9 (1) (i) of the Act to tax indirect transfer of assets should be made prospective . • we believe that application of above provision from a retrospective date have direct impact on future investment in India and may lead to reopening of settled matters /cases , resulting in to long drawn litigation for the sellers on account of completed transactions . • Further , the party acquitting the share may be subjected to withholding tax proceedings on account of such completed transactions , which may result in protracted litigation . • A threshold limit (Say 50%) should be specified to determine when a share would be construed to derive substantial value from assets located in India . • We recommend that the said amendment should be prospective and further we believe that the specification of a threshold limit for determination of “substantial Value” would avoid unwarranted litigation that may arise on account of non-availability of specific guidance on the issue . • Contd……

6. Collaborating for Competitiveness Recommendations on Direct Taxes • Clarification with respect to meaning of term ‘extension’ used in the Proviso to section 36(1)(iii) of the Act and also that the Proviso is not applicable to interest paid on loans taken for acquisition of capital assets used for continuation of existing business. • Proviso to section 36(1)(iii) of the Act provides for disallowance of interest incurred in relation to loans borrowed for acquisition of a capital asset used for extension of a business. • In absence of clarification in relation to the meaning of the term ‘extension’, the tax department has been disallowing interest expenses even in respect of capital borrowed for acquisition of capital assets, which are used for carrying on the existing business activity (i.e. for continuation/ expansion of existing business). This approach has resulted in significant disallowances and resultant, litigation and hardship for the assesses. • It is thus recommended that necessary clarification should be brought in to clarify that ‘extension’ should be construed as commencement of a new business activity and proviso to section 36(1)(iii) should not be applied in case of funds borrowed for continuation/ expansion of existing business. • Contd……

7. Collaborating for Competitiveness Recommendations on Direct Taxes • Allowabilityof deduction in respect of expenses disallowed under section 40(a)(i)/ (ia) of the Act for a particular year, in the year in which liability under section 201 is paid • Recovery of tax liability under section 201 of the Act in relation to a particular expenditure, along with disallowance of the same expenditure under section 40(a)(i)/ (ia) leads to dual tax impact for the assesses causing significant financial hardship. • We recommend that amendment should be brought in to NOT disallow expenditure of bandwidth/interconnectivity charges either under section 40(a)(i) of the Act (i.e. payment to non-residents) or section 40(a)(ia) of the Act (i.e for payment to residents) on account of non-deduction of taxes due to the retrospective amendment to section 9(1) of the Act. In other words, in a retrospective amendment, the payer cannot be fastened with an obligation which is higher or different than the obligation at the time of credit or payment of income. Hence, withholding tax obligations are to be discharged based on the provisions of law as it stands on the date of credit or payment whichever is earlier. Consequentially, the taxpayer should not be fasten with any interest or penalty provisions relating to non deduction of taxes. • Contd……

8. Collaborating for Competitiveness Recommendations on Direct Taxes • Deduction in respect of employee’s contribution should also be governed by section 43B • Section 43B presently covers employer’s contribution only and employee’s contribution is left to be governed by section 36(1)(va). • Section 36(1)(va) mandates that the employee’s contribution should be credited by the due date specified under the relevant Act, rule, notification or order governing that fund. Manner of tax treatment of employee’s contribution and employer’s contribution should be on the same footing to ensure simplicity of reporting and computing. • Contd……

9. Collaborating for Competitiveness Recommendations on Direct Taxes • Restoration of Exemption under section 10(23G) of the Act in respect of certain income of the companies investing in telecom sector • Section 10(23G) provided exemption in respect of interest on long term finance and long term capital gains arising to investing companies / infrastructure capital funds for investment in telecom operating companies. However, such exemption has been withdrawn with effect from FY 2006-07. • The exemption provided under section 10(23G) enhanced the viability of telecom projects and encouraged investments in the telecom sector. Further, such exemption was only provided for investment in telecom operators. • It is recommended that such exemption be restored and be extended to all entities engaged in telecom sector. • Allow deduction for expenditure incurred on CSR activities as per (new) Companies Act, 2013 • Contd……

10. Collaborating for Competitiveness Recommendations on Direct Taxes • Availability of tax holiday under section 80IA in case of merger / demerger of telecom companies after 1 April 2007 and the benefit of said section may also be extended to companies started their telecom business after 2007. • Given the increasing cost and cut throat competition, a consolidation phase in the telecom sector seems to be inevitable. We believe that the continuity of the tax holiday for an undertaking in the hands of the transferee company could be a key factor in the consolidation decision. The Government should extend the tax holidays to new business undertakings after 1 April 2007 as the new business undertakings will bring in new technology and improvement to the Industry in India. When other tax incentives such as SEZ incentives are available to the amalgamated companies u/s 10AA (5), there is an existing discrimination against the telecom industry, which should be rectified. • Reduction in Minimum Alternative Tax (MAT) • MAT rate has steadily increased from 7.50% in Assessment Year (‘AY’) 2005-06 to 18.5% in AY 2013-14. • However, income tax rates have reduced from 35% in AY 2005-06 to 30% in AY 2013-14. This has resulted in significant accumulation of MAT credit by companies, with concerns on ability to claim credit under the Act. • It is recommended that MAT rate be reduced and the MAT credit remaining unabsorbed is allowed as a deduction to the tax payer • Contd……

11. Collaborating for Competitiveness Recommendations on Direct Taxes • Simplify the procedure for credit of tax refunds due to foreign companies directly to their offshore accounts and ability to provide the number of the overseas bank account in the tax return. • At present, it is mandatory to provide a bank account number in the income tax return in case of refund, however, details of a foreign bank account cannot be provided therein. • No procedure for credit of tax refunds to foreign companies directly to their offshore accounts force them to either open a bank account in India or substantial time and effort is wasted in trying to get their refunds collected in India and remitted overseas thereafter. • Specific provisions for processing of refunds in a time bound manner • Despite all the initiatives taken by the Government so far, tax payers are unable to receive their refunds in a timely manner. • It is thus recommended that strict mechanism for issuance of refunds in a timely manner should be introduced to redress the grievances of the taxpayers in this regard. • Contd……

12. Collaborating for Competitiveness Recommendations on Direct Taxes • Timely processing of rectification applications filed under section 154 of the Income Tax Act, 1961 (‘Act’) • Despite of the notification directing the Assessing Officers to dispose off rectification applications within a period of two months, there are undue delays in processing of such applications. • Requirement to dispose off rectification applications and passing of necessary orders in a timely manner should be brought under the Act, along with remedial provisions to redress the grievances of the taxpayers resulting from non-processing of the rectification applications in a timely manner. • Specific exclusion for non-residents not having any place of business in India from complying with withholding tax obligations • At present there is no specific provision exempting a non-resident, which has no place of business in India, from complying with the withholding tax provisions specified under the Act. The issue becomes more complex when all aspects of the transactions are concluded outside India and effectively results in “extraterritorial” application of Indian TDS provisions. • The issue of extra-territoriality has been the subject matter of litigation in various cases. Requiring a non-resident to withhold taxes irrespective of their having a business presence in India creates hardships to non-residents who may themselves not be assessed to India tax, but are simply availing services from Indian residents. • Contd……

13. Collaborating for Competitiveness Recommendations on Direct Taxes • Exclusion of tax protected arrangements with non-resident taxpayers from the purview of section 206AA of the Act. • Section 206AA was introduced with an intention to regularize the compliances by income recipients with respect to obtaining Permanent Account Number (‘PAN’) in India, in absence whereof tax needs to be withheld by the payer at a higher rate of 20%. • Above provision has resulted in significant hardship and costs for the resident payers making payments to non-residents not having PAN in India, under tax protected agreements i.e. where the payer is under an obligation to bear the tax liability. The intention of legislature was never to penalize payers for defaults / non-compliances by the payee. • Allowabilityof TDS credit in relation to income earned by merging company, post the Appointed Date of merger, to the merged company • Income earned by merging entity post the appointed date till the effective date of merger belongs to and is taxed in the hands of the merged entity and hence, credit in respect of taxes deducted at source from such income/ revenue should also be allowed to the merged entity. • However, since tax deduction is done by the payer in the name of the merging entity, the tax department denies credit in respect such TDS to the merged entity in absence of any specific provision in the Act in this regard. • Contd……

14. Collaborating for Competitiveness Recommendations on Direct Taxes • Provide limitation period for completion of withholding tax proceedings under section 201 in respect payments made to non-residents. • Non provision of limitation period results in litigation where the revenue department initiates these proceedings after significant delay • On lines similar to Dispute Resolution Panel (‘DRP’) provisions, the Commissioner (Appeals) should be required to dispose off the appeal in time bound manner by amending provisions of section 250(6A) of the Act. • Since no time period has been specified for the Commissioner (Appeals) to dispose off the appeals filed by taxpayers, there is a significant delay in disposal of appeals at the first appellate level resulting in deferment of settlement of issues and on going litigation for subsequent years. • Contd……

15. Collaborating for Competitiveness Recommendations on Direct Taxes • Withdrawal of amendment made to special audit provisions under section 142(2A) of the Act vide Finance Act, 2013. • Finance Act, 2013 has amended the provisions of section 142(2A) of the Act has expanded the scope of the special audit provisions by providing that a special audit can be ordered by the tax authorities having regard to the nature and complexity of the accounts, volume of the transactions, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business activity of the assessee. • Telecom business is a technology driven business with high volume transactions. Expansion of the scope of section 142(2A) of the Act may result in the tax authorities ordering special audits in a mechanical manner in case of telecom operators on an year to year basis. • Contd……

16. Collaborating for Competitiveness Recommendations on Direct Taxes • Introduction of New Dispute Resolution Mechanisms to Reduce the number of tax litigations/appeals • To reduce the number of litigations/appeals with the Tax Authority, it is recommended to introduce new provisions or setting up new committees to adjudicate the tax disputes between Tax Authority and Taxpayers instead of going through litigations/appeals. The new dispute resolution mechanism should be aimed to resolve the disputes on a mutually agreed positions (settlement based approach).

17. Collaborating for Competitiveness Recommendations on Direct Taxes • 20. Complete stay must be granted till the disposal of the appeal based on the merits of the case • With the increasing tax litigation, the demand for disputed taxes has also been ever rising. Though the power to grant stay vests from the assessing officer to the appellate authorities, the taxpayers are rarely, rather never granted complete stay for their outstanding tax demands based on the nature of the dispute. • It is practically seen that in most cases, stay, if accepted, is granted only up to fifty percent of the outstanding tax demand and even the stay granted demand of fifty percent is required to be paid within the earliest of six months period or disposal of the appeal. On vacation of the stay, aggressive recovery measures such as attachment of bank accounts, etc. are resorted to by the assessing officers. • Further, even appellate Tribunal is not vested with powers to grant complete stay of the recovery proceedings of the outstanding tax demands. It is noted that the Act provides maximum time limit of four years, on one hand, for disposal of appeal before the Tribunal, and on the other hand, provides that even in cases where the delay in disposal of appeal is not attributable to the assessee, tribunal can grant stay only to a maximum of 365 days. It is a known fact that the cases in the Tribunals remain undisposed off for more than a year, more so when a Special Bench is formed to decide on a contradicting issue and thus all cases, involving such issue, is adjourned until the disposal of the special bench. In such circumstances, the appeals before tribunal are bound to remain pending for a long time. • The taxpayers are not granted stay based on their merits and thus causing undue hardship. It is thus suggested that the stay related instructions be enforced strictly and it be ensured that complete stay be granted in genuine cases of the taxpayer. • Contd……

18. Collaborating for Competitiveness Recommendations on Direct Taxes • Dividend Taxation • In India, a classical system of taxation is followed for corporates whereby income is first taxed in the hands of a company without deduction of dividends paid and the company's post tax income is then distributed to shareholders after the payment of Dividend Distribution Tax (DDT) by the Company under section 115O of the Act. • From economic point of view it is the same income that has borne both corporate tax (at 33.99%) and DDT (16.995%). Further, the shareholder are NOT allowed to take credit of DDT paid by the Company. This has resulted in a very high overall tax rate (approx. 51%) when compared to developing companies. • We recommend to abolish the DDT to maintain the overall tax rate in line with the developing countries. • Contd……

19. Collaborating for Competitiveness Recommendations on Direct Taxes • 21 Transfer pricing issues • Acceptance by tax officers of transfer price determined by regulatory authorities like Customs, RBI, DGFT etc. • “Secret Power" exercised by tax department to gather the information which is not in public domain may be curbed. Adequate safeguards are necessary to protect confidential information relating to the taxpayer. It is thus recommended that the use of secret comparables should not be permitted as they do not give a level playing field. Moreover, if such power is vested with the TPO, then due opportunity should be provided to the taxpayer to present its case. It is generally seen that the TPO, in such cases, shares only such data which is used against the taxpayer. It is suggested that the TPO must not be allowed to cherry pick data against the taxpayer and he must share all such data collected under section 133(6) with the taxpayer. • Use of multiple year data, as accepted in the OECD guidelines should be permitted to be in line with the best international practices. Currently, the TPO routinely disallows use of multiple year data and only relies on the data of the year of assessment, which invariably comes into the public domain well past the conclusion of the concerned fiscal year. It is onerous to expect the taxpayer to comply with a data point which does not exist at the time of transaction. Hence, to cover for this contingency and also to provide for stability in margins, multiple year data should be allowed unconditionally. • Contd……

20. Collaborating for Competitiveness Recommendations on Direct Taxes • 21 Transfer pricing issues (contd) • Correlative adjustments to be permitted • Remove the duplication of penalty failure to maintain documents/ information (section 271AA) and failure to furnish information/ documents (271G). • Reduce the penalty for non maintenance of documents/ information from 2 percent of transaction value to 0.25 percent of transaction value or be an absolute amount . • We recommend that the limit for scrutiny should be fixed at a high level, say INR 100 Crores to have a meaningful audit of the Transfer Pricing and bring down the litigations • It is thus suggested that the values determined or adopted by other regulatory authorities be accepted for the purpose of transfer pricing. • Contd……

21. Collaborating for Competitiveness Recommendations on Direct Taxes • 21 Transfer pricing issues (contd) • It is also recommended that the concept of “inter-quartile range” may be introduced in the legislation, wherein the tax payers are expected to earn a margin which meets any point within the range. • Currently, a deviation up to 3 percent of the transaction value is allowed from the arm’s length price for the purpose of transfer pricing provisions as against 5 percent available earlier. Considering the wide variation of margins earned by the players of industry, the irreconcilable difference between them, high degree of subjectivity involved in the Function, Assets and Risks analysis of the comparables and various other issues discussed above, a tolerance band of 5 percent itself was very minimal, which is now further reduced • It is thus suggested that an increased margin of deviation, up to ten percent, should be allowed for the purpose of justification of arm’s length price • The provisions may, therefore, be rationalized to avoid duplicity of effort and resources and a clarification be inserted to exempt foreign companies from the Transfer Pricing requirements, where the Indian Companies report the same transaction • Contd……

22. Collaborating for Competitiveness Recommendations on Indirect Taxes • SERVICE TAX : • Concept of partial reverse charge mechanism should be done away • Increased compliances due to modified reverse charge scheme – Notification No. 30/2012-ST • Capturing information about the status of vendors (i.e. individual, HUF, Firm, AOP) has increased manual compliance • Increased classification disputes e.g. implant placement of resources for maintenance services - whether manpower supply or maintenance services? Manpower supply is under reverse charge, while maintenance is not • Liability of service recipient where there is a valuation dispute at service provider end leading to penal consequences for service recipient for no fault and such disputes could arise after considerable time lag. • Service tax law should be amended to provide relief to service providers in case of bad debts. • The Finance Act 2011 introduced Point of Taxation Rules 2011 that makes it mandatory for service providers to pay Service tax at the time of invoicing. The service providers specially in the telecom sector, are unable to collect the invoice amount from the service recipients, which is then required to be written off as bad debts. In such cases, Service tax paid by the at the time of raising of invoice becomes a cost for them. • Contd……

23. Collaborating for Competitiveness Recommendations on Indirect Taxes • Service tax on perquisites extended by the employer to employee to be kept outside the ambit of Service tax regime • Draft circular issued for public discussion in respect of staff benefits provided by employers to employees • Draft circular provides that perquisites given by the employer to employee during the course of employment, for which salary is foregone or for which reimbursement is made, would amount to provision of “service” liable to Service tax • Provision of service by an employee to employer is outside the scope of “service” and remuneration of any form should not be taxable. • Taxing all perquisites would result in double taxation in the hands of the employees as the same would be subject to Indirect Tax as well as Income Tax. • Contd……

24. Collaborating for Competitiveness Recommendations on Indirect Taxes • Clarification required as to who is the service recipient i.e. person contractually obliged to pay the service provider or the person who physically receives the service • Law does not define who is the “service recipient” • Service recipient is not defined under Service tax Law. Guidance Note provides that the person who is legally entitled to receive a service and obliged to make payment, is the receiver of a service - whether or not he actually makes the payment or someone else makes the payment on his behalf • Guidance Note also provides that the place relevant for determining location of recipient is the place where the service is "used" or "consumed”. Location of service recipient has been defined under Place of Provision of Service Rules, 2012 (PPS Rules). • Guidance Note read with the definition of the location of the service recipient creates an ambiguity regarding the location of the service recipient in cases where the physical beneficiary is in India while the contractual beneficiary is outside India. • Ambiguity results in determining when a service would be considered to be provided within and outside the taxable territory. • Contd……

25. Collaborating for Competitiveness Recommendations on Indirect Taxes • Issuance of guidelines for disposal of pending Service tax refunds • Internal Circulars/Instructions prescribing upper time limit for refund processing are not being followed in letter and spirit. • Different practices are followed by authorities at different jurisdiction for processing of refund. • Authorities often ignore documentation issued by other statutory authorities/experts (e.g. SOFTEX Forms, FIRCs, CA certificate, etc.). • There is lack of clear guidelines on the manner and extent of verification. • Entire refund claim is being rejected due to minor discrepancies in the documentation. • Refunds are also inordinately delayed. Clear mandate should be provided with committed timelines for refunds • Cenvat Credit on CSR related spends • In terms of the Companies Act, 2013, each company is required to spend a specified percentage of its profits towards Corporate Social Responsibility (CSR). For this purpose, companies would be procuring goods and services on the payment of applicable duties / taxes. • It is suggested that a clarification be issued in advance, in order to avoid litigation, that credit of duties / taxes paid on goods and services used for CSR would be available since such expenses are mandated by a statute. • Contd……

26. Collaborating for Competitiveness Recommendations on Indirect Taxes • Other Recommendations: • Withdrawal of special audit/CAG Audit since these are leading to duplication of efforts, costs for both Government and assessee. Guidelines in relation scope of special auditor to be provided in law and to be communicated to companies before audit. • Restriction on input tax credit of inputs and input services not in line with the negative list regime and be removed

27. Thank you !! Collaborating for Competitiveness Association of Competitive Telecom Operators (ACTO) 601, Nirmal Towers, 26, Barakhamba Road, Connaugt Place New Delhi-110 001Tel. No. +91-11-43565353, +91-11-43575353, e-mail: info@acto.in web: www.acto.in 27