FICCI-KPMG-Report-13-FRAMES

The power of a billion: Realizing the Indian dream 193
Further, the problem of dual taxation (i.e. levy of
service tax as well as VAT on certain transaction) is
expected to be sorted out with the implementation
of GST. Therefore, the industry expects that the
Government will release definitive timelines and
steps for the implementation of GST at the earliest.
Also, the industry expects that other applicable
indirect taxes such as entertainment taxes will
be subsumed into a potential GST. If the levy of
entertainment tax is kept out of GST, it would
be particularly unjustifiable in States such as
Maharashtra, where the rate of entertainment tax
being levied on films is relatively high. Therefore,
entertainment tax should form part of the GST.
The Finance Minister, vide Finance Bill 2013, has
taken a step forward towards implementing GST by
setting aside a sum of INR 90 billion towards the first
installment of the balance of CST compensation for
States.
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Value Added Tax and Service tax on Copyright
The Union Budget 2012-13, had exempted the
licensing of copyright in cinematographic films from
service tax. However, acceding to the film industry’s
request, in Finance Bill 2013 the Finance Minister
has proposed to restrict the benefit of the said
service tax exemption to licensing of copyright in
cinematographic film for exhibition in a cinema hall /
theaters with effect from 1 April 2013.
Separately, the Government of various States have
made ‘copyright’ liable to VAT, treating the same as
intangible goods
Therefore, the dual levy of Service tax and VAT on
the same transaction / consideration pertaining to
copyright in cinematographic films continues which
needs to be addressed by the Government.
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Mandatory Permanent Account Number (‘PAN’)
The Finance Act (No. 2) of 2009 mandated a higher
withholding tax rate of 20 percent in case of payees
(i.e. recipients of income) not having a PAN, by
introducing section 206AA in the IT Act. This provision
also impacts payment made to non-residents.
With the changed dynamics of the industry, the
involvement of non residents in the industry has
increased to a great extent. While non-resident
technicians assist in film production, a lot of content
is also procured by broadcasters from foreign parties.
Most of the above contracts with non residents are
‘net of tax’ contracts i.e. taxes are borne by the payer.
In case of one-off payments, non residents typically
cannot be expected to apply for Indian PAN at the
time of receiving the payments from residents (i.e.
when tax deduction has to be made). This has given
rise to a situation, where even if the appropriate rate
of tax deduction at source (in terms of the provisions
of the IT Act or the applicable tax treaty) is much
lower, taxes are withheld at a higher rate (in absence
of PAN). This has led to a significant increase in the
overall costs of doing business for the Indian entities.
Considering the above situation, the Government
could consider measures to address this.
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Tax Residency Certificate (‘TRC’) mandatory to
avail tax treaty benefit
The Finance Act 2012 has introduced section 90(4)
in the IT Act which makes it mandatory for nonresident
taxpayers to obtain a TRC containing certain
prescribed particulars from their respective countries
in order to claim the benefit under the tax treaty.
The Central Board of Direct Taxes (CBDT) issued
a circular in September 2012 prescribing the
information that the TRC should contain in order to
avail tax treaty benefits. Based on a plain reading
of the provision, it appears that if the TRC does not
contain any of the prescribed information, the benefit
of tax treaty may not be available. It needs to be
appreciated that the Tax authorities of the respective
countries have their own internal procedures /
format for issuing the TRC to the tax residents of
their country and it may or may not contain all the
information prescribed by the Indian Government.
If the treaty benefit is denied for want of any of the
prescribed information in the TRC, it will cause undue
hardship to the tax payers.
Hence, the Government should release an
appropriate clarification addressing the above
issue, so that the treaty benefit is not denied to
the residents of other countries because certain
information is not mentioned in the TRC.
Further, Finance Bill 2013 proposes that for a nonresident
to claim tax treaty benefit, submission of
TRC containing prescribed particulars is necessary
but not sufficient condition. This amendment is
proposed to be retrospective from financial year 2012-
13.This has raised concerns among the non-resident
taxpayers that even in the cases where a valid TRC
is furnished, the Tax authorities may go beyond such
TRC and make further inquiries to analyse the claim
of treaty benefit by the non-resident.
To address such concerns of the taxpayers, the
Government immediately issued a press release
clarifying that TRC will be accepted as proof of
residency and necessary amendments will be made
in the law to address the above issue.
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Withholding tax rate on royalty and fees for
technical services enhanced by Finance Bill 2013
Finance Bill 2013 proposes to enhance the basic
withholding tax rate on payments by a resident to
non-resident towards royalty and fees for technical
services from 10 percent to 25 percent on gross
basis. This will have significant impact on payments
made for acquisition of content, transponder hire
charges, etc. and therefore, enhance the cost of
doing business, especially where the tax is to be
borne by the Indian party. However, there is a silver
lining here, given that a lower withholding tax rate
under tax treaties can be applied, provided the nonresident
obtains an Indian PAN and a TRC containing
the prescribed particulars.
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