Finance Minister tabled the Direct Taxes Code Bill, 2010 (DTC 2010) in Parliament on 30 August 2010 with a view to simplify the direct tax legislation in India. The DTC 2010, once enacted, would come into force from 1 April 2012. This Article provides key amendments as may be applicable to the Technology, Media and Telecommunications (“TMT”) sector.
Salient features
- Investment-linked incentive scheme to replace the current profit-linked tax holiday.
- Introduction of grandfathering provisions whereby tax holiday as available under the existing law continues to be available under DTC 2010 for the unexpired period.
- Losses allowable for carry forward for indefinite period.
- Deduction for in-house research covers all industries as against bio-technology and manufacturing under the existing law.
- The meaning of the term royalty and fees for technical services has been expanded.
- SEZ developer and SEZ units subject to book profit tax at the rate of 20% on book profits
- SEZ developer subject to Dividend Distribution Tax at the rate of 15% on dividend distributed to shareholders
Technology
General
- The profit-linked tax holiday available under the existing law to the following industries will also be available under DTC 2010 for the unexpired period of time:
- Information and communication technology industry, computer hardware and call centres in the states of Himachal Pradesh and Uttaranchal. As under the existing law, the tax holiday will be available if the manufacture or production begins by 31 March 2012.
- The definition of royalty and fees for technical services has been modified as under:
Ø Royalty now covers the following:
– Transfer, use, etc. of a process even if not secret as against the existing law where it has been argued that only secret process is covered
– Use or right to use of transmission by satellite, cable, optic fibre or similar technology
Ø Fees for technical services now specifically includes consideration for development and transfer of software
- Deduction towards in-house scientific research covers all industries as against bio-technology and manufacturing under the existing law
Specific to SEZ developer or units operating in SEZ
Ø Investment-linked incentives are provided for SEZ developer or units operating in SEZ. For this purpose, apart from deduction towards operating expenses and finance charges, deduction will also be available for the following:
1. License charges and rental fees, if actually paid
2. Capital expenditure
3. Pre-commencement expenses
Deduction will not be available towards expenditure on purchase, lease or rental of land or land rights. This was not clear in the DTC 2009.
Ø The disqualifications contained under the existing law in the event of splitting up or reconstruction of existing business or set up by the transfer of previously used machinery or plant are also contained in the DTC. In such a situation, the deductions for following expenses will not be available:
1. Capital expenditure
2. Pre-commencement expenses
The deduction under normal provisions as applicable to other businesses will however be available.
Ø Loss from one business can be set off against profits of another business. However, losses can be set off only against the income from ordinary sources and not against special sources.
Ø The profit-linked tax holiday available under the existing law to units operating in SEZ will also be available under DTC 2010 for the unexpired period of time. The tax holiday will be available if manufacture or production begins by 31 March 2014. It is clarified that capital expenditure will not be allowed as deduction in computing the gross total income.
Ø Under the DTC 2010, SEZ developer or a unit operating in SEZ will be subject to book profit tax (similar to Minimum Alternative Tax (“MAT”)) at the rate of 20% of book profits. The specific provisions exempting applicability of MAT in the case of SEZ developer and SEZ units as contained in the existing law is absent in the DTC 2010.
Ø Under the DTC 2010, SEZ developer will be subject to Dividend Distribution Tax (“DDT”) at the rate of 15% of dividend distributed to shareholders. The specific provisions exempting applicability of DDT in the case of SEZ developer as contained in the existing law is absent in the DTC 2010.
Media
Ø The definition of royalty and fees for technical services has been modified as under:
1. Royalty covers transfer of all or any rights in respect of live coverage of any event
2. Exclusion for sale, distribution or exhibition of cinematographic films from royalty contained in the existing law is absent in the DTC 2010.
3. Fees for technical services now includes consideration for development and transfer of software
Ø Activities of non-resident news agency or publishers of newspapers, magazines or journal confined to the collection of news from India for transmission out of India is not considered as business connection under the existing law. Such exclusion is absent in the DTC 2010.
Ø Operation of shooting of cinematograph films in India by non-resident is not considered as business connection under the existing law. Such exclusion is absent in the DTC 2010.
Ø Deductions for in-house research as discussed above.
Ø As per the rules prescribed under the existing law, the cost of production of feature film is allowed in the year of release of film or partly in the year of release of film and partly in the subsequent year depending upon the date of release of film. While there exists an enabling provision under the DTC 2010 to frame rules, a separate notification would need to be issued in this regard.
Telecommunications
Ø Under the existing law, license fees paid to operate Telecommunication Services is eligible for either amortisation over a period of license or is eligible for depreciation. Under the DTC 2010, only depreciation can be claimed in respect of such expenditure. Where amortisation is claimed under the existing law, the DTC 2010 does not contain grandfather provision enabling deduction for unexpired period.
Ø Changes in definition of royalty and fees for technical services as discussed above.
Ø The profit-linked tax holiday as discussed under „Technology? above.
Ø Deductions for in-house research as discussed above.
Summary
| Industry |
Beneficial provisions | Detrimental provisions |
| Applicable to all | · Deduction towards in-house scientific research covers all industries as against bio-technology and manufacturing under the existing law |
|
| Technology – SEZ developer
or units operating in SEZ |
· Accelerated deduction for
expenses |
available except under grandfathering provisions (although tax holiday has been extended to units in SEZ which begins manufacturing or production by 31 March 2014)
|
| Media | – |
Cinematographic Films not excluded from royalty
|
| Telecommunications | – |
|
