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Taxing times for foreign satellite operators in India

By | May 14, 2014

      With the steep increase in television channels in India, the demand for satellite transponder capacity has also risen rapidly over the past few years. A capacity crunch is already plaguing the growth of the number of television channels and thus, foreign satellite operators (FSOs) offer a ray of hope for the Indian television industry to help provide the much-needed capacity. However, the regulatory and taxation requirements are making it increasingly difficult for these FSOs to provide services and fulfill the needs of Indian players. Taxation of FSOs and other connectivity service providers have been prevalent in India since the early part of 2000, and, with the changing tax law environment, smooth running of business is far from reality.

      FSOs providing connectivity services to customers in India have been facing challenges from the Indian Revenue Authorities who allege that the revenues earned from transmission services are liable to tax withholding in India. This allegation is based on the ground that the customers of the FSOs are being provided the satellite equipment and the processes embedded therein on a “right to use” basis, and thus covered under royalty taxation. However, the FSOs claim that these revenues do not fall within the taxable definitions of the Indian tax laws, and therefore they should not be faced with any tax withholding since they do not have any physical presence in India.

      The position of the FSOs was accepted by the high court in one of the cases in January 2011, where it was ruled that no withholding ought to be done in such cases. However, in March 2012, the Indian parliament brought about a retroactive change in the domestic tax law to include payments made toward connectivity services such as satellite and undersea cables, within the definition of royalties liable to withholding tax in India. Though this position is being contested before Indian courts, the retroactive nature of tax liability has increased the scope of tax litigation as well as the immediate cash outflow ultimately affecting India as a television business destination. Some tax experts regard the retroactive nature of the amendments in the domestic tax laws as being against the basic principle of international rule of equity and fair play.

      To add to the hardship, in 2013 the rate of tax under the domestic tax law was increased from 10 to 25 percent. Such a steep increase in tax and litigation costs incurred by the FSOs adds on to the cost of Indian payers and ultimately trickles down to the end consumer. From a business viewpoint, such action has certainly negatively impacted the confidence of FSOs and other connectivity service providers on India’s governmental policy. Further, the lack of certainty and unpredictability of policy laws leaves the businesses unplanned for any possible policy change, especially in cases of a retrospective amendment.

      In this context, going forward, it will be important for the Indian government to formulate policies and procedures with a view to rationalize the tax regime and eliminate the uncertainty in doing business with India. This is also necessary to help the Indian television industry continue its growth journey unabated. However, not much is being done to remove such hurdles for smooth business functioning. One has to watch out for the upcoming general elections in India and the new government to act upon the representations made by industry. VS

      Smita Jha leads the entertainment and media practice in PwC India and has extensive experience in developing market entry strategies, market assessment and feasibility studies.

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