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The Direct Taxes Code, 2010

Specific proposals for Telecom sector

Background
• The Finance Minister of India tabled The Direct Taxes Code, 2010 ("DTC") in Parliament for debate and
discussion on 30 August 2010. The DTC will be effective from 1 April, 2012 and not from 1 April, 2011, as
had been intended earlier.

• This alert outlines key proposals in the DTC relating to the Telecom sector. For other key general
proposals, please refer to our “Snapshot on DTC 2010”, which has been sent separately.

Key General Proposals


Tax Rates for companies

Particulars Income tax Act 1961 (‘Act’) DTC

Domestic Co 33.22% 30%


Foreign Co 42.23% 30%
Branch Profit tax - 15%
MAT* 19.93% on Book Profits 20% on Book Profit
DDT 16.61% 15%
Wealth Tax 1% on Net Wealth exceeding Rs. 3mn 1% on Net Wealth exceeding Rs. 10mn
* MAT credit reinstated and allowed to be carried forward up to 15 years

PwC
General Anti-Avoidance Rule (“GAAR”) Key Proposals relating to Telecom Sector

• GAAR empowers the Commissioner of • No specific provision in the DTC to allow


Income-tax to amend, disregard or re- deduction of expenditure incurred for
characterise or declare an arrangement as acquiring any right/license to operate
impermissible: telecommunication services. For unabsorbed
expenditure under section 35ABB of the Act,
- If the arrangement entered into was with
the DTC is silent on allowability of such claim.
the objective of obtaining tax benefit and,
Accordingly, one needs to deliberate with the
inter alia, lacks commercial substance or
law makers on the continuity of deduction, so
misuses the provisions of the DTC.
that clarity can be obtained on this aspect.

• GAAR provisions would override provisions of • Scope of “Royalty” enlarged to include


tax treaties. payments for use or right to use of
- Thus, GAAR provisions are highly transmission by satellite, cable, optic fiber or
subjective and provide sweeping powers similar technology. In light of the enlarged
to the tax department. scope of royalty, various payments made to a
non resident Satellite / Telecom Company for
hiring of transponder, etc. or leasing
Controlled Foreign Company (“CFC”) bandwidth in undersea-cables, would now be
taxed as Royalty in the hands of payee under
the DTC, and would trigger withholding tax
• CFC provisions introduced with a view to tax obligation on payer.
the passive income earned by foreign
company directly or indirectly controlled by a • Royalty definition in the Act included “secret
resident in India. formula or process”, which was interpreted by
taxpayers to apply the word “secret” even to
• CFC means a foreign company, which the word “process”, resulting in an argument
satisfies the following conditions: that only if a “secret process” was involved
- The foreign company is controlled by then the payment was liable to tax as Royalty.
resident tax payers - ‘control’ defined to However, the definition of Royalty under the
mean one or more persons resident in DTC provides for “secret formula, process”,
India, individually or collectively, directly or which essentially tries to negate the aforesaid
indirectly, holding shares carrying not less argument of taxpayers and hence enlarging
than 50% of the voting power or capital of the scope of Royalty.
the company, and
• Enlargement of scope of fees for technical
- Such foreign company is a resident of a services (“FTS”) to include payments for
country with lower level of taxation, i.e. the development and transfer of design, drawing,
amount of tax payable in foreign country is plan or software, or similar services, which was
less than 50% of the corresponding tax not provided in the Act.
payable under the DTC.
• Tax rates on Royalty and FTS (gross basis)
• CFC provisions not triggered in case the earned by a non-resident are increased from
foreign company is listed on a stock exchange 10% in the Act to 20% under the DTC
or is engaged in "active trade or business" - However, DTC provides that the beneficial
(subject to certain conditions) or specified provisions under the tax treaty shall prevail
income does not exceed Rs 2.5 mn. over the DTC

• Thus, it is pertinent to keep in perspective the


CFC provisions while making any outbound • Domestic tax withholding rates on works
investments, considering that the underlying contract, fees for technical services, use of
foreign tax credit (corporate tax paid by the machinery or plant or equipment, land or
overseas subsidiary in that country) building remains same as in the Act.
mechanism is currently not provided in DTC. Additional category of service contracts
introduced, which would attract withholding @
2%. Therefore, where fees is not in the nature
PricewaterhouseCoopers
fees for technical services, same may be
categorized as payments under service
contracts, attracting tax withholding @ 2%.

• Failure to furnish Permanent Account Number


continues to result in deduction of tax at a
higher rate of 20%.

• Advance Pricing Arrangements have been


introduced to provide certainty of tax liability
with regard to international transactions. This
comes as a welcome move for the Indian
Telecom companies entering into international
transactions with their overseas group
companies for bandwidth etc.

Contacts

Shyamal Mukherjee Ketan Dalal Sandeep Ladda


Executive Director Executive Director Executive Director
Tax & Regulatory Services Tax & Regulatory Services Tax & Regulatory Services
Tel No. +91-124-3306536 Tel No. + 91 22 66891422 Tel No. +91 22 6689 1144
Email: shyamal.mukherjee@in.pwc.com Email: ketan.dalal@in.pwc.com Email: sandeep.ladda@in.pwc.com

The above information is a summary of recent developments and is not intended to be advice on any particular matter. PricewaterhouseCoopers expressly disclaims liability to any person in respect of anything done in
reliance of the contents of these publications. Professional advice should be sought before taking action on any of the information contained in it. Without prior permission of PricewaterhouseCoopers, this Alert
may not be quoted in whole or in part or otherwise referred to in any documents

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