The finance ministry is looking to tax foreign telecasting companies beaming their programmes to domestic households.
The ministry has revised the terms of reference of its Emerging Issues Task Force, to decide on taxation of these companies. The task force, which is headed by the Director General of Income Tax (International Taxation), will submit its report on the subject to the Central Board of Direct Taxes in time for the next Budget.
A decision to tax foreign telecasting companies will affect companies like Zee and Star. The government feels that it is missing out on a significant source of revenue, as there are no specific provisions in the Income Tax Act governing the taxation of such companies.
This is because the income tax department had some time ago withdrawn its circular number 742, which provided for taxing of the profits of foreign telecasting companies in certain cases, on a deemed basis. The rate of tax was 10 per cent of the gross fees earned from India.
To beam their programmes to the country, telecasting companies use the services of satellites, which are usually operated by other foreign companies. The income tax department feels it has a right to tax this payment made to satellite companies. In other words, telecasters must deduct tax at source (withhold tax) as per Indian laws, when paying satellite owners.
In addition, television companies have also begun to beam programmes in Indian languages. But the mode used by foreign companies is to engage a domestic production company to develop content, for which it is paid a fees. The revenue department is keen to explore the possibility of taxing this revenue model also.
However, this has been disputed by television companies, which claim they are basically based outside the country and only beam their channels here. They also cite various provisions of the Double Taxation Avoidance Agreement that India has signed with the US and the Mauritius to buttress their arguments.
According to tax officials, broadcasters get advertisements from domestic companies for their channels through their agents or subsidiaries and associate companies, which are located in the country. Consequently, the latter should be treated as a permanent establishment and taxed as per transfer pricing principles.