IAMAI Seeks Income Tax Exemption for Internet Companies in India

The Internet and Mobile Association of India [IAMAI] in its annual Budget representation to the government has suggested that internet and mobile value added services companies be given tax exemption along the lines of software and services companies for the next five years under section 10 (a) of the Income Tax Act. This industry has been growing on its own steam for the last 10 years and given some support from the government, is capable of not only serving and empowering the Indian market but also build global brands.

Commenting on the suggestion, Dr. Subho Ray, President IAMAI argued,

“Without adequate provisioning of content and services, the government’s huge investments in broadband infrastructure is likely to have limited impact. Direct fiscal benefits to content and services companies will ensure that more and more consumer centric services are available at the end of the pipe”

According to the association, while it might be against the grain to argue for tax exemption, it is important to keep in mind that the software, ITeS and Telecom industry which are among the most visible sectors in India today have had remarkable growth backed by government’s fiscal support in one form or the other.

The association contends that one of the pre-conditions of meeting the government target of 600 million internet users by 2015 is local language content and services that is woefully lacking. Without direct fiscal incentives in the form of exemption of direct or indirect taxes, it is very unlikely that local language will ever become popular in India.

1. Direct Taxes

Issue: The best case study of tax incentive helping a fledgling industry grow and reach global proportion with thereby making India a knowledge superpower is the IT and IT enabled service industry. It is generally accepted that the industry would not have reached the stage where it is today but for exemption of Income Tax under sections 10 (A).

Today Internet and Mobile Value Added Services are what IT and ITeS used to be 10 years back. The Internet technologies is an emerging sector where India has an opportunity to take the lead; they are in a position to create global companies such as Amazon, Google and eBay; they are operating in India helping Indians with their services and making Indians efficient and productive.

Recommendation: These sectors have however, never so far been either recognised or given any fiscal benefits. An emerging sector/s requires fiscal and tax benefits to achieve its full potential. What the government did for 15 years for the IT Services sector, without that key support, India would not have seen giants like Infosys and Wipro emerge.

  • It is our recommendation that the following organizations be exempt from Income Tax for five years under section 10(A) of Income Tax Act: service providers on Internet and mobile; companies providing Internet and broadband connectivity mobile content providers Mobile Value Added Services platform, technology and solutions providers, and transaction providers on the Internet and mobile devices
  • Modern day IT and software is increasingly being defined by online technology providers and an exemption for five years will provide an opportunity to create in India global companies. The revenue loss to the exchequer would be more than made up by the overall social and economic contribution of these companies as has been clearly seen in the case of software and services.

Tax Exemptions for long-term Scientific Research and Development

Issue:  The Government of India had earlier granted tax shelter to companies dedicating themselves to the cause of long-term scientific research and development under section 80IB (8A). This benefit was enjoyed by many technology companies. However, this benefit was terminated in 2007 at time when Internet companies had not yet started significant scientific research and development. However, in the last two years, the Internet services and Mobile Value Added Services companies have started undertaking cutting edge scientific research to provide better services to the Indian users. It is also well known that technology research at present comprise primarily research related to Internet access and services.

Recommendations: In order to encourage investments in research relating to Internet and MVAS services, the provision of granting 100% deduction under section 80IB (8A) should be extended up to 31 March 2015.

Fiscal Benefits for Low cost High Speed Access

Issue: ICT for development comes to nothing unless the last man in the queue is provided with access to cost effective ICT based services to deal with his/her daily life needs through major ICT platforms like the Internet. Also the talk of last mile connectivity at the grassroots is less meaningful in the absence of whether adequate provisions are made to access the same. Hence, the quintessential need to take care of low cost access while making provisions for ICT based citizen services delivery within the larger framework of Internet Governance

Recommendations:

  • IAMAI recommends conditional cash transfers (CCTs) to eligible households in the form of coupons either to be used for purchase of CPE (capital grants) or access to broadband services and internet services
    (allowances) at cybercafés.
  • For broadband penetration across India, there is a need for a service which is priced no more than Rs 200.00 per month. The experience of cable TV and mobile phones demonstrate that a price point of around.
  • Rs. 200.00 can trigger brisk demand side expansion of internet services in India. Although not sacrosanct, Rs. 200.00 is also indicative of the amount majority of households would be willing to pay for internet services.

Fiscal Benefit for Local Language Content Proliferation

Issue: The Telecom Regulatory Authority of India itself has strongly recommended some fiscal measures that would help the internet users and by implications encourage the adoption of internet and broadband by more and more people. Government being a major producer and user of digital content and application must promote creation of digital content in regional languages. At present, English language dominates and this needs to change for internet to become relevant to the masses. Mobile handset applications in local languages will further drive adoption of internet and broadband in rural areas. The next giant leap from approximately 100 million internet users to 300 million would be primarily driven by local content in local language

Recommendation:

  • Waive service tax for smaller companies or waive income tax for big companies. Such incentives will help these companies grow, thereby leading to overall development of the ecosystem and consumer
    benefits.
  • Benefits/incentive to manufacturers of digital hardware to have fonts in ALL Indian languages on their hardware/digital devices.
  • Incentive to Software/VAS Products/Services which offer their content/offerings in Indian languages.
  • 5 year moratorium to broadband providers by which savings can be passed onto customer.
  • Tax moratorium to data centers in India by which hosting becomes a lot cheaper in India. Lower costs will enable content providers to develop/offer relevant and localised content/services and this will help
    in the overall growth of the digital economy; enabling success of government’s E-governance & M-Governance and Financial inclusion initiatives.

Our take: Why Indian Languages Failed to make a mark Online!

Product Development, Bandwidth Charges and Software License Expenses to be treated as Revenue Expenditure

Issue: Internet Services and Mobile Value Added Services companies invest highly in people and technology. This is due to the inherent nature of the industry as well as due to the fast changing technology scenario. The government however, disallows such spending as “expenses” treating them as items of long enduring nature.

Recommendation:

  • A separate guideline may be issued bringing costs of product development, bandwidth charges and software licenses as revenue expenditure.
  • 100% deduction may be allowed in these items in the year that these expenses are incurred.

Maintaining preferential tax treatment for long-term capital gains for VCFs

Issue: Internet and Mobile Value Added Services Industry unlike any other industry does not get any kind of financial support from any of the financial institutions. Venture Capital is the only way for them to raise funds and VC investments are critical for nurturing and growing the Indian Internet Industry. This industry will not get benefitted if Long Term capital gains tax is made the same as short term tax, as a result there will be no incentive for VCs to invest in India, and their money will flow into Israel, Eastern Europe and UK.

Recommendation:

  • We would request the Finance Ministry to maintain preferential tax treatment for long-term Capital gains for the Venture Capitalists in the absence of which Indian companies will be starved of the start up capital they need to grow and innovate.

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