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Budget 2011: What The Digital Industry Wants

Every year, the IAMAI, the body representing mostly large Internet and some Mobile VAS companies in India forwards suggestions it deems important for its members (let us know – are all members consulted?), requesting certain sops from the Finance Minister from the Union Budget.

We’re expecting some significant announcements for the Digital & Media industry given that a National Broadband Plan rollout is expected, FM Radio Phase III licenses are expected to be auctioned, and a digitalization plan is expected to be announced (which will require imports). Even then, it is rare for requests from the digital industry to be entertained. Requests put forth by the IAMAI, on behalf of its members:

– E-Commerce Tax Exemption: The Government of India should also recommend to all State Governments to waive sales tax on goods and services that are transacted through electronic mode (e-commerce) for the next 5 years up to limits to be prescribed by the Government.

– Entertainment Tax: The Government of India should direct to the State Governments to waive Entertainment Tax, currently approximately 30% in certain states, levied on broadband subscriptions and entertainment services, if they are provided through a broadband or Internet platform.

– 5 year Moratorium on Service Tax: On Online Advertising and Online Services: The IAMAI suggests that the online industry in India accounts for only 400 odd crores annually (Really?), and a moratorium on service tax would help the industry grow: as a result, services will help drive broadband penetration.

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– Online Classifieds: a 5 year moratorium on service tax under section 65 (72) [zh]. Why? The IAMAI estimates that the online classifieds industry alone pays Rs. 60 crore a year in service tax, directly collected from the users by the service providers and submitted to the government. These sites, though, drive broadband penetration and cater to tiny and micro industries run by individuals.

– Depreciation For CapEx: Allow 100% depreciation in first year for PCs and broadband Customer Premise Equipment (CPE) including modems and routers.

– Web Hosts: Profits that accrue to web hosting enterprises based in India should be partially exempt from the income tax by at least 50% for the next 5 years.

– Annual broadband allowance: All corporations, whether public or private, should be allowed to give a Rs. 6,000 per annum allowance to employees for broadband services access at home. This allowance should be removed from taxable income for the corporation.

– Income Tax Exemption for five years for the following companies: 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. MediaNama adds: This is a fairly standard, annual request. Given the national broadband plan, and the government expenditure planned, we’d be surprised if this goes through. The rationale here is to offer the same incentives to mobile and Internet companies, that were offered to IT and IT Enabled Services. But really, can you expect mobile service providers to get tax relief, given the scale of profit?

– Cyber cafe’s be exempted from Service Tax for at least 5 years, but continue to pay service tax to ISPs.

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– Duties on Imports: Decreasing to the level of duties on mobile phones the current overall levels of duties for imported items used in broadband networks, and equalizing duties on inputs and domestically manufactured goods with those that are imported.

Long term R&D Tax Exemption: Granting 100% deduction under section 80IB (8A) should be extended up to 31 March 2015, since a tax shelter benefit for such ventures was terminated in 2007, at a time when Internet companies had not yet started significant scientific research and development. Now they’re focusing on Internet access and services research. MediaNama adds: Are Indian ventures really investing significantly in R&D? We’d like to see this go through, if only because it might provide and incentive for Indian ventures to invest in R&D. More than this, we’d like to see incentives being given to open-source ventures, over proprietary technology.

Product Development, Bandwidth Charges and Software License Expenses to be Treated as Revenue Expenditure, with 100% deduction may be allowed in these items in the year that these expenses are incurred. IAMAI explains: Internet Services and Mobile Value Added Services companies invest highly in people and technology, but the nature of the industry is such that the technology scenario evolves quickly. The government however, disallows such spending as “expenses” treating them as items of long enduring nature.

Abolish MAT: for high technology companies especially in the Internet and Mobile Value Added Services sectors, to help manage their cash flows better. IAMAI Explains: Most Internet service and Mobile VAS companies are operating at huge losses mainly on account of low product monetization and due to the fact that most of the technical expenditure are treated as capital expenditure. These companies are currently covered under MAT at the rate of 18% on their book profit. MediaNama adds: To say that Mobile VAS companies are operating at a huge loss is factually incorrect. This is true of most Internet companies, though.

– Encouraging the availability of low cost access devices through depreciation, donation and recycling of used Pcs.

– Maintain Preferential Tax Treatment for longterm capital gains for VC Fund Issue: Why? The IAMAI (falsely?) suggests that Venture Capital is the only source of funds for the Internet and Mobile Value Added Services Industry, and this provision is necessary to provide incentive for VCs to invest in India, else, they’ll invest in Israel, Eastern Europe and UK.

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Note: these are fairly similar to last years requests, which you may read here.

Additionally, we have received a note from Airtel Digital TV, with the following requests for the Finance Minister:
– Relief from the custom duty of 5% on Digital Set Top Boxes
– Implementation of Goods & Services Tax, since while DTH is a Central subject, the industry continues to face entertainment tax sometimes as high as 25% (an average of 10%) from various State governments.
– Another tax element for DTH operators is the License Fee of 10% which for some reason is only levied on the DTH platform, an anomaly that needs urgent rationalization.
– Chipsets constitute the bulk of the STB cost, production of which is concentrated in the hands of a select few international vendors, and with no indigenous manufacturing being able to measure to such scale and standard, 95% of the demand for STBs is met via imports.

Written By

Founder @ MediaNama. TED Fellow. Asia21 Fellow @ Asia Society. Co-founder SaveTheInternet.in and Internet Freedom Foundation. Advisory board @ CyberBRICS

MediaNama’s mission is to help build a digital ecosystem which is open, fair, global and competitive.

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