Almost all sectors of Indian economy today is marked by enhanced penetration of Internet and the Indian Media and Entertainment industry is no exception to this. A major trend which the sector is witnessing in the Convergence of media and entertainment sector with technology. With the emergence of Video on Demand VoD) and Over the Top (OTT) services the introduction of mediums like Netflix, Hotstar, or Amazon Prime has revolutionized the way the sector had been operating till last decade. The growing popularity of online web series and making available content online over various mobile applications has changed the outline of this sector. However, this digitization is partnered with a host of new challenges for this sector from the tax and regulatory perspective, which has emerged recently in this sector.
Generally, offshore digital Media and Entertainment companies provide services in India through a licensing arrangement in India. There has been protracted litigation on whether such licensing arrangement would be taxable in India as Royalty or Fees for Technical Services and hence, any payment made by Indian licensee would be subjected to withholding taxes in India. Similarly, in order to enhance user experience, such overseas M&E companies tend to set up a mirror server in India for efficient delivery on content. There have been contradicting views on whether setting up such mirror servers in India results in creating an artificial presence in the form of a Permanent Establishment (PE) of foreign entity in India and hence, any income sourced from Indian operations of such overseas entity would be taxable in India. While judicial precedents are divided at present, a clarity in these evolving concepts are expected in future by higher judiciary.
Another major tax uncertainty which is impacting the sector player is whether supply of software-related services to companies in the overseas jurisdiction tantamount to exports. Recently, the Indian service tax authorities have been taking a position that such services do not amount to exports and hence, do not qualify for the benefits eligible to an entity engaged in exports in India. This has come as a major blow to the digital service sector in India and a certainty in this aspect is the need of the hour. One will have to wait and see how this spells out in the present GST regime.
India has been at the forefront in adopting global trends of taxation associated with digital economy. The overseas M&E sector players operating in India through a digital medium have a very peculiar business model – they need not be physically present in India in order to undertake business operations. This has lead the International Business and Economic Development organizations like Organization for Economic Co-operation and Development (OECD) to providing guidance on taxing transaction in digital economy.
Taking a clue from OECD guidelines on digital economy, India has introduced two new levies/taxes. First is a 6 percent equalization levy on any payments made by an Indian resident to a non-resident toward online advertisement. The liability on withholding equalization and filing return as been cast on the Indian resident making payments to such a nonresident recipient. This is impacting industry players operating on wafer thin margins. The second levy is the Goods and Services Tax (GST) on Online Information Database Access or Retrieval Services (OIDAR) @18 percent. OIDAR services have been defined in the legislation to include all services which are performed online using Internet or use of IT with least human intervention at the time of rendering such services. In case GST is applicable on OIDAR services, such nonresident digital E&M players will be required to carry out GST compliance in India and to customize their accounting and invoicing system to comply with GST requirements.
It is clear that Convergence of technology and entertainment and media sector has not only led to creation of new opportunities for E&M players, it has also made the governments to align their tax policies to address tax challenges in such digital economy. E&M players operating in such a convergent digital economy should align the India business models to address the tax challenges posed by the recent developments.