H P Agrawal: Tax on foreign telecast firms

FOREIGN ENTERPRISES

Taxation of foreign telecasting firms in India has been a controversial issue. No uniform basis of taxing the income is being adopted by the assessing officers at different places.

Keeping this in view, the Central Board of Direct Taxes (CBDT) through circular No 742, dated May 2, 1996, clarified that : "The assessing officers shall accordingly compute the income in the case of the foreign telecasting companies, which are not having any branch office or permanent establishment in India or are not maintaining country-wise accounts by adopting a presumptive profit rate of 10 per cent of the gross receipts meant for remittance abroad or the income returned by such companies, whichever is higher and subject the same to tax at the prescribed rate, 55 per cent at present."

The above circular was initially applicable until March 31, 1998, which was extended through circular No 765, dated April 15, 1998 until further orders.

But the CBDT through a PIB press release, dated March 5, 2001, withdrew the above circular with effect from March 31, 2001, stating, "the total income of the foreign telecasting companies from advertisements, hitherto computed on a presumptive basis shall now be determined by the assessing officers in accordance with the other provisions of the Income-Tax Act, 1961, in relation to the assessment year 2002-2003 and subsequent assessment years.

"In case, accounts for Indian operations are not available, the provisions of rule 10 of the Income-Tax Rules, 1962, may be invoked. Where the foreign telecasting company is a resident of a country with whom India has the double-taxation avoidance agreement, its business income (including receipts from advertisement) can be taxed only if it has a permanent establishment in India.

"Therefore, the taxability of the foreign telecasting company in this regard shall be determined on the facts and circumstances of each case. Taxation of foreign telecasting companies who are residents of countries with whom India does not have a double-taxation avoidance agreement, shall be governed by the provisions of Section 5 read with Section 9 of the Income-Tax Act, 1961."

It has recently been reported in the press (see Business Standard of August 31, 2004) that at present there is no specific provision in the Income-tax Act governing the taxation of foreign telecasters.

The government feels that it is missing out on a significant source of revenue. It has also been reported that the issue of taxing foreign telecasters has been referred to an emergency task force headed by the director-general of income-tax (international taxation).

It is unfortunate that the highest tax body in the country has been unable to make up its mind as to the basis on which income of foreign telecasting companies should be computed and taxed.

The CBDT took a definite stand in 1996 which continued for 5 years""up to March 31, 2001. However, thereafter the CBDT reversed its stand, withdrew the circular, and left everything to the discretion of the assessing officers. The issue now is being again considered afresh by making reference to a task force.

What does this mean to a foreign enterprise doing business in India? Should not there be an effective mechanism to check such flagrant misuse of judicial discretion?

When the CBDT itself says in the absence of any specific provision dealing with taxation of foreign telecasting companies, the different assessing officers have been taking divergent views, then what is the justification of leaving the entire issue to the discretion of the assessing officers?

agar@nda.vsnl.net.in