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Tuesday 28 February 2012

New consolidated FDI policy


NEW CONSOLIDATED FDI POLICY 2011:


In the latest review of consolidated Foreign Direct Investment (FDI) Policy, Department of Industrial Policy & Promotion (DIPP), issued a circular 1of 2011 that came into effect from 1st April, 2011. This note recaps the major changes that have been introduced in the FDI Policy vide circular 1 of 2011. The changes that have been introduced are as follows:-

1. Pricing of Convertible instrument: greater flexibility introduced

As per Circular 2 of 2010, Indian companies were allowed to issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily preference shares. The pricing of the capital instruments was to be determined upfront at the time of issuance of relevant instruments. Such upfront determination eliminated the scope of commercial benefit of investing through convertible instruments. Therefore, DIPP with a view to recognize and address this issue has amended the FDI Policy.

The new FDI policy has now provided vide Circular 1 that instead of specifying the price of convertible instruments upfront, companies will have the option of prescribing a conversion formula subject to FEMA which prescribes the Discounted Cash flow method of valuation for unlisted companies and in case of listed companies, valuation in terms of SEBI( Issue of Capital and disclosure Requirement) Regulations, 2009. The introduction of conversion formula will help the recipient companies to obtain a better valuation of convertible instruments based on their performance. 

2. Share against non cash consideration:

The FDI policy allows issue of shares by Indian companies to foreign investors only against cash      remittances received through normal banking channels. However, the only exceptions to this are conversion of external commercial borrowings outstanding as well as payment obligations towards lump sum fee or royalty for technical collaborations. Any other type of transaction involving an issue of shares to foreign investors for consideration other than cash requires approval of the Government of India through the Foreign Investment Promotion Board (FIPB). Although the Government had been initially hesitant in granting approvals for such transactions, it has adopted a more liberal stance lately.

In this background, and in order to provide more investment options, the Government issued a discussion paper in September 2010 considering additional methods of issue of shares for consideration other than cash.

These included:

· Import of Capital Goods/ Machinery/ Equipment, Services,
· Import of Raw Material/ Trade Payables, Pre-operative/ Pre-incorporation Expenses, Share Swaps,
· Intangible Assets (including franchisee rights), and One Time Extraordinary Payments (including arbitration awards).

In the new policy that the Government announced yesterday, only the following additional methods have been accepted for issue of shares for consideration other than cash (para. 3.4.6 of the Policy):

· Import of capital goods/ machinery/ equipment (including second-hand machinery);
· Pre-operative/ pre-incorporation expenses (including payments of rent, etc.).

Issuance of equity instruments under this category will be subject to the following conditions prescribed by DIPP:

· Submission of foreign inward remittance certificate(FIRC) for remittance of funds by the overseas promoters for the expenditure incurred.

· Verification and certification of the pre-incorporation/ pre-operative expenses by the statutory auditor.

· Payment should be made directly by the foreign investor to the company. Conversion of payments made through third parties citing the absence of a bank account or similar such reasons will not be permitted.

· The capitalization should be completed within the stipulated period of 180days from the date of receipt of advance against equity.

· FIPB approval would be subject to pricing guidelines of the Reserve Bank of India and appropriate tax clearance.

The benefits of this  changes are that

· It enables Indian companies to procure equipment and services from foreign enterprises (particularly collaborators) when they are either unable to pay cash, or when a cash transaction is not desirable from a financing standpoint.
· It allows payment by Indian companies through issue of its own shares. Such a method also ensures that suppliers and collaborators have an interest in the success of the Indian company’s business by taking a stake in it (and thereby assuming risk).

3. Rationalization and Simplication of Policy for downstream Investment:

Indirect foreign investment into Indian companies had been a subject matter of ambiguity in the FDI policy. For instance, if an Indian company (that has foreign investors) makes investments into another Indian company, would that downstream investment be treated as domestic investment or foreign investment? While rules govern such investment?

And order to streamline the policy, the Government had issued Press Notes 2, 3 and 4 of 2009 to clear the confusion on downstream investments. However, the policy continued to operate in a complex manner, particularly because there were differences based on the type of intermediate company:

· operating company;
· operating-cum-investing company;
· investing company.

To simplify the process further, the new Consolidated FDI Policy, Circular No. 1 of 2011 eliminates the differences regarding the type of intermediate company, and applies a common set of principles to so long as the Indian intermediate company is owned and/or controlled by non-resident entities. Investments by such an intermediate company would be considered a foreign investment for the purpose of sectoral caps and other conditionalities.

The relevant part of the policy reads:

· Downstream investment by an Indian company, which is owned and/ or controlled by non-resident entity/ies, into another Indian company, would be in accordance/compliance with the relevant  sectoral conditions on entry route, conditionality’s and caps, with regard to the sectors in which the Indian company into which the downstream investment is being made, is operating.

However, some distinctions have been maintained to the policy regarding foreign investment into the intermediate company itself depending on its nature. For example, if that is an investing company, then foreign investment is allowed into it only under the approval route.

The relevant policy states:

· Foreign investment into an Indian company, engaged only in the activity of investing in the capital of other Indian company/ies, will require prior Government/FIPB approval, regardless of the amount or extent of foreign investment.

Whilst the circular 1 of 2011 deals with applicability of relevant sectoral conditions and caps, etc on downstream investments, it still needs to be clarified whether such downstream investment would be subjected to other FDI regulations viz. transfer of shares, issuance of preference shares regarded as external commercial borrowings etc.

4. Previous Venture:

Under the previous FDI Policy, a foreign investor was required to obtain a no- objection letter from the existing Indian Joint venture partner in case the foreign investor intended to invest in the same field where they had a previous joint venture. In such cases, automatic is not available.

This condition has been completely abolished under the circular 1 of 2011. Going forward this requirement does not apply to any joint venture past or present and foreign investors would be free to enter into new ventures in the same field without the NOC of their existing Indian partner. Foreign investors are no longer required to obtain government approval even if they had previous ventures in India so long as the new investment otherwise falls within the automatic route. It is perhaps the most significant and likely impactful change introduced in the new policy.

5. Sectoral Rules:

Earlier, FDI under the automatic route up to 100% was available for floriculture, horticulture, development of seeds, animal husbandry, pisciculture,  aquaculture and cultivation of vegetables & mushrooms under controlled conditions and services related to agro and allied sectors.

The new FDI policy broaden the category and allows FDI in development and production of seeds and planting material, even if the same has not been done under controlled condition.


Conclusion:

Circular 1 of 2011 has many explicit helps, and no visible hurts for foreign investors, with the removal of ‘Press Note 1’ condition being bold and impactful. There were several more reforms that were anticipated, for example liberalization to permit foreign investment into Limited Liability Partnerships (the new policy provides that the Government is reviewing its policy to allow FDI in LLPs), liberalization of the policy on investment into real estate, as well as clarifications required on certain provisions of the current policy regarding lock-in on original investment (erstwhile Press Note 2 of 2005), liberalization of investment in multi brand retail, and so on and so forth. It is hoped that the government will embark on far reaching reforms to address these needs in the coming months.

Sectoral budget expectation



Macroeconomic Union Budget 2012-13 Expectations
The Union Budget of 2012-13 will be conducted at a time when the economy is in the midst of an economic downturn and upside risks of further contagion from the slowdown in the developed economies remain high. This time around expectations from the government to dole out ambitious or big-budget announcements are few as Government finances remain crippled with the target for fiscal deficit for FY12 is expected to be breached by over a percentage point. Lower revenue generation during FY12 owing to the slowdown in the growth momentum and inflated subsidy bill would continue to pose challenges for the government for the ensuing year as well. The government in this budget is thus expected to focus strongly on fiscal consolidation. Moreover, expectations for a reform-oriented budget from the government to help the economy to gather momentum are very high.
Widening of the tax base, extension of service tax to more services currently not taxed and setting out clear guidelines for disinvestment process for revenue mobilization is expected to be considered by the government during this budget. During FY12, the government was able to divest its stake in PSUs only to the extent of Rs 11.44 billion (as on 31-Dec-11) against the target of Rs 400.00 billion due to adverse capital market conditions. Clearly this year too, garnering of revenues through disinvestment would depend on how the economic conditions turn out during the year. Moreover, some provisions of the Direct Taxes Code could be implemented during this year which would help to widen the tax base and raise revenues. While implementation of the Goods and Services Tax (GST) by this year could have helped in garnering revenues for the government, it is unfortunate that the government is again set to miss its deadline by another year.
However, rationalization of expenditure this year would remain critical as it would be difficult for the government to raise excise duties and service taxes given the deterioration in the investment activity and the dismal performance in the industrial sector. While it is expected that the government would consider bringing down subsidies (by removal of subsidy in diesel) it remains uncertain as the subsidy on the petrol is still not fully de-regulated.
The prospect of the Indian economy to emerge out of the current phase of slowdown in growth largely depends on the investment activity especially, in the infrastructure arena and timely execution of projects. Although, substantial allocation has been made during the previous budgets on the infrastructure sector, timely and effective utilization of these funds have always remained an area of concern. Moreover, obstructions in the form of delays in approval and decision making had stalled many new projects. Therefore, measures such as incentives for investments in sectors such as fertilizers and agricultural supply chains, rationalization of Dividend Distribution Tax to make investment in infrastructure sector more attractive, concrete steps towards creation of a deep and robust debt capital market to make long term debt instruments available for infrastructure and granting infrastructure status to healthcare and education sector are some of the steps that could provide a boost to infrastructure. Stimulating the confidence level among the business community and creating suitable avenues for boosting the investment and consumption demand would be the most crucial aspects of the budget this year. Besides initiation of reforms and measures’ such as further liberalization of FDI in some sectors, mining sector reforms and easing of procedurals conducive to investment, undertaking steps to ensure speedy implementation of the key policies already announced would aid in reassuring that the Government remains committed in uplifting the pace of growth of the economy.






Sectoral budget wish-list/expectations
Infrastructure
Infrastructure Financing
1.      Rationalization of Dividend Distribution Tax to remove its cascading effect and make investment in infrastructure sector more attractive.
2.      Exempting infrastructure companies and SEZ units from MAT provisions.
3.      Reintroduction of section 10 (23G) of Income Tax Act, which provided tax exemption of interest and long term capital gains in the hands of Infrastructure capital companies. This will reduce cost of borrowings for infrastructure companies.
4.      Exemption of interest earned by foreign lenders on overseas loans availed by Indian borrowers in all cases similar to earlier provisions under section 10(15) (f).
5.      Permit Banks to issue long term tax free infrastructure bonds and enhance the participation of banks, financial institutions and large NBFCs in infrastructure financing.
6.      Concrete steps towards creation of a deep and robust debt capital market to make available long term debt instruments for infrastructure.
7.      Bring reforms to insurance and pension sector to tap these sectors for infrastructure financing.
8.      Further implementation of Deepak-Parekh Committee report to create a long term debt fund for infrastructure sector.
Others
9.      Setting up of Expressway Authority of India as envisaged in the Eleventh Plan document.
10.  Encouragement to Private sector to build storage facilities for agriculture goods by providing fiscal incentives.
11.  Concrete steps to promote greater investments in agriculture infrastructure viz. cold storage, warehouses & Irrigation.
12.  Extension of weighted deduction for R&D to investments by private sector in agriculture infrastructure and also to services provided to farmers.
13.  Privatization of coal mines and stimulating overall demand through fiscal measures.
14.  Grant infrastructure status to aviation, telecom, healthcare and education sector
15.  Grant ‘Declared Goods’ Status to Aviation Turbine Fuel (ATF).






Oil & Gas Sector
1.      10-Year Tax Holiday for Oil & Gas Companies.
2.      Elimination of Customs Duty on Liquefied Natural Gas (LNG) with an aim to lower the cost of imported fuel for the core sectors of fertilizer and power plants.
3.      Declaring “Goods Status” to Natural Gas & LNG.
4.      Inclusion of crude oil and petroleum products under the recommended Goods and Service Tax (GST) regime. The inclusion of petroleum products under GST will eliminate twisted wires of taxes paid by suppliers as well as by the industry at different stages in the petroleum value chain. Further, it will also enable the States and the Centre to capture full revenue potential up to sale to final consumers.

Power Sector
1.      Disinvestment of power generation, distribution and transmission PSU companies.
2.      Exemption of basic customs duty and countervailing duty implemented on thermal or steam coal. Further reduction of customs duty from the imported coal is important as it discourages power projects based on imported coal.
3.      Natural Gas should be included in the list of Goods of special importance under Section 14 of the Central Sales Tax Act for uniform taxation across the country. Moreover, with an aim towards a greener environment, natural gas should be given preference over crude oil.
4.      Extension of the eligibility norms of tax holiday incentives for power generation companies from starting their power generation before 1 April 2011 to another five years.
5.      Re-establish tax exemptions of income from investment in power generation projects. One more way is the tax exemption on the interest earned by foreign lenders on overseas loans availed by Indian borrowers as was the position earlier under section 10(15) (f).

Metals and Mining Sector
1.      Removal of 2.5% import duty on iron ore lumps, fines and pellets.
2.      Government should abolish or reduce the export duty on iron ore fines in order to increase the profit margins of miners.
3.      Providing subsidy for importing raw materials and providing tax incentives for managing them locally.
4.      Providing additional incentives to the Iron ore producers to add value to the mineral and pelletisation so as to encourage its conservation for domestic use.
5.      Adequate steps to privatize coal mines to reduce the coal shortage in the country.
6.      Allowing exploration of deep-seated minerals on a first-come-first-served basis rather than by auction so that the sector looks attractive for private players and the approach is expected to increase investments into exploration and mining for minerals like copper, gold, diamond, nickel, etc.

MSMEs
1.      Lower interest rate for MSMEs.
2.      To announce tax breaks based on the ratio between employment and capital invested.
3.      Income tax exemption on profits ploughed into the business.

BFSI Sector
1.      Removal of the Securities Transaction Tax (STT) on equity trades for the upcoming Union Budget is priority. Abolition of STT will revive intra-day trading, reduce transaction cost, promote equity culture and retail participation and engender healthy speculative activity required for the functioning of the market and revival of sentiments.
2.      Lock-in period for fixed deposits of up to Rs 1 lakh that are eligible for tax deductions under Section 80C of the Income Tax Act is to be brought down to three years from the current five years to bring it on par with a similar deduction available for equity linked savings products where lock-in is only three years.
3.      Microfinance bill to be proposed in budget session.
4.      Emphasis on the financial strengthening of Public Sector Banks (PSBs). PSBs like SBI likely to get capital infusion which is expected to bring more stability.

Capital and Engineering Goods
1.      Import duty from the current 5.0% may be hiked on power generation equipment for projects above 1,000 MW capacity by levying additional duty of 5.0% and countervailing duty of 4.0% making it a total of 14.0% to ensure level playing field in providing cushion to domestic manufacturers against cheaper imports from China.
2.      Entry Tax on material handling equipment is likely to be exempted.
3.      Motor vehicles, dumpers & tippers are eligible capital goods under CENVAT credit scheme only for a few service providers. Manufacturers are not entitled to avail CENVAT credit of duty paid on such capital goods. The duty on such capital goods may also be allowed as CENVAT Credit to manufacturer where these capital goods are utilized for the purposes of manufacturing.
4.      Current CENVAT credit of 50% on capital goods in the year of receipt to be increased to 100%.
5.      Countervailing duty of 5.0% may be levied on the import of goods on which 1.0% duty is imposed under central excise.
6.      Mandatory exemption of central sales tax from the current 2.0% and VAT from the current 5.0%–14.5% for domestic supplies of power equipment’s to mega/ultra-mega power projects or exemption of such levies for evaluation of bids is expected.
7.      Duty exemption is expected in the import of Cold Rolled Grain Oriented electrical steel which is not manufactured in the domestic market and is a critical raw material in manufacturing of transformers.

Healthcare Sector
1.      The income tax clause of 100% deduction on profits derived from the business in initial five years needs to include the currently excluded companies.
2.      Moreover, the tax exemption clause should be extended to ten years or grant an option to the hospitals to select five consecutive years from initial 10 years of commencement.
3.      To boost innovation, investment in healthcare research, by way of deductions from profit linked to investment or research tax credit is needed.
4.      Percentage of weighted deduction on contributions made to an exclusive research and development should be increased from 125% to 175%.
5.      Medicines, bulk drugs, medical equipment and implants are essential to provide healthcare facilities. It is expected to be either exempted or kept under a lower tax rate under the proposed GST regime.


Pharmaceutical Sector
1.      To promote research and development in the pharmaceutical sector,  deduction from profits linked to investments to R & D is needed
2.      To provide clarity on deductions on R&D expenditure for companies where manufacturing activity is partly or entirely outsourced, specific provision for such companies is needed.
3.      Excise duty on Active Pharmaceutical Ingredients (API’s) needs to be lowered from 10.0% to 5.0% so as to be on par with other pharmaceutical goods. Moreover, abatements expected to be increased from 35.0% to 45.0% to cover the trade margins of pharmaceutical companies.
4.      All lifesaving drugs need to be exempted from Goods and Service Tax (GST).
5.      The existing inverted duty structure in the pharmaceutical industry has resulted to accumulation of CENVAT credit. Lowering the excise duty structure for raw materials or providing a refund mechanism for the accumulated CENVAT credit to reduce tax liability will be beneficial for pharmaceutical companies.
6.      Advanced pricing agreement mechanism which can minimize the tax litigation on issues related to import prices of API’s is needed.


Telecom Sector
1.      To provide infrastructure status to the telecom sector and subsequent tax benefits related to infrastructure.
2.      To provide incentives for expanding into remote regions in the form of tax holidays or subsidies.
3.      Rationalisation of levies and duties for mobile companies including a uniform annual revenue share of 6-8%.
4.      Abolition of service tax on internet and broadband services is expected.
5.      CENVAT credit for telecom towers is expected.
6.      Tax rebates and exemptions (customs duty, excise duty and VAT on any inputs) for companies which set up R&D facilities are expected.
7.      Subsidy on capital investment for setting up the R&D facility is likely.

Automobiles
1.      The Government is considering raising the excise duty on diesel cars. If implemented, it would increase the prices of diesel cars, thereby affecting demand.

Leather
1)      Implementation of 2.0% interest subvention on rupee export credit.
2)      In the wake of rupee losing value against other major currency which has been making the raw material import costlier, an increase in rate of Duty Free Import Scheme to 5.0% from the prevailing 3.0% is expected. 
3)      Exemption of service tax on the leather tanning operations and common effluent treatment plants.
4)      Exemption of excise duty on footwear and reduction in the rate of excise duty on other leather products from prevailing 10.0% to 5.0% is expected.
5)      Clarification on independent foreign agents who are only engaged in securing export orders to be excluded from the tax deduction at source.
6)      Financial Support of Rs 90 Cr. towards creation of social infrastructure facilities like hostels and dormitories for women employees involved in leather manufacturing industry is proposed.
7)      Establishment of sector skill council to train workers and develop a curriculum for 50 shop floor operations.

Real Estate & Construction

1.      Uniform tax regime or rationalized tax structures to resolve dispute and litigations arising from transactions taxability.
2.      Home loan tax bar to be doubled to Rs 300,000 from Rs. 150,000.
3.      Expectation on subvention in interest rates for existing home loans, and to new housing loans.
4.      Promotion on rental housing, and lowering the tax rate on rental income from 30% to 20%, along with taxing only 50% of the rental income as compared to the current 70%. Also, income tax exception from rental income (under Section 24) should be increased from the current 30% to 50%.


IT/ITes Sector
1.      MAT (Minimum Alternate Tax) rate should be kept stable.
2.      Special incentives for Small & Medium Businesses.
3.      Revival of tax benefits under the Software Technology Parks of India (STPI) scheme.
4.      Increased IT adoption by Government. 
5.      Measures to boost STPs/SEZs projects in Tier-II and Tier-III cities.
6.      Further strengthening of legal framework for protection of Intellectual Property Rights (IPR) and data security.
7.      Inadequate infrastructure facilities in terms of transportation, connectivity, power and communication facilities have increased the cost of doing business in India. This is forcing IT firms in India to explore other low cost destinations such as Philippines. Thus, in order to sustain the long-term growth of the IT/ITes industry, it is imperative for the Government to take measures to increase the infrastructure investments.      

Gems & Jewellery

1.      MAT rate should be held steady.
2.      The import duty on gold and silver to be kept stable.
3.      Increase cost of trading to foreign bullion players.
4.      Capital gains exemptions for investment in jewellery.
5.      Initiatives for enhancing skills of artisans.
6.      No further increase in excise duty on branded jewellery.
7.      Offer low cost capital funding to jewelers.

Cement
1.      The tax structure is expected to be revisited.
2.      To grant “declared goods” status for the industry in order to bring a uniform tariff structure across the country. This will also lower the tax burden on these companies.
3.      Some incentive towards the Ready Mix Concrete (RMC) business will lead to bulk supply of cement and consequent reduction in packaging cost.
4.      Tax incentive to be provided for promoting blended cement in the larger interest of mineral conservation, waste utilization and bringing down carbon emission.
5.      Since cement industry is directly impacted by the fortunes on the infrastructure sector, the further thrust on infrastructure investment in the country is widely expected.

Retail Sector
1.      Opening of FDI in non-food multi-brand.
2.      Tax holidays/Fiscal Incentives for retailers willing to spend in rural areas.
3.      Rs. 75 cr. budget for promotion of gems and jewellery of the retail trade and exemption for the application of the Lottery Act for ONE national shopping festival yearly across India.
4.      Reduction in Minimum Alternate Tax (MAT) Rate to 15.0% from 18.5%.
5.      Formulation of a Retail Policy.
6.      Establish Public Refrigerated Warehouse Complexes (PRWs) in Backward Districts.
7.      Allocate significant resources for Mobile refrigerated vans.
8.      To enable the retail sector provide employment to a large mass of local population, simplified labor laws for flexibility in operations is expected.
9.      Permission to operate 24x7.
10.  Consumer Affairs – Weights & Measures Act.
11.  Retail and Entertainment Zones (REZ).
12.  In order to augment the living standards of people in the city, initiatives to create Retail and Entertainment Zones (REZ) similar to SEZ and IT parks is expected. Retailers in REZ to get benefits like exemption from stamp duty, Octroi, and cheaper power.
13.  VAT Refund for making India attractive for shopping tourism.
14.  Consumption Incentive: Providing a consumption incentive in the form of personal income tax relief to consumers, who can spend say up to 25% of their income on consumer goods and services, which can be supported by tax invoices from the retailer/establishment.

Textile & Garments Sector
1.      Roll back of 10% excise duty on branded garments.
2.      To promote seed research for cotton, seed companies should be given a status of infrastructure companies and income of seed companies should be treated as agriculture income. Finance extended to seed companies should be treated as priority sector lending in the banks.
3.      Price deregulation, particularly in cotton is essential.
4.      Right to equality to Small Scale Sector.


Tourism & Hospitality Industry
1.      As inbound tour operators attract and offer their services to foreign tourists in India, service tax exemption is expected on tour operator's foreign exchange earnings.
2.      Increase service tax abatement to 90% for Domestic tour operators.
3.      To improve tourism industry in India, Section 80HHD can be revived. Under this act, tour operators and travel agents should be allowed to transfer part of their profit to tourism development reserves for investment in tourism related projects.
4.      Export industry status to Tourism Industry.
5.      Domestic Airfares- Taxes on ATF is expected to be revisited.
6.      Uniform State Luxury tax at 5%.
7.      Uniform all state transport taxes.
8.      Infrastructure status for Hotels and convention centers.



Consumer Goods
1.      Restructuring of the income tax slab is expected in line with the Direct Taxes Code Bill. This will increase the disposable income in the hands of consumers thereby impacting the consumer goods sector positively.
2.      The standard excise duty at 10% is expected to be maintained in the Budget.
3.      Introduction of GST should be given high priority in order to make Indian industry competitive.
4.      Levying of safeguard duty and anti-dumping duty in appropriate cases especially in the case of import from China.

Media & Entertainment Industry
1.      Clarification is sought in the budget explaining whether tax on carriage fees/placement charges and up-linking charges paid by television channel should be deducted at 2.0% treating such payments as consideration for work or at 10.0% considering it as payment towards technical services/use of process, etc.
2.      Payments made on sale of satellite rights of loss making films to television channels are subject to TDS as they are treated as “royalty” for use of copyright. This is causing hardship to companies and thus such payments are expected to be exempted from TDS.
3.      It is expected that expenditure by foreign broadcasters on acquiring telecasting rights in films/programmes either on an outright basis or on license for specified period should be allowed as a deduction in the year of first telecast or deferred over the period of license rather than capitalizing it for claiming depreciation.
4.      A clarification to the effect that the payment for grant of distribution rights is not for the ‘copyright’ in the content and hence, do not qualify as ‘Royalty’ is sought for in the Budget.
-          Service tax is applicable on the temporary transfer or permitting the use of Copyright in relation to the cinematographic films. However, under the state specific Value Added Tax (VAT) laws, transfer of right to use of the Copyright is already subject to the VAT. This dual taxation should be avoided by implementing GST.