Govt out to tighten reins on royalty payments by OTT, IT and ITES: Sources

Royalty payments going untaxed has been an ongoing dispute relating to what constitutes a royalty.

Aiming to tighten the reins on royalty payments which are going untaxed, the government is planning to increase the mandate of reporting on such payouts, with a focus on over-the-top (OTT) platforms, IT and information technology-enabled services (ITES) sectors, sources said.

"IT and software-as-a-service sectors are sending royalty payments without taxation. OTT platforms that do not have permanent establishment are also on focus. We are looking at increasing the mandate of TDS (tax deducted at source), and the mandate of reporting royalties and remittances. Then we will be able to see what is the nature and purpose of these," a senior government official told Moneycontrol.

Royalty payments going untaxed has been an ongoing dispute relating to what constitutes its definition. Entities from the companies' side argue that such payments do not constitute royalty. It is a long-drawn litigated part.

"With an increased reporting mandate, we will run the royalty payments on our risk management. If any risky entity is flagged, then we will take it up. If it is flagged by risk management, then notices will be sent. Our focus is on gathering more information on these payments," he said.

If some rights are being transferred by an entity, it constitutes royalty, according to Indian legislation. If an entity here has rights and is again distributing them, it will be considered royalty. For example, if a telephone operator buys rights from an OTT platform for 100 films and makes payment on a regular basis then that will constitute royalty.

"It's being taken note of. In such cases there has to be a TDS deduction on royalty," the official said.

Cloud services also on radar

Cloud services taxation is another issue which the government is focusing upon.

"In some bilateral treaties, cloud services are getting taxed. Virtual equipment under cloud services is being taxed in some treaties. But it is not uniform in the 95 treaties that we have. We cannot simply amend Indian legislation. We are working to amend treaties," the government official said.

Under the Organisation for Economic Cooperation and Development (OECD) pillar 1, pillar 2 frameworks will be for all digital companies to address this issue.

"Then certainty will develop on taxation of cloud services. What is received by US entities is being taxed there. India’s argument is that since it is sourced in the country, we should have the right to tax it. OECD tax framework will make this dispute settlement easier," he said.