According to highly-placed government sources, the forthcoming Budget session of the Parliament is expected to come out with a rational taxation system for FTCs, to bring them on par with Indian telecasting companies.

The "presumptive profit" provision was worked out in 1996 for foreign telecasting companies to give them tax relief, keeping in view the fact that they were making losses in global operations and it was a new line of business for them. The Central Board of Direct Taxes (CBDT), which had formulated the provision favouring foreign telecasting companies, is now reviewing the "presumptive method of determining profits of FTCs" to put an end to the discriminatory practice.

The government is working towards ending the discrimination, as around 90 per cent of TV broadcasters operating from India are misusing the "presumptive profit provision," which is meant only for foreign telecasting companies. Says a government source: "Except four to five south Indian TV channels, all Indian TV channels are enlisted as foreign telecasting companies so that they can take advantage of the special provision granted to FTCs. Also, over the years, profitability of FTCs arising from ad revenues and royalties for pay channels has increased sharply, thereby questioning the basis of a special tax regime for them."

Among the broadcasters registered as foreign telecasting companies and working in the country through their Indian agents are Asia Today (Zee Telefilms), Satellite Television Asian Region Advertising Sales BV (News Television India Ltd or Star), Sony Entertainment Television Singapore (SET India), Discovery Channel (Discovery Communications India), ESPN Asia (WD India Pvt Ltd), MTV (MTV India), TVM Ltd (TV India), BBC Worldwide (BBC Worldwide India), and Television India Mauritius (Eighteen Entertainment India Pvt Ltd).

Going by a recent estimate made by the Finance Ministry, these foreign telecasting companies have paid a total of only Rs 71.21 crore as income tax during the past four assessment years. The astonishingly low tax figure is due to the presumptive method of calculating the profit and the income tax for FTCs.

The method is based on the presumption that foreign telecasting companies have their advertising agencies and Indian agents in the country, and that the ad agencies and Indian agents would retain 15 per cent each of the total income of the FTCs, with the remaining 70 per cent being remitted abroad by the FTCs. Based on these presumptions, the CBDT in 1996 prescribed a presumptive profit of 10 per cent of the gross receipts of FTCs, after deducting the 30 per cent commission payable to their ad agencies and Indian agents. That is, a foreign telecasting company needs to pay income tax only on a presumed profit of 10 per cent out of its earnings remitted abroad.

The presumptive profit for FTCs is taxed at the normal rate, but the total amount of tax works out to be marginal because of the way their profits are calculated. For example, the rate of taxation for 1995-96 to 1997-98 was 55 per cent and from 1998-99 onwards, it was 48 per cent. But the effective tax rate for FTCs worked out to 3.8 per cent for 1995-96 to 1997-98 and 3.36 per cent for 1998-99 onwards, because of the 10 per cent "presumptive profit" criterion.

The Indian telecasting companies, which have not opted for the FTC route, have to, however, pay a much higher tax based on their actual earnings. Pointing out the disparity between the two, a government source says: "No Indian telecasting company will be forced to become an FTC if CBDT comes up with a rational tax structure."

According to a note prepared by the Finance Ministry, the CBDT had formulated the presumptive profit guidelines for foreign telecasting companies in 1996 because it was still a new area of commercial activity. In fact, representatives of foreign telecasting companies had pointed out to the CBDT then that they had suffered losses in global operations and that they would earn substantial profits only after three to four years. These companies had also expressed their inability to maintain countrywise accounts and file only after three to four years.