Rakesh Jariwala, Tax Partner- Media & Entertainment Practice, EY, decodes the Media & Entertainment industry’s expectations - in terms of taxes - from the Union Budget to be presented on July 10
The Indian Media & Entertainment (M&E) industry, which broadly comprises Television, Films, Print, Digital Media and others is maturing. With the next wave of growth, it is expected to grow multi-fold over the subsequent years. However, the ability of the M&E industry to grow at the desired pace has been marred by myriad taxes in various forms and multifarious statutory compliances.
The much anticipated first Union Budget of the new government on July 10, 2014 would be a litmus test of sorts as to whether it is able to deliver on its election promises regarding reforms and good governance. This Budget could well be the impetus for big ticket investments that are critical to reviving the economy. In line with the above and current issues being faced by the M&E industry, here is the wishlist from the Budget:
TELEVISION
The Indian Revenue Authority (IRA) has been contending that the placement/carriage fee paid by broadcasters to cable operators is in respect of technical services provided by the cable operators, and accordingly, such payments should be subject to Tax Deducted at Source (TDS) under Section 194J of the Income-tax Act, 1961 (Act).
The Budget should provide for a clarification that the payments made towards placement/carriage fees are not in the nature of fees for technical services and TDS is required to be done on such payments under Section 194C of the Act.
Grant of distribution rights by Foreign Telecasting Companies (FTC) to Indian broadcasters is not for ‘copyright’ in the content and hence, is not in the nature of ‘royalty’. However, the IRA has been characterizing distribution fees received by FTCs as ‘royalty’. A clarification to the effect that these payments do not qualify as ‘royalty’ is sought to settle the dust.
The IRA has been alleging that discount to advertising agencies by broadcasters is in the nature of commission or brokerage and accordingly, liable to TDS under Section 194H of the Act. However, since broadcasters provide discount on tariff charged by them for the ad spots, the question of payment of commission to advertising agencies does not arise. Given the lack of clarity on the issue, it is imperative that the Budget issues a clarification on the matter, to avoid protracted litigation.
The Indian advertising agencies are unable to take the export benefit on the advertisement placement services rendered to foreign advertisers, as the place of provision for intermediary services is construed to be in India [in terms of Rule 9 of the Place of Provision of Service Rules, 2012 (‘PoPS Rules’)]. In order to make the Indian advertising industry attractive globally, the Budget should provide for the export benefit to the Indian advertising agencies, in this regard.
FILMED ENTERTAINMENT
Typically, taxes on line production fees are withheld at 2% under Section 194C of the Act, whereas the IRA has held that payment to line producers are in the nature of fees for technical services and subject to TDS at 10%. To avoid protracted litigation, it is suggested that it be clarified that a film production contract, not involving technical services, is covered in the definition of ‘work’ for the purpose of Section 194C of the Act.
To boost growth of multiplexes in Tier II and Tier III cities, it is suggested that the erstwhile benefit available under Section 80-IB of the Act should be reintroduced for construction, maintenance and operations of multiplexes in these cities. Further, tax incentives should be offered for digitization of cinemas to expedite the growth prospects in these cities and curbing piracy.
Despite specific provision in law exempting sale, distribution or exhibition of cinematographic films from the definition of royalty, there is litigation in this regard. A clarification in the Budget may help avoid protracted litigation. Pursuant to the Negative List, majority of the services availed by producers have become liable to service tax. Producers can claim CENVAT credit on input services only in the ratio of their taxable turnover to the total turnover. Services rendered by performing artistes in general were included in the ‘revised negative list of services’ of the draft negative list concept paper released by CBEC in November 2011. Thus, in order to curtail the tax cost of the producers, it is suggested that in the Budget the exemption mentioned in the draft negative list of service be restored.
Service tax on transmission of digital cinema is a direct cost to the producers and thus, no CENVAT credit can be availed of such service tax. This has not only resulted in an additional burden of service tax on the film producer, but has also encouraged piracy which currently haunts the Indian M&E industry. It is recommended that in the Budget, the notification exempting service tax on digital cinema that was earlier rescinded, be re-instated.
There is an ambiguity on the availability of the export benefit on the post-production services provided in India by the Indian entities to entities located outside India (in light of Rule 4 of the PoPS Rules). Thus, it is recommended that in the Budget, Rule 4 (a) of PoPS Rules be amended to specifically include the activity of processing of digitally or physically imported goods. In light of the ATA Carnet (International Uniform Customs document), it is recommended that a Customs Notification be issued whereby the film production equipment is allowed to be temporary admitted into India without the need to raise customs bond, payment of duty and other related customs formalities.
LIVE EVENTS AND SPORTS
The definition of ‘output services’ under the CENVAT Credit Rules, 2004 excludes sponsorship services. The organizers of live/sports event are unable to claim CENVAT credit of the services tax paid on input services used for provision of sponsorship, as the service receiver is liable to deposit service tax under reverse charge mechanism. Such inputs service tax becomes an additional cost to the organizer of live/sports events. Thus, in the Budget the definition of ‘output service’ should be amended to clarify the anomaly and the organizers should be allowed to avail the CENVAT credit of the input service tax and utilize it for discharging service tax liability on other output services.
India’s potential in various sportshas not been fully exploited due to lack of adequate infrastructure. To address this and give impetus to sports as an industry, it is suggested that tax incentives in the form of deductions or exemptions be granted for development of sports infrastructure. The procedure of obtaining Tax Clearance Certificates (TCC) is time consuming and onerous. It is suggested that an alternate mechanism for clearance or a monetary threshold for triggering TCC provisions is provided, as the current set up and administrative burden discourages foreign talent to shoot/perform/participate in India events.
INDUSTRY-WIDE ISSUES
The weighted deduction of 200% of the actual expenditure incurred on in house research and development of the Act is currently available to only certain segments of M&E sector. It is suggested that this benefit should be made available to products as well as production services companies. India has the potential to become a global digital media hub offering digital cinema service and related management solution capabilities to the motion picture industry, which could be housed in Special Economic Zones (SEZs).
To incentivize development of such media hubs, Minimum Alternate Tax on SEZ units, which is acting as an impediment to the growth of investment in such units, should be abolished or withdrawn. Currently, carry forward of loss and accumulated depreciation on amalgamation or merger is allowed only in case of companies engaged in specified business (banking, public sector company engaged in business of operation of aircraft) or companies owning an industrial undertaking, ship or hotel. These provisions were introduced to incentivize India’s manufacturing sector. Given that India is now moving towards a service sector economy, it is imperative to extend these benefits across the board to all companies irrespective of their line of operations, so that companies in the M&E sector may benefit from these provisions (this has already been included in the discussion draft of the Direct Tax Code, 2013 and accordingly should be introduced in the current legislation).
The proposed Goods and Services Tax (GST) legislation seeks to subsume all major indirect taxes excluding Entertainment Tax which shall be continued to be levied at a local level. This would impose a serious burden on the film industry, create significant practical difficulties and would be a hurdle in achieving the simplicity that GST seeks to achieve. It is strongly recommended that entertainment tax, in whichever form, should be fully subsumed in GST without creating a window for their levy at the local level.
Thus, the new Government’s election tagline ‘Achche din aane waale hai’ has set the bar high as far as expectations are concerned. Given the current fiscal deficit and high inflation rate, a complete overhaul of the tax policies may actually be detrimental rather than rectifying the situation. It would hence be prudent and reasonable to set realistic expectations from the new government at this stage and it would be interesting to see how the new government tackles industry expectations.
(Views expressed are personal)
