Taxing entertainment

Written by Jehil Thakkar | Updated: Mar 28 2014, 21:51pm hrs
Despite the challenging macro environment, the media and entertainment (M&E) industry grew at a robust rate of nearly 12% in 2013. The structural changes taking place in the industryespecially in television and digital spacescontinued to take the industry down the path of fulfilling its potential. However, the myriad of taxes in various forms and multifarious statutory compliances are, to an extent, playing spoilsport. The industry has been burdened with the varied stream of direct and indirect taxesentertainment tax, service tax, VAT, income tax, etc.

On the direct tax front, a major issue on which broadcasters are at loggerheads with tax authorities is regarding withholding tax (WHT) on various payments. The controversy revolves around the rate of WHT on payment for production of TV programmes, carriage fees, placement charges, etc. While the taxpayers are of the view that such payments attract WHT at 2% as they are consideration for work, the tax authorities have been contending that such payments are liable for WHT at 10%, on the ground that such payments are towards technical services/royalty. Given this, the taxpayers often face a dilemma as to whether the payment is subject to WHT and, if so, at what rate. Default on WHT invites grave consequences.

A new controversy arose last year over the 15% agency commission reflected by the broadcasters in the invoices raised on the advertising agencies. The tax authorities have been contending that such discount is in the nature of commission paid by television channels to advertising agencies and, accordingly, is liable to WHT at 10%. However, taxpayers believe that the aforesaid discount given to advertising agencies is a notional amount which is not in the nature of commission and, hence, not liable for WHT.

The increase in domestic WHT rate on payment of royalty to non-residents from 10% to 25% is also having a material impact in relation to acquisition of content, transponder hire charges, etc. This has resulted in significant increase in the cost of doing business, especially where tax is to the account of the Indian party. However, a lower WHT rate under tax treaties can be applied provided the non-resident obtains an Indian PAN and a tax residency certificate from the local tax authorities.

Foreign broadcasters are also facing turbulent times in India, litigating on various fronts. Taxability of advertisement revenues earned from India, characterisation of subscription revenues, i.e. whether royalty or business income, etc, are some of the key issues at the forefront.

For the film sector, there are several ambiguities surrounding the applicability of Rule 9A/9B, dealing with deduction of expenditure incurred on production of films/acquisition of distribution rights of films. Key issues on hand are whether the rule extends to satellite, music, home video and other rights in addition to theatrical rights, whether it is directory or mandatory, deductibility of expenses which are not covered by Rule 9A/9B, etc.

The DTH industry has had its more than fair share of tax issues. Applicability of WHT on discount on sale of set top boxes (STBs)/recharge coupon vouchers is a major area of controversy for them. The tax authorities have been taking a view that the discount is in the nature of commission and, hence, subject to WHT at 10%, whereas the industry is of the view that the discount is not in the nature of commission and, hence, not subject to WHT.

On the indirect tax front, huge levy of entertainment tax on film exhibition is an area of major concern. Also, dual levy of tax on copyright has been a major pain point for the industry. Licensing of copyright in cinematographic films (other than for exhibition in cinema halls/theatres) is subject to service tax. Separately, the governments of various states have made copyright liable to VAT, treating the same as intangible goods, resulting in a dual levy of tax on the same item, which is against the basic tenets of taxation.

Further, service tax on services of actors and technicians is also hitting hard on the pockets of the producers. Actors and certain technicians are liable to service tax under the negative list regime. However, licensing of copyright in cinematographic films for exhibition in cinema halls/theatres is exempt from service tax. Hence, it results in substantial loss of CENVAT credit for the film producers (vis-a-vis the service tax payable on services availed from actors, technicians, etc), resulting in huge cost for them.

The DTH industry is subject to a variety of taxes on various transactions such as VAT on sale of STBs, service tax and entertainment tax on subscription revenues, etc. To build the subscriber base, majority of the DTH players have shifted from the model of selling STBs to the customers to providing the STBs on entrustment basis, without charging any consideration for the same. The VAT authorities of various states are still seeking to levy VAT on such transactions on the ground that the installation and activation charges recovered from the customers include the price of STBs. Instead, the DTH industry has been paying service tax on such charges; thus again leading to potential dual levy of tax on the same transaction.

All in all, the M&E industry is facing tax litigation galore on various counts. It is now time for the government to provide fillip to the industry by addressing the issues discussed above. This should not only provide a boost to the M&E sector but can also attract foreign investment in India, thus contributing to the growth of the Indian economy.

With contributions from Maulik Mehta, senior manager, international tax & regulatory, KPMG in India

The author is partner and head of media & entertainment practice, KPMG in India. Views are personal