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 industry—especially in television and digital spaces—continued 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 taxes—entertainment 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