Guest Article: Himanshu Parekh and Pankil Sanghvi: Media and Entertainment sector tax proposals for the Union Budget 2011

The Media and Entertainment industry hopes for simplification of the oppressive tax laws plaguing the sector in the forthcoming Union Budget.

The Media and Entertainment ('M&E') sector has emerged as one of the fastest growing sectors of India. Over the past decade, the M&E sector has registered an exponential growth with an estimated size of INR 650 billion and a CAGR of 13 per cent. The industry is pegged to reach INR 1,091 billion by 2014.

With a myriad taxes in various forms and multifarious statutory compliances, the M&E sector is keenly awaiting the Union Budget 2011 to be presented by the Finance Minister Pranab Mukherjee on February 28, 2011. The Industry hopes for simplification of the onerous tax laws and resolution of some of the long-standing tax controversies impacting this sector.

Provided below are the key issues affecting the sector and the wish list from the budget.

Rationalisation of tax structure

The M&E sector is subject to a host of taxes / levies like service tax, licence fees, entertainment tax, and state levies such as VAT, apart from corporate income-tax. To add to the above, there exists a disparity between taxes imposed on companies falling under different segments in the M&E sector. For instance, a broadcasting company is subject to taxes such as service tax, VAT etc., while print companies enjoy relief from service tax and are also eligible for certain other waivers.

A re-look at the sector tax framework bringing uniformity and rationalising the multiple levies into a unified levy would ease the otherwise burdensome compliances and reduce to a great extent the current litigation on various vexed issues.

Amendments in advance tax rules

The M&E sector is prone to uncertain profits. For advance tax purpose, the profits from release of a film or television show cannot be predicted with any degree of certainty, as is possible for the manufacturing or other industries. This issue gains further prominence when a film or programme is released in the last month of the financial year (typically, January to March). The taxpayer has to then pay interest on unpaid advance tax of previous quarters for such inconceivable profits.

The film and television industry would expect the Budget 2011 to either provide exemption from advance tax or introduce special provisions for discharge of advance tax liability, commensurate with its cash flow position.

Relief and clarifications on withholding tax

Budget 2010 mandated a higher withholding tax rate of 20 per cent in case of payees (recipients of income) not having a Permanent Account Number (PAN). With the changed dynamics of the industry, greater amount of content is being procured from foreign players and various one-off payments are being made to foreign artistes. Most such contracts are net of tax contracts, i.e., taxes are borne by the Indian companies. Accordingly, the cost for the Indian companies, in some cases, has gone up by a further 15 per cent (on account of grossing up of taxes). A suitable clarification in the Budget 2011, relaxing the higher withholding rate (where the taxes are borne by the payers) is much warranted as the payers (Indian companies) are being unnecessarily penalised for failure on the part of the payee to apply for PAN.

Budget 2009 increased the withholding tax rate applicable to advertising contracts from 1 per cent to 2 per cent. The advertising industry operates on thin margins and the increased withholding tax burden has aggravated cash flow issues for the advertising industry. A roll back of the withholding tax rate to 1 per cent is sought from Budget 2011.

Telecasting companies make payments towards production of programmes on commission basis. Withholding tax rate on payments for production of programmes for broadcasting or telecasting is prescribed at 2 per cent. This view has been also endorsed by the Delhi High Court in the case of Prasar Bharti. However, the tax authorities frequently allege that such payments are exigible to higher withholding tax at 10 per cent (the rate applicable to technical services). A suitable clarification in the Budget 2011 on this matter to the effect that withholding tax on the above payments should be 2 per cent, would stem down the unnecessary litigation on this issue.

Deductibility of expenditure incurred for acquiring telecasting rights in films/ programmes

Whether the expenditure incurred by foreign broadcasting companies for acquiring telecasting rights in films / programmes either on outright basis, or on licence for a specified period, should be allowed as deduction in the year in which rights are acquired or be deferred over the period of licence or be capitalised for claim of depreciation has been a matter of considerable debate. A similar issue is upsetting the FM radio operators with regard to license fees paid to the government. Specific legislation clarifying that on account of a small shelf life of television programmes, the entire expenditure should be allowed as a deduction in the year of first telecast, or at least allowed as a deduction as per accounting norms rather than tax depreciation is much warranted.

Taxability of subscription revenues earned by foreign telecasting companies

The foreign telecasting companies generally grant distribution rights for the channels to an Indian company, which in turn, transfers these distribution rights to the MSOs, cable operators, etc. The payment for grant of distribution rights is not for the 'copyright' in the content, and hence, is not in the nature of royalty. The income from grant of distribution rights is in the nature of business income. However, the divergent views taken by the tax authorities in characterising these receipts as royalty or business income has led to protracted litigation. A clarification to the effect that the payments do not qualify as 'royalty' is sought for in the Budget 2011.

Dual taxation on transfer of copyright

Post introduction of the service category of 'Copyright Service' in the Budget 2010 (which is made effective from July 1, 2010), service tax is applicable on the temporary transfer or permitting the use of copyright in relation to the cinematographic films. Under the state specific Value Added Tax (VAT) laws, transfer of right to use of the copyright is already subject to the VAT. Prior to introduction of service tax (copyright services), the transfer of copyright was subject to only VAT under the respective VAT law.

This dual taxation (Service tax and VAT) on transfer of copyright in relation to the cinematographic films is affecting the industry at large, and lack of clarity on the applicability of service tax and VAT on same transaction from the government is fuelling speculations. It is envisaged that the clouds of dual taxation would be cleared post implementation of the comprehensive Goods and Service Tax (GST) by the government.

In the meantime, the industry is left with levying both service tax and VAT on the transfer of copyright in cinematographic films. Some industry players have challenged the constitutional validity of levying service tax under the newly introduced service category of 'Copyright Services', while as some are challenging applicability of VAT on the same. In the past, the media and entertainment industry has been struggling with the regulators to get concessions / benefits. With the upcoming Budget 2011, the industry expects the government to come out with some clarification and clear the ambiguity on the above aspect.

While the M&E sector has tremendous growth potential, prudent fiscal legislation would only help to perform at its potential. The government would do well to introduce appropriate tax reforms to enable the Indian M&E sector reach new heights and become truly global.

(Himanshu Parekh is executive director, Tax & Regulatory Services, KPMG. Pankil Sanghvi is senior manager, Tax and Regulatory Services, KPMG)