The Hindu Business Line : Tax signals crisscross broadcasting

Many transactions in the media and entertainment space face the cascading impact of taxes. The GST regime, to come into force from April 1, 2010, would possibly address this issue.

With reality shows gaining popularity, the indirect tax implications are becoming challenging.

K. R. Girish
Amitabh Khemka

Consider these examples of cascading effect of indirect taxation: A television channel company acquires satellite rights of a blockbuster movie from an Indian company, such rights being in the nature of ‘copyright’, would attract Central Sales Tax (CST) / State VAT (value added tax). The channel company would, generally, have output service tax liability (a Central Government levy) on its broadcasting services, in which event, it would not be eligible to claim credit of CST/VAT paid so as to use against the output liability. CST/VAT paid, hence, would be the tax cost of the transaction.

Similarly, where a television channel company commissions a television programme, the producer would charge service tax for programme production services. The television channel company, where it grants such programme to a DTH platform holder to exhibit it exclusively on such platform in a regional language, would attract CST/VAT. Service tax paid by a channel company on input service would not be available as credit against the output CST/VAT liability.

There are many such transactions in the M&E (media and entertainment) space, where the input taxes paid is not available as credit and is to be regarded as the tax cost of the transaction, because of the peculiar federal structure of indirect taxes in our country. Goods and Services Tax (GST), to be implemented with effect from April 1, 2010, possibly, may address this issue of cascading impact.

Changing world

The world of tax is changing and indirect taxes are the heart of this change, not only in our country but across the globe. However, in the Indian context, especially in the M&E sector, indirect tax is often the forgotten tax on business.

The integration of the global economy is encouraging the spread of GST, which is being used to replace the revenue lost as a result of tariff cuts under the World Trade Organization (WTO) agreements. Unlike corporate tax, which can take one or more years from the making of a profit to the payment of taxes, GST is effectively collected as the transaction occurs. GST is a particularly attractive alternative for governments as it is a very efficient means of collecting revenue.

Related issues

For the grant of right to distribute the films by a producer to distributors in specific territories, no indirect tax is being paid. The issue is which tax to pay and in which jurisdiction.

Such grant of rights being in the nature of ‘copyright’ would attract CST/VAT where the distributor is remunerated on a fixed fee or on a revenue-share basis. However, if the distributor is remunerated on commission basis, it is possible that service tax authorities take a view that such commission earned by the distributor is liable to service tax.

The jurisdiction of payment of CST/VAT in the case of tangible goods is easy to determine on the basis of physical movement of goods. However, in the case of goods of an intangible or incorporeal nature like copyrights, it is difficult to establish ‘location’/‘movement’ of goods.

One view in the matter could be that, relying on the decision of apex court in the 20th Century Finance case, the situs of levying CST/VAT should be the situs where the contract between the producer and distributor is entered into. However, this view is debatable and this is likely to be a subject matter of dispute between industry and the tax authorities, possibly under the GST era too. This brings in the opportunity to plan. Intellectual property right held, in substance, by a production house located outside India could possibly mitigate such tax exposure and possible disputes.

The rate of tax in the GST era, post April 1, 2010, is likely to go up substantially if the general rate is applied to intellectual property right; current rate of VAT in most States is 4 per cent. Currently, copyrights are excluded from the scope of service tax. Downloads of content on mobile, Internet, IPTV are a subject matter of disputes for levy of both the taxes — service tax and VAT. Telecommunication companies though, have been paying service tax on these as ‘value added services’ to the ‘telecom’ services; few have started paying both the taxes.

In the European Union, this controversy has been put to rest, there being a single tax — GST. Further, ‘supply of services’ is defined to mean ‘any transaction which does not constitute supply of goods’. It appears that in India the regime of taxation by the Centre as well as by the States on the same transaction as services and goods respectively would continue until introduction of GST, though the apex court has held that both service tax and VAT should not be levied on same aspect of the transaction.

Selling of airtime

The tax position with regard to transaction of commissioning of television serial by a television channel and subsequent sale of airtime by the channel to the advertisers is now legally settled, with an efficient credit mechanism. However, in the event the channel sells airtime to the producer of the serial for the slot (30 minutes, for instance) and the producer of television serial in turn sells the airtime to advertisers (say in total for eight minutes), the indirect tax implication, the tax cost and cash outflows would change. Both service tax and VAT authorities could claim to levy tax on sale of airtime.

With reality shows becoming popular on television, the issue of indirect tax implication on sharing/grant of right to use/licensing of the ‘format’ is equally becoming popular (challenging). Whether there is a rendition of any service when the ‘format’ is given; whether, such ‘format’ is goods are open questions.

Grant of telecast rights by Cricket Board not being grant of any copyright should not per se have any indirect tax implications, however this also remains an open issue. Hopefully, under GST, these may not remain an open issue.

Meeting the challenges

In addition to the traditional approaches to indirect tax management, such as increasing the dedicated internal resources, there are a range of new and emerging approaches that businesses could consider: increase the level of awareness of indirect taxes throughout the business; increase the visibility of indirect tax within the businesses; utilise new technology to effectively automate and manage the indirect tax decisions and compliances; and influence potential future changes in indirect tax by proactively and openly engaging in consultation and negotiation with tax authorities and regulators.

(The authors are Partner and Senior Manager, respectively, BSR & Co.)