Budget 2012 not a box-office hit

Faced with myriad taxes and statutory compliances, the media and entertainment sector had eagerly hoped that Union Budget 2012 would simplify the onerous tax laws and resolve longstanding tax controversies. Levy of service tax and VAT on copyright content has been a major sore point for the industry. Heavy entertainment tax (exceeding 30-40 per cent) on film exhibition is another concern. The broadcasting sector is plagued with tax issues, more prominently the uncertainty surrounding TDS (tax deducted at source) on payments and a higher withholding tax of 20 per cent if the income recipient does not furnish a PAN (permanent account number). The likely levy of service tax and VAT on activation charges and recharge coupons has been haunting the DTH industry for some time.

The Finance Minister, Mr Pranab Mukherjee, made some important amendments in the income tax and service tax legislations affecting the media and entertainment sector. In the area of indirect tax, the Minister presented the film industry in its centenary year a gift in the form of service tax exemption on transfer of copyright in cinematographic films. This would give the film industry some respite. Significant changes such as increase in service tax from 10 to 12 per cent and introduction of the negative list of services could impact the industry adversely.

The existing list of 100-plus service categories subject to service tax is now replaced by a small list on which no service tax would apply. Advertisement in any medium except television and radio would not attract service tax, as also performances in folk or classical music, dance or theatre. But actors working in movies or TV programmes could now be subject to service tax.

In an attempt to overrule a landmark decision of the Delhi High Court in the case of AsiaSat, the definition of ‘royalty’ under the Income-tax Act has been expanded. Accordingly, payments by TV channels for satellite transmission could now be liable to tax in India (subject to benefits available under tax treaties). Even software payments and connectivity payments are now covered under ‘royalty’. Income of foreign entertainers, which attracted 30 per cent tax on a ‘net income basis’, would now be taxed at 20 per cent of the gross receipts.

While corporate tax rates have remained unchanged, slab rates for taxation of individuals have been raised, providing them some relief. The introduction of the General Anti-Avoidance Rules has been delayed by a year. Important amendments have been made to combat black money in India. One welcome amendment is the introduction of Advance Pricing Agreement provisions, which will significantly reduce transfer pricing litigation.

All in all, it has been a lacklustre budget for the media and entertainment industry. In the area of indirect tax, some activities may still attract dual levy of VAT and service tax as they would be considered ‘sale of goods’ under the State VAT Act and ‘provision of service’ under the service tax law. The State and Central governments should join hands to address the worry of dual taxation and clearly demarcate sale of goods and provision of service. Further, the advent of GST (Goods and Services Tax) is expected to allay some of the industry’s major concerns, though there is no word yet on the implementation date. However, with the proposed introduction of the Direct Tax Code from April 1, 2013, a new set of issues is likely to emerge in the area of direct taxes. The industry is likely to witness challenging times ahead.

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