Taxing Formula 1

Amidst familiar scenes of stray dogs and serpentine traffic snarls, the arangetram of Formula 1 racing in India was lapped up at the Buddh International Circuit. India needed to showcase that it could improve on its messy execution and financial management capabilities showcased during the Commonwealth Games. The F1 race proved the point.

The taxman, however, does keep an eye on such glitzy events where the bucks are bigger.

The entertainment tax exemption granted to the F1 race has reached the Supreme Court courtesy a public interest litigation. In an interim order, the Court directed the organisers to deposit 25 per cent of ticketed receipts in an escrow account. The merits of the case will be decided later.

UP Entertainment Tax

The UP Entertainment and Betting Tax Act (Act) evolved in the pre-Independence era in 1937. Its initial focus was on the collection of entertainment tax from cinema halls and betting tax from horse races.

The focus does not seem to have altered drastically after 74 years. Unwittingly, the Government of Uttar Pradesh states that the main aim of the department administering the entertainment tax is to provide healthy and wholesome entertainment in a healthy environment to the people of the State! The Act prescribes tax rates for cinematographic exhibition, joy rides in an aeroplane, horse-races, non-classical music, pool games and bowling alleys, interior cinemas and video exhibitions.

The schedules to every taxing statute inevitably have a residual clause with the motive of preferring to be safe than sorry. In the case of the UP Act, it is worded as all other class of entertainment not covered in other clauses, including games of skill.

The Apex Court appears to have placed the F1 race in the residual category as a game of skill since the applicable tax rate is 25 per cent. Exemptions specified in the Act are for drama, nautanki, quawali, kavi sammelan, mushaira , classical and folk music and dance and variety programmes consisting of a combination of any of the others.

Unsurprisingly, any form of car racing does not find a mention in either the taxing schedule or the exemption list. In 2009-10, the total collections from entertainment tax in UP was Rs 193.50 crore — it would not need too much of thinking to conclude that a major contributor would be the movie entertainment tax.

IPL

The organisers of the F1show are quick to draw parallels with the IPL, which seems to enjoy a perennial exemption from entertainment tax. If anything, the IPL displays its portfolio of entertainment events more than a F1 show wherein a set of cars vroom more than 60 rounds at high speeds across a fixed path. Equality before law is the tenet on which they would attempt to defend themselves. Though the Madras High Court recently expressed its dislike at the exemption from entertainment tax for the IPL, the law is yet to be amended to withdraw the exemption. The pseudonym Invisible Powers League is sometimes assigned to the IPL thus making any comparison irrelevant. Entertainment according to the normal tax parlance is defined to be any amusement or recreation or any entertainment provided by a multi-system operator or exhibition or performance or pageant or a game or sport, whether held indoors or outdoors to which persons are admitted on payment. The last limb is sufficient to draw F1 into the tax net.

The event-specific exemptions granted to specific events provides feelers that the Government is not very keen on looking upon this as a regular revenue source.

Service tax

Amongst indirect taxes, service tax bags the pole position and is bagging all the lap records for boosting the Government's coffers. It did not take long for the IPL to be brought into the service tax net as the different revenue-sharing agreements were not sufficient to avoid falling into the large canvas of business auxiliary service. F1 may have initially escaped the service tax net since there appears to be no revenue sharing agreement with the international organisers and ticket sales are not taxable, but subsequent use of the facilities for shows and events at Buddh would bring it into the net.

The litigation over renting of immovable property is only a Supreme Court judgement away from being laid to rest. The tentacles of service tax are large enough to include advertising services and small enough to cover pandal and shamiana operators.

Both entertainment and service taxes are proposed to be subsumed into the still-hazy GST scheme. If and when it does fructify, it would be a good opportunity to prove that the Government is serious about entertainment tax by avoiding event-specific exemptions, be it F1 or IPL.

(The author is a Bangalore-based chartered accountant.)

COMMENT NOW