Media & Entertainment industry – Key tax issues and expectations from Budget 2018

Himanshu Parekh

It is that time of the year again when corporate India is waving its wish-lists to the Finance Minister, hopeful that the government fulfils some of its expectations and addresses its concerns.

The Indian Media and Entertainment (M&E) sector has had an impressive growth graph.  It grew at a Compound Annual Growth Rate (CAGR) of 11.61 per cent from 2011-2016¹.  High speed data connectivity, access to affordable 4G handsets and collapsing data prices will continue to push consumption and propel the industry to touch revenues of Rs 7.5 to 8 trillion by 2022 from an estimated Rs 4.5 trillion in 2017. This sector is expected to witness a spate of consolidation, more international investments and incremental growth in subscription and mobile advertising revenues. It is anticipated that the industry shall generate additional 2.5 million jobs over the next four-five years.

The M&E sector has been facing myriad tax issues, including the following, which it expects to be addressed in the Union Budget 2018-19.

Benefit of carry forward of losses on amalgamation

Industrial undertakings that are eligible for benefit of carry forward and set off of losses in case of amalgamations, include undertakings providing telecommunication services, but do not include undertakings in the M&E sector. With the convergence of telecommunication and M&E sector on the horizon and the trend of consolidation being witnessed in the sector, extending this tax benefit to the M&E sector would provide a boost to consolidation among media players and keep their growth engine viable.

Tax Deducted at Source (TDS) on various payments

The government has issued circulars to clarify TDS aspects in relation to payment to software production houses and advertising commission/discount given by broadcasters to advertising agencies but there still remains a lot of controversy over some other payments made by this industry.

Payment of channel placement/carriage fees by broadcasters to cable operators/multi-system operators being treated by the tax department as fees for technical services, liable for TDS at 10 per cent, has resulted in protracted litigation. While the Bombay High Court has held in favour of the tax payer on this issue, a clarification once and for all, to the effect that such payments are subject to TDS at the rate of 2 per cent, being towards ‘work’ relating to broadcasting, will help mitigate litigation on this issue.

Further, applicability of TDS on discount given to distributors on sale of set top boxes/recharge coupon vouchers for the Direct To Home (DTH) industry has been another area of long drawn controversy. The government should put to rest this controversy by issuing a clarification that such discount is not in the nature of commission, and hence is not subject to TDS.

The retrospective amendment to the definition of ‘royalty’ which was introduced in 2012, though stated to be with a view to clarify the legislative intent, has effectively expanded the scope of royalty under the Income-tax Act, 1961 (‘the Act’).  Consequently, tax authorities are treating payments by broadcasters towards transponder hire charges to be payments for use of a ‘process’ (which is defined to include transmission by satellite, cable, etc.) or for use of equipment and hence, in the nature of ‘royalty’, which is liable to TDS at 10 per cent. Even where a foreign satellite company is governed by a tax treaty, tax authorities are importing the definition under the Act into the treaty. This has resulted in foreign satellite companies passing on their tax costs to the Indian broadcasters. To curtail litigation and undue burden on the Indian broadcasters, the government should clarify that payment to foreign broadcasters does not amount to royalty and thereby align India’s position with the international position thereon.

Sports segment

With increasing number of league-based events now occurring in India, sports segment is in the limelight. However, taxation of sports associations and teams/sportspersons continues to be a vexed issue. The typical issues are around TDS on acquisition of live telecasting rights, payments made to foreign sports body, prize money paid to foreign teams, payment towards sponsorship/ advertising revenues, etc. It is important to have clarity on these issues and demystify the various controversies.

Taxation of subscription revenues earned by Foreign Telecasting Companies (FTC)

Subscription revenues of FTC are typically collected by distributors in India, and subsequently remitted to FTC. Such payments towards grant of distribution rights have been alleged to be for use of copyright and are subjected to tax in India as royalty rather than business income (as held by the Tribunal in several cases). A clarification in this regard to the effect that the payment is in the nature of business income is long awaited.

Goods and Services Tax (GST)                                       

Various states have been authorising their local bodies to levy entertainment tax on cinema exhibition. Levy of local body entertainment tax defeats the basic purpose of implementation of GST, besides resulting in compliance and enforcement challenges.  Hence, the industry recommends that the local body tax be subsumed into SGST, and an appropriate allocation can be made to the local body by the State.

Also, the industry requests that important exemptions in the state entertainment regime be continued in GST regime, such as, exemption of entertainment duty on admission rates retained as service charge by cinema exhibitors.

Customs duty on set-top boxes

The government has very recently doubled the import duty on set-top boxes to 20 per cent. This increase will have impact on the ongoing digitisation of cable services in India and hence, the industry expects that the customs duty be brought back to the earlier rate.

Last but not the least, it is hoped that the corporate tax rate would be brought down from 30 to 25 per cent as promised by the Finance Minister in his speech for Union Budget 2015-16, and it be granted infrastructure status which will aid it in availing better financing options, given the capital investments needed in digitization, technology upgradation, setting up of multiplex theatres and cable & distribution networks.

The Union Budget 2018-19 is expected to provide the much needed impetus for accelerating economic growth. Clarifying some of the contentious tax issues and updating the tax laws to keep pace with the evolving business models in the M&E sector will provide much needed respite to the industry.

(Himanshu Parekh is Partner and Co-Head Media & Entertainment, KPMG India)