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Union Budget 2010: Rough deal
March, 08th 2010

When the Finance Minister in his budget speech acknowledged that the film industry has been experiencing difficulties, it appeared that the entertainment sector, and more specifically Film Industry, should finally be getting a respite from controversies relating to valuation of the content being imported. While the FM did rationalise the customs duty structure, on the flip side, he has slapped entire media and entertainment (M&E) sector with service tax. This, no doubt, is a big blow to the M&E sector, which is already burdened with one of the most unfavourable tax regime in India (only tobacco and alcohol could be considered to be in the same league!).

An analysis of the indirect tax impact on the M&E sector is below.

Customs duty: There was an anomaly in Customs Tariffs which granted an exemption on the royalty value on import of movies on cinematographic film reels only. However, when the same movie was imported on other media such as a betacam tapes (by broadcasters), stamper (by home entertainment companies) or on VCDs or DVDs, the said import was liable to customs duties on the entire value including royalty or license fee that was payable as a condition of sale. The Government has tried to rectify this anomaly.

Now, similar to cinematographic film reels, customs duty will be payable on the cost of the media (such as betacam tapes, stampes, VCDs, DVDs) and value of freight and insurance. While the exemption appears to be intended for all types of content being imported, at a ground level, there are some apprehensions that the revenue could seek to restrict the exemption only to certain content being imported on media. Hopefully, the Government will clarify its intentions.

Import of promotional materials like trailors, making of the film etc imported free of cost in the form of Electronic Promotion Kits / Betacams has been exempted from custom duties.

Service tax: The service tax ambit has been extended to a number of areas in the M&E sector:

# Temporary transfer or permitting the use or exploitation of all copyrights except original literary, dramatic, musical and artistic works.

# Grant of rights to exploit any event including events relating to art, entertainment, business, sports or marriage is also covered within the service tax net. Thus, exploitation rights granted by any person in events such as company sponsored cricket match, film award functions, celebrities' marriages, beauty contests or music concerts is proposed to be liable to service tax.

# Contracts for promotion or marketing of a brand (of goods, services, event or endorsement of name) of a business entity are made liable to service tax. Prior to this amendment, endorsement of goods or services was considered as taxable business auxiliary services. However, promotion of brand (without reference to a particular good or service provided) of a business entity is now proposed to be a taxable service.

# Sponsorship received for a sports event, hitherto excluded from service tax, is now proposed to be made taxable.

The impact of the above amendments on media and entertainment sector is as under: 

Film sector - Theatrical

Until now, theatrical distribution was primarily liable to entertainment taxes. Customs duties on import of film reels is exempted (with duty only applicable on cost of media and value of freight and insurance) as also VAT is exempted in most States (States which do not grant exemption, the Governments typically do not collect VAT). The present budget proposes to tax royalties paid by distributor to service tax. Given that the service tax cannot be set-off against entertainment taxes, the entire tax so collected will be an additional cost to be borne by the supply chain.

Home entertainment and music distribution sector

Distribution of music rights and home entertainment rights to companies is typically liable to VAT at 4%. In addition to VAT, service tax is proposed to be charged on distribution of music rights. The service tax is an additional cost as credit of such service tax is not available against recorded VCDs and DVDs (which are exempted from excise duty).

Broadcasting sector

Satellite rights granted to various channel companies was already liable to a VAT of 4%. In addition to VAT, service tax is proposed to be charged to these channel companies. Further, satellite rights purchased for various events such as sports events, celebrity marriages, fashion shows etc will now attract service tax.

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