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Union Budget 2006-07: Sponsorship of non-sports events not too taxing for the industry

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Union Budget 2006-07: Sponsorship of non-sports events not too taxing for the industry

The Union Budget 2006-07 has widened the service tax net to include sponsorship of events other than sports events among 15 other services. However, key industry players in the non-sporting events aren’t too worried, the reason being that the 12 per cent service tax can be offset against other indirect tax liabilities.

Explaining the “prevalent” ambiguity on this subject that the provision clears, Ravi Krishnan, Managing Director, IMG/TWI, South Asia, said, “While the view was that sponsorship of events, including sports events, was earlier not covered as a taxable service, there were doubts as to whether it could be covered under advertising services and be considered a taxable service, thereby leading to litigation.”

He elaborated that the Finance Minister, by adding sponsorship of non-sports events as a taxable service in this Finance Bill, had made it clear that earlier sponsorship of events was not a taxable service and would only become a taxable service from the date it was notified. “This has cleared the air and will preclude litigation for earlier years as also clearly exempting sponsorship of sports events,” Krishnan added.

The fact that sports events have been excluded from the service tax net brings in its share of good news to the industry. Reflecting on this, Ravi Kiran, CEO, Starcom MediaVest Group, South Asia, said, “I am happy that sports events have been excluded from the service tax net. This will help encourage corporate sponsorship of sports events.”

What is the implication of the levy of services tax on non-sports events on the industry? Devraj Sanyal, COO, Percept D’Mark, replied, “The service rate will be increased from 10 per cent to 12 per cent. The sponsors have to spend more, and since more services have been brought into the service tax net such as international air travel in business class, transportation of goods in container, public relations services, Internet telephony and travel by cruise ship – the organiser has to budget accordingly.”

Farokh Balsara, Industry Leader, Media and Entertainment Practices, Ernst & Young, observed, “Sponsorships are normally a block deal. Advertisers will expect event managers to come with a comprehensive amount inclusive of service tax. There could be cases where they would even expect the organisers to bear the incidences of the tax to some extent. However, this wouldn’t really become a hindrance in any significant way.”

Giving his perspective on the changes hereon, Krishnan said, “The organiser of the event who owns the sponsorship rights will now add on the 12 per cent service tax in the invoice to the sponsor, that is, if the sponsorship fee was Rs 100, then the invoice would be for Rs 112.”

He asserted that while this meant that the sponsor would pay an additional 12 per cent, there was also a mechanism for the sponsor to get the credit for this 12 per cent against their excise duty liability or service tax liability.

“Since sponsors of big events are usually large or medium sized manufacturing or service companies, the additional 12 per cent they pay should not be an additional burden as they can offset against their other indirect tax liabilities,” Krishnan added.

In regards to the organiser of the event, he said, “They will collect the 12 per cent service tax from the sponsor and deposit it with the Government after taking credit for any input service taxes paid.”


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