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Taxation issues may cripple radio expansion

06-June-2013
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Taxation issues may cripple radio expansion

Radio is one of the highest regulated media in the Indian context. Right from purchasing the spectrum to paying music royalty, radio broadcasters have to bear a number of taxes and fees. With the advent of Phase III, broadcasters’ tax implications will go up, adding either to their capital cost or operational cost.

In 2011, the government raised the FDI limit in the radio sector from 20 to 26 per cent. Nonetheless, the FDI limit for radio is still the lowest in the Indian broadcasting space and has failed to attract foreign investors, leaving broadcasters to deal with their own woes.

License woes
Radio players are currently dealing with a number of direct and indirect taxes, which are likely to increase post Phase III expansion, depending on the policies then designed or altered by the government. To start with, for a new radio station, players have to give a one-time license fee and an annual license fee – a recurring amount which has to be paid to the government every year. While the one time license fee is a part of the capital cost, the treatment of the fee is a major issue.
   
Also, there is no clarity on whether new license obtained will be housed in an existing company or a new one? In case of an existing venture, the expenses incurred will be allowed as revenue expenditure and expenses incurred in setting up a new station will be treated as capital expenditure, in which no deduction of expenses will be available.

Tax loses
Radio broadcasters often face issues in breaking even the investment made and due to the slow economy, are usually faced by low y-o-y growth. Thus, a number of times, radio players have significant tax losses brought forward. Under the Income Tax Act, 1961, taxes can be carried forward only for a period of eight years and no carry back of such tax losses is permitted. Thus, radio players will have to look at effective methods of utilisation of tax loses to avoid added expense.

Indirect taxes
While direct taxes and unclear license policies are a major headache for radio broadcasters, indirect taxes hold the biggest consideration for the growing radio industry. Major indirect taxes applicable to the radio industry are service tax, value added tax, custom duty and stamp duty.

Radio owners need to pay a service tax on the ad revenues earned each year. Service tax rate currently is 12.36 per cent. Also, broadcasters have to pay copyright of sound recordings or music which is levied with the service tax.

Radio industry pays VAT for expenses such as royalty paid on music as it is an expense to the radio station. However, given that the radio players do not enter into a lot of revenue transactions that attract VAT, the amount charged to them remains unutilised and results in an additional cost to them. Similarly, custom duty and stamp duty as well imply additional costs for radio players that need to be abolished soon.

Tax implication is something that is the eating up radio players already. Burdened with this kind of expenses already, Phase III expansion will mean a lot of investment for radio players. With FDI giving no relieve to the industry and the existing government support, expansion at the current expenses is indeed going to be a hard ball to play.
 
With inputs from the CII – E & Y report – Poised for Growth
 

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