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Budget Impact: A mixed offering for media and entertainment sector – E&Y’s Rakesh Jariwala

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Budget Impact: A mixed offering for media and entertainment sector – E&Y’s Rakesh Jariwala

The Union Budget 2010-11, presented by Finance Minister Pranab Mukherjee on February 26 is being seen as a balanced one with no major surprises. Ernst & Young’s Rakesh Jariwala cuts down to the basics and highlights the points in the Budget that impact the media and entertainment sector.

Income tax:

  • It is sought to introduce the Direct Tax Code from 1 April 2011.
  • Under the current income tax provisions, an ambiguity prevailed on taxability of certain types of income, including royalty and fees for technical services, where intellectual property rights/ services were provided from outside India and were utilised in India. It is now sought to be clarified that value of such rights/ services shall be taxable in India so long as the services have been utilised in India, irrespective of whether the non-resident has a residence, a place of business or a business connection in India, or has rendered services in India.
  • Conversion of companies into LLP is sought to be exempted from capital gains tax. However, this amendment may not have any significant impact as the exemption has been extended only to the small companies having turnover of less than Rs 60 lakh. Given the restricted applicability, the media companies that are looking to migrate to LLP as a business vehicle, will not be able to benefit from this exemption.
  • Minimum Alternate Tax rate has been increased from 15 per cent to 18 per cent.
  • Weighted tax deduction for R&D benefits has been increased from 150 per cent to 200 per cent. This would benefit certain segments of the media industry.
  • Under the current income tax provisions, where taxes were not deducted or after deduction not paid during the financial year (except deduction of taxes made in March), the entire expenses were disallowed. It is now sought to be allowed a deductibility of expenses even if taxes are deducted during the financial year, but deposited before the due date of filing the return. However, an interest of 1.5 per cent per month shall be levied for delay in depositing the taxes.

Indirect tax:

  • It is sought to introduce Goods and Service Tax regime from April 1, 2011.
  • For services tax levy purposes, the category of Intellectual Property Rights services specifically excluded copyrights from its scope (except where copyrights were taxed under other service categories, for example, broadcast services). Now, copyrights on cinematograph films and sound recordings have been brought under the service tax net. This could result in additional tax cost of 10.30 per cent on exploitation of cinematograph films and music rights.
  • Earlier, sponsorship revenues for sports were excluded from the levy of service tax. Now, sponsorships for sports events is sought to be brought under the services tax net.
  • It has been clarified now that customs duty on import of film, music and gaming software (excluding pre-packaged software) will be charged only on the value of the carrier medium and customs duty on the balance value will be exempt. However, the balance value has been sought to be brought under the service tax net.
  • To enable smooth transition to digital technology by multi-service operators, project import status and concessional custom duty of 5 per cent is being extended to an import of Digital Head End equipment, with full exemption from special additional duty.
  • Service tax has been extended to cover event and brand management.

(Rakesh Jariwala is Tax Partner, Media & Entertainment Practice, at Ernst & Young. The views expressed are personal in nature.)


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