Burden of Service Tax

The Union Budget has made the business of licensing of copyrights a taxing affair by making amendments to section 105 and applying service tax "to any person, by any other person, for—
(a) transferring temporarily; or
(b) permitting the use or enjoyment of,
any copyright defined in the Copyright Act, 1957, except the rights covered under subclause
(a) of clause (1) of section 13 of the said Act.”

This provision affects entertainment industry and film entertainment industry significantly. Exploitation of entertainment content is based on transfer of the copyright in such content to the exploiter either by way of license or assignment. Imposition of 10.3% service tax on all such transactions/transfers would mean than effectively Licensor/Assignor shall impose a service tax of 10.3% on the value of copyright transfer which would in turn make entertainment content more expensive for the end consumers i.e cine-goers.

When distributor would license a film to the exhibitors, they will collect a service tax of 10.3% on behalf of the government. The exhibitors in turn would pass on the tax so paid on the final ticket prices thereby raising the prices for tickets or any other entertainment product such DVDs by 10.3%. This would be in addition to the Entertainment tax of 25% (varying from state to state) on the gross receipts and further VAT of 4% on the transaction value as applicable in most of the states.

The Budget speech was a sugar coated knife that would bleed the entertainment industry. Finance Minister, in his speech said :

"India is a nation of movie-goers. The film industry has been experiencing difficulties in importing digital masters of films for duplication or distribution loaded on electronic medium vis-a-vis those imported on cinematographic film, owing to a differential customs duty structure. I propose to rationalise this by charging customs duty only on the value of the carrier medium. The same dispensation would apply to music and gaming software imported for duplication. In keeping with the tradition of Indian cinema, however, I shall provide a surprise ending. In all such cases the value representing the transfer of intellectual rights would be subjected to service tax."

This effectively means that Films imported on cinematograph films for exhibition or on digital media such as digital masters, stampers customs duty for duplication and distribution of CD/DVDs would now be charged only on the value of the carrier medium and the customs duty on the balance value will be exempt. Promotional material such as making of films etc. imported free of cost in the form of electronic promotion kits (EPK)/Betacams are being fully exempted from basic customs duty and CVD. Similar tax treatment, as provided to films above, is being extended to music and gaming software (other than pre-packaged form) for retail sale imported on digital media for duplication.

Pre-packaged Movies, Music and Games (meant for use with gaming consoles) will continue to be charged to import duties on value determined in terms of the provisions of the Customs
Act.

However, the importer would have to pay a service tax of 10.3% for licensing the copyright of the film on the transaction value of such licensing. Therefore, if say a blockbuster like Avatar is imported for DVDs to be sold ideally, Importer can do so in two ways-(a) by importing physical CDs/DVDs of the film to be sold in bulk or retail (b) Licensing the copyright in the film for vide rights exploitation in the territory of India and asking Copyright owner to send the master tape for replicating the same in India and then distributing the physical copies.

As per the Budget, importing physical DVDs/CDs remains taxable as earlier and for licensing the copyright, the service tax would be charged. The rationale behind such imposition is not clear as to how importation of copyrightable materials amount to 'services'.

This would affect the entertainment industry and particularly film industry adversely in more than one way. Apart from the fact that licensing of copyright in films and other entertainment product would be costly affair, for end consumer, increased cost for access to entertainment would indirectly fuel piracy in entertainment product as consumers would be driven towards pirated and cheaper access to such products.