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Overview - Media & Entertainment
There have been no policy announcements which impact the Media & Entertainment industry in Budget 2010. Similar to past experience, Budget 2010 has offered no incentives to the Media & Entertainment Industry in its direct tax proposals. However, the indirect tax proposals address certain representations made by some sections of the industry.
The key indirect tax proposals in Budget 2010 have been discussed below:
Indirect taxes
| • | The norms for determining the appropriate value for content imported into India has been a vexed issue; while some relief was provided to cinematograph films a few years ago, import of content on other media continued to face valuation issue for the purposes of customs duty. Taking account of industry representations on this count, the Minister of Finance has notified that in case of import of motion pictures, music, gaming software for use on gaming consoles, duty will be levied only on the cost of the carrier medium and the freight and insurance charges incurred in relation to the carrier medium. This relief is provided by way of an exemption from duties on all values other than the carrier medium value. Quite appropriately, the exemption has not been extended to imports in pre-packaged form for retail sale
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| This should come as a welcome reprieve to importers of content, whether broadcasters, replicators or aggregators
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| • | Digital head-end projects have been granted project import status; this would enable project owners to import capital goods required for setting up projects at a concessional basic rate of duty of 5 percent. This benefit was hitherto only available for digital cinema development projects
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| • | Import of promotional material (such as trailers) in form of EPK/betacam has been made wholly exempt from customs duty, provided no remittance is made against such import. This benefit will be welcomed by distributors of overseas films. More than the financial impact, it is the ease in import process (due to the complete exemption) that is important
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| • | Service tax on newsfeed service providers has been exempted provided the news agencies are notified and do not distribute profits to its members
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| • | Copyright is sought to be brought within the service tax net, excluding specified categories like original literary works, dramatic works etc. Effectively, the impact of customs exemption on the import of content has been somewhat negated especially in case of consideration paid for rights in video and audio based content and software for gaming consoles
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| While the introduction of service tax could be a relatively tax neutral development for broadcasters already paying service tax on their revenues, it may result in an incremental cost to the retail segment which enjoys an excise exemption on the manufacture of CDs/DVDs. Also, the distribution of movies and audio content will be negatively impacted through the dual impact of service tax and (the pre-existing) Value Added Tax (VAT)
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| • | Service tax is proposed to be imposed on the grant of rights for commercial use or exploitation of any event. Grant of rights for live or belated broadcast of events may also attract tax under this category. Taxability of such transactions undertaken jointly or in partnership would need to be ascertained
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| • | The services of promotion or endorsement of brands of any goods, services or event (for example celebrity endorsements) are proposed to be brought within service tax net
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Conclusions
In the recent past (January 10, 2010), the Ministry of Information & Broadcasting had issued a notice stating that they would not accept applications for downlinking or uplinking channels in India since the Ministry felt that spectrum and transponder capacities for satellite TV channels were limited. If the Ministry were to limit the number of television channels that are available for viewing in India, a fall out of this policy could be consolidation in the television industry. Notwithstanding the various representations made by industry seeking reliefs and rationalization, the Government could have introduced enabling provisions through Budget 2010 to facilitate consolidation in the television industry. A basis for such facilitation could have been to allow media companies to protect their tax losses in the event of a merger.
The industry has been subjected to a fairly high incidence of indirect tax. One hopes, as and when GST is introduced, it would provide some relief from the multiple levels of tax suffered by this industry either by way of exemptions or by way of grant of appropriate credits.
Overview - Information Technology
In the run up to Budget 2010, the IT sector was mainly looking forward to another round of extension of the tax holiday under section 10A/10B. Budget 2010, presented in the backdrop of rapidly improving economic sentiment, represents a mixed bag for the IT industry. The absence of any announcement of extension of Software Technology Park (STP)/Export Oriented Unit (EOU) tax holiday coupled with the increase in Minimum Alternate Tax (MAT) have certainly proved to be a dampener. However, the host of indirect tax benefits; like the exemption on imports as well as the service tax clarity on export of services; have given the industry something to cheer about!
Also, the transition of the Unique Identification Authority of India (UIDAI) into an operational stage and allocation of an amount of INR 19 billion for this project in the Budget along with the proposal to constitute a Technology Advisory Group for Unique Projects is a welcome move and one that is likely to open up significant avenues for the Indian IT sector in the fast growing “e governance” market.
The key tax proposals in Budget 2010 have been discussed below:
Direct tax
| • | The increase in MAT rate from 15 percent to 18 percent is likely to adversely impact IT companies enjoying tax relief under the provisions of section 10A/10B of the Act. The provisions of the proposed Direct Tax Code (DTC) would be keenly awaited to see whether the credit in respect of such MAT would be available under the DTC regime |
| • | As against widespread expectations particularly amongst mid/small size IT companies, no announcements were made on extension of the STP holiday beyond March 2011 |
| • | The anomaly in the tax holiday computation mechanism for SEZ Units (corrected in the previous year’s Budget, although prospectively) has now been retrospectively corrected and is now applicable from the time the SEZ law was introduced. This is certainly a welcome move that is likely to help some of the older SEZ Units |
Indirect tax
Excise duty
| • | Mean excise duty rate has been increased from 8 percent to 10 percent, including IT products such as computers, packaged software, MP3/MP4 or MPEG 4 player |
| • | A 4 percent excise duty has been imposed on microprocessors, floppy discs, hard disks, CD-ROM drives, DVD drives/writers, flash memory, combo drive “meant for external use with a computer or laptop as a plug-in device”. However, these products would continue to enjoy excise duty exemption, when “meant for fitment inside a CPU housing/laptop body” |
| • | An accelerated rate of depreciation has been prescribed for computing reversal of CENVAT credit on removal of used computer and computer peripherals. The following rates have been prescribed for computer and computer peripherals:
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| For each quarter in the first year |
10 percent |
| For each quarter in the second year |
8 percent |
| For each quarter in the third year |
5 percent |
| For each quarter in the fourth and fifth year |
1 percent |
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This should result in a significant benefit to IT players undertaking IT outsourcing contracts through domestic units |
Customs duty
| • | An upfront exemption (instead of refund) of the special additional duty of 4 percent will be available on products imported in a pre packaged form and intended for retail sale. This comes as a significant relief to IT hardware players, who were earlier facing significant challenges in obtaining refunds |
| • | Full exemption from Basic Customs Duty (BCD) and Countervailing Duty (CVD) which is presently available on parts, components and accessories for manufacture of mobile handsets including cellular phones and their parts, has been extended to parts, components for manufacture of battery chargers and hands-free headphones of mobile handsets |
| • | The list of specified raw materials and capital goods used in the electronics/IT industry, on which customs duty exemption is available, has been expanded to include a few more items |
| • | In the previous Budget, customs duty/excise duty was exempt on the value paid towards “transfer of right to use” packaged software, only when the right to use was transferred for commercial exploitation. In Budget 2010, the condition of commercial exploitation has been removed, thereby making the exemption available to packaged software in all cases |
Service tax
| • | Service tax exemption has been granted on value paid towards “transfer of right to use” packaged software, intended for single use, on which customs duty/excise duty has been paid |
| • | The condition of “provided from India and used outside India” for services to qualify as export services has been removed – this would provide a significant relief to service exporters in the IT industry, especially with respect to global contracts having multiple jurisdictions of delivery of services |
| • | A beneficial amendment has been made to enable speedy refund of accumulated tax/duty credits used for exporting services – this should bring about a benefit for IT/ITeS service exporters. There was a Circular of the Revenue earlier on this matter, which has now been made part of the refund notification itself |
| • | The definition of “Information technology software service” has been amended to tax such services when provided even otherwise than in furtherance to business or commerce |
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