Guest Post: The ‘Taxman’ imposes service tax on copyright licensing agreements

In a move that is bound to increase the cost of entertainment, Pranab da ‘Taxman‘ has proceeded to impose service tax on the licensing and assigning of copyright between two parties. Guest blogger, Ayan Roy Chowdhury ([email protected]), brings us an interesting piece on the law and its implications for the entertainment industry. We’ll hopefully bring you more such pieces on the subject of Tax & IP.

The ‘Taxman‘ imposes service tax on copyright licensing agreements
Ayan Roy Chowdhury

The Union Budget has made the business of licensing of copyrights a taxing affair by making amendments to the definition of “taxable Service” under clause 105 of section 65 in Chapter V of the Finance Act, 1994 which had introduced the service tax regime in India by introducing a sub-clause (zzzzt) :
“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 sub-clause
(a) of clause (1) of section 13 of the said Act.”

The exemption for literary, dramatic, musical and artistic works under section 13 (1) (a) leaves all other rights and related activities under the Copyright Act a “taxable service” and this affects entertainment industry significantly leaving some of the other major revenue earning industries like IT sector untouched as computer programs are covered under the definition of literary works under section 2 (o).

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.”

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 video 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.

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2 thoughts on “Guest Post: The ‘Taxman’ imposes service tax on copyright licensing agreements”

  1. If I ran a theatre group – not a registered company or trust – just running as a sole proprietorship/partnership – and put up plays in prithvi theatre or habitat centre (for instance), would I be subject to service tax?

    There are two ways to put up plays at a venue, when you hire the venue and you carry out everything from publicity to ticket sales and make whatever income that gives you, or there are venues where everything is arranged for you and you get a cut from the ticket sales while the rest goes to the venue. Please shed some light on this.

  2. To streamline my comment, I would like to add that: this regards performance of a play in a venue, and whether performance of a play (whether performed by an unaligned group at a venue, or promoted by the venue) is a taxable service, and if so, where does it say so?

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