WIRC. Controversial Issues Relating To Overlaps In Indirect Taxes. CA Ranjeet Mahtani. Media & Entertainment Sector. 20 th August, 2011

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1 WIRC Controversial Issues Relating To Overlaps In Indirect Taxes Media & Entertainment Sector CA Ranjeet Mahtani 20 th August, 2011

2 And in my opinion, entertainment in its broadest sense has become a necessity rather than a luxury in the life American public - Walt Disney (b.1901 d.1966) Media and entertainment industry is projected to grow to US $ billion by 2013 FICCI & KPMG Report, 2009

3 Fundamental Issues Multiplicity of taxes Cascading effect of taxes Lack of complete adjustment (fungibility) of taxes / duties paid - inter-se credit impermissible in case of Central Excise Duty / CVD, Service Tax State VAT, Central CST Entertainment Duty Double taxation Plethora of taxes, uncertainty, limited credits coupled with rampant piracy and parallel market gobbles up margins / returns on investment

4 Issue 1 Entertainment Duty Entry 62 of List II (State List) of Seventh Schedule to the Constitution Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling For e.g. Bombay Entertainment Duty Act, 1923 Levied and collected by the State Entertainment duty is inter alia levied on admission to any entertainment to exhibition by cinematograph. Entertainment duty is also levied on exhibition with aid of any antennae with a cable network or display of visuals using any other apparatus including DTH Duty of entertainment varies from 15% to 45%

5 Issue 1 Commercial activities of pre-production, production, post-production, distribution and exhibition at different stages are levied and assessed to varying Indirect Taxes Degree of credit (set-off) is enabled No fungibility between the plethora of Indirect Taxes and Entertainment Duty The chain of economic transactions leading to the delivery of content to audience is saddled with a high degree of taxes / duties From a consumer standpoint there is a large outlay towards taxes and duties By its nature, burden of Indirect Taxes is shifted to the consumer

6 GST and Issue 1 Proposed GST to subsume Entertainment Duty This will resolve the long-standing prayer of the industry to abolish multiplicity of taxes / rationalize rates, and enable fungibility of Entertainment Duty with other Indirect Taxes Contrary indications from certain States The First Discussion Paper and TFC Report recommend that Entertainment Duty will be subsumed (other than that levied by local bodies) Art. 243X of the Constitution levies by municipality For e.g. SHOW TAX (levied in major cities) Complete resolution?

7 Issue 2 Equipment hire / lease A) Equipment required by production houses in the process of movie-making B) Consumer premises equipment (CPE) placed by cable operators on customers site Whether such transactions are liable to VAT or Service Tax? In order to assesses and pay taxes, determine the true nature and character of the transaction Supreme Court In Playworld Electronics [1989 (41) ELT 368 (SC)] In Gosalia Shipping P. Ltd. [(1978) 113 ITR 307 (SC)] True nature and character of transaction and its taxation

8 Issue 2 Transfer of right to use goods equipment, is a species of deemed sale, liable to VAT Parameters laid down by the Supreme Court in BSNL s case [2006 (2) S.T.R. 161 S.C.] 91. To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes : a. There must be goods available for delivery; b. There must be a consensus ad idem as to the identity of the goods; c. The transferee should have a legal right to use the goods-consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee; d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor this is the necessary concomitant of the plain language of the statute - viz. a transfer of the right to use and not merely a licence to use the goods; e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.

9 Issue 2 Service Tax under the taxing entry for supply of tangible goods for use service Equipment hire / lease - 65(105)(zzzzj) of the Finance Act, 1994 Taxable service means any service provided or to be provided, - to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances

10 Issue 2 CBEC s contemporaneous clarification Transfer of the right to use any goods is leviable to sales tax / VAT as deemed sale of goods [Article 366(29A)(d) of the Constitution of India]. Transfer of right to use involves transfer of both possession and control of the goods to the user of the goods Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes, etc., offshore construction vessels & barges, geo-technical vessels, tug and barge flotillas, rigs and high value machineries are supplied for use, with no legal right of possession and effective control. Transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is treated as service Proposal is to levy service tax on such services provided in relation to supply of tangible goods, including machinery, equipment and appliances, for use, with no legal right of possession or effective control. Supply of tangible goods for use and leviable to VAT/sales tax as deemed sale of goods, is not covered under the scope of the proposed service. Whether a transaction involves transfer of possession and control is a question of facts and is to be decided based on the terms of the contract and other material facts. This could be ascertainable from the fact whether or not VAT is payable or paid. [Emphasis supplied]

11 Issue 3 Copyright Exploitation is an action of Sale (incl. deemed sale) of goods, and liable to VAT, or Rendition of services, exigible to Service tax First, there cannot be double taxation on the same article. SC in TISCO s case [1977 (1) ELT J61 (SC)]

12 Issue 3 Copyrights are species of goods Intangibles, See Section 13 and 14 of the Copyright Act, 1957 Supreme Court in TCS s case [(2005) 1 SCC 308] In India the test, to determine whether a property is goods, for purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed etc. 27. In our view, the term goods as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. Article 366(12) of Constitution goods includes all materials, commodities and articles;

13 Issue 3 Ratio also propounded in later cases of the Supreme Court BSNL Sunrise Associates [(2006)5 SCC 603] State Legislatures have levied VAT on transactions (purchase or sales of) involving intangibles For e.g. Maharashtra levies 5% VAT on intangibles enumerated in C-39 Goods of intangible or incorporeal nature as may be notified from time to time by the State Government in the Official Gazette Notification No. VAT-1505/CR-114 taxation-1, dated Sr # 9: Copyright Notification No. VAT/1511/CR54(2)/Taxation-1, dated , amends the entry to read Copyrights excluding those for distribution and exhibition of cinematographic films in theatres and cinema halls Most States have nil rated transactions involving copyrights

14 Issue 3 Sale (outright), i.e. permanent transfer is liable to VAT All ingredients of sale transaction are fulfilled Transfer of right to use goods (incl. copyright), is a species of deemed sale and liable to VAT Article 366(29A) A.V. Meiyappan s case [(1967) (20) STC 115 (Mad.)] Supreme Court in BSNL Para. 39. Similarly, the tile to the goods under Clause (d) remains with the transferor who only transfers the rights to use the goods to the purchaser. In other words, contrary to A.V. Meiyappan s decision a lease of a negative print of a picture would be a sale. Transactions involving any form of exploitation of goods (permanent or temporary), is a subject within the taxing domain and powers of the State, and is its sole and exclusive prerogative Entry 54 of List II of Seventh Schedule to Constitution Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I

15 Issue 3 1 st July, 2010, taxing entry for Copyright Services effective 65. In this Chapter, unless the context otherwise requires, - (105) taxable service means any service provided or to be provided, - (zzzzt) to any person, by any other person, for (a) Transferring temporarily; or (b) Permitting the use or enjoyment of, any copyright defined in Copyright Act, 1957, except the rights covered under sub-clause (a0 of clause (1) of section 13 Service Tax is levied under Entry 97 of Seventh Schedule of the Constitution List I (Union List) of the 97. Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists

16 Issue 3 Re-characterization Transaction in goods is re-characterized and re-fashioned as one for services The same transaction may involve two or more taxable events in its different aspects. But, the fact that there is overlapping does not detract from distinctiveness of the aspects Supreme Court in BSNL Levy of both taxes is on the same value / consideration The same value (only one source of consideration) is sought to be taxed to VAT (as goods) and Service Tax (as services) Without any abatement

17 Issue 3 Ultra-vires the Constitution of India Article 246 postulates exclusivity qua the lists Supreme Court in Committee for Protection of Democratic Rights case No overlapping in the field of taxation. A tax if specifically provided for under one legislative entry effectively narrows the fields of taxation under other related entries Supreme Court in Godfrey Philips case In our Constitution, conflict of taxing power of Union and States cannot arise Supreme Court in Kesoram Industries case Exclusivity to be maintained Payment of Service Tax and VAT are mutually exclusive Supreme court in Imagic Creative s case Writ Petitions challenging validity of Service Tax entry pending. The solution: Goods and Services Tax?

18 Issue 4 No set-off inter-se Central levies and State levies Curtailment of tax credits CENVAT Credit Amended definition of input service, which denies credit in relation to personnel expenses and other business expenditure For e.g. Input Tax Credit (Maharashtra Value Added tax Act, 2002) Rule 53(6) of the Rules which stipulates that for a dealer whose sales receipts (arising from all business transactions, except stock-transfers) is less than 50% of the gross receipts, the set-off will have to be restricted only to such products / goods that are sold or resold within 6 months from date of purchase, or are stock-transferred outside the State. The provision requires that credit is available only to the extent of sale / resale of corresponding goods Office stationery, film posters, raw stock of film, etc. Cascading impact of taxes

19 Thank You