(a) Film producers
/distributors
Indian producers/distributors
would be subject to tax in India on the profits realized by them out
of the production/distribution activity. A unique feature of film production
is that the revenue begins to flow only once the production is complete,
which could take anywhere between 6 months to 6 years and most of the
revenue will be generated by the film in the initial period of its release,
compared to its balance useful life. Thus, an important issue that arises
is how the production expense should be written off against the revenues.
Should it be based on (a) the useful life of a film or (b)
in proportion to its revenues? These factors could be subjective and
it may not be possible to project the revenues a film would generate
or the duration for which a film could be exhibited. Realizing these
difficulties, certain rules have been added to the Income Tax Act, 1961
("ITA") which provides that if the rights of exhibition of the
film are sold or if the exhibition of the film has begun, then the entire
cost of production is allowed as an expense for computing profits.244
However, if the film is not released for at least 90 days before the
year's end, then the cost of production equivalent to the revenues generated
from exhibition or sale of the film are allowed as a deduction in that
year. The balance cost of production is allowed as a deduction in the
subsequent year.
As opposed to this,
the U.S. Internal Revenue Code provides that the cost of producing a
film could be amortized as follows:245
(i) Straight-line
method of depreciation Under the straight-line method of depreciation,
the cost of the film is depreciated ratably (i.e. in equal amounts)
over its useful life, which has been prescribed at 15 years.
(ii) Income forecast
method of depreciation Income forecast method of depreciation follows
the flow of income principle, which matches allocable portions of
the cost of property with anticipated income. Under this method, the
unamortized capitalized costs will be amortized based on the following
formula:
Unamortized
capitalized costs X Current net year income
Total estimated net income to be derived by film
(b) Artists
and technicians
There are no specific
provisions dealing with how the taxable income of artists, directors
and other technicians have to be computed. In their cases, as in the
case of other professionals, income is computed on the basis of the
method of accounting followed by them.
(c) Foreign studios
- distribution activity
Major source of
revenue for foreign studios would generally be either from theatrical
distributions in India or from the broadcast of films on cable or satellite.
As per the provisions of the ITA,246
the distribution fees that are paid by the distributors in consideration
for the Indian distribution rights of the films should be treated as
business income. Business income of a studio located in a country that
has entered into a taxation treaty with India would be taxable in India
only if such a studio has a permanent presence, either directly or through
an agent, in India. If such a studio has a permanent presence in India,
then the business income attributable to the Indian presence could be
subject to tax in India at the rate of 42% (inclusive of a 5% surcharge)
on a net-income basis.
(d) Foreign studios
production activity
The ITA provides
that no income shall accrue or arise in India for a non-resident company,247
partnership,248
or individual249
engaged in the shooting of a film in India.250
Thus, if such a foreign studio were engaged in the shooting of a film
in India, it would not have to pay any taxes in India as long as its
activities are restricted to shooting of the film.
(e) Taxation
of non-Indian artist performing in India
Generally, the Double
Taxation Avoidance Agreements entered into by India with other countries
provide that when any income accrues to any artist (irrespective of
the fact of whether it is paid to him or not) on account of his personal
performance/activities in India, such income may be taxed in India.
The Central Board of Direct Taxes, India ("CBDT") has issued
a circular,251
clarifying the issue of taxability of a non-resident artist performing
in India. This provides that income received by a non-resident could
be either regarded as income covered within "Article 17 on "Artists"
or "Royalties," depending on the nature of the income. The provisions
of this circular could be summarized as follows:
(i) When an artist
performs in India without any consideration, there would not be any
tax in India, as he does not receive anything in India for such a
performance.
(ii) Amounts received
by an artist for live performance and endorsement fees, which relate
to such performance would be taxed in India under Article 17.
(iii) Amounts
paid to an artist for acquiring copyrights of his performance in India
for subsequent sale in India would be taxed as royalties, but if such
copyrights are to be sold overseas, then such amounts will not be
subject to tax in India.
(f) Tax incentives
in India
(i) Export
Incentives
The ITA provides that a certain percentage of profits generated by
an Indian company from the export of film software, music software,
television software, television news software including their telecast
rights subject to fulfillment of some conditions, will be allowed
as a deduction while computing the taxable income of such an Indian
company.252
(ii) Benefits
available for the shooting of film in backward area
Another provision of the ITA provides that a prescribed percentage
of profits (which are in the range of 25% to 100%) generated by an
industrial undertaking set up in backward states or districts as may
be notified by the Central Government, may be exempt from tax in India
for a period ranging from three to twelve years, beginning from the
year in which the industrial undertaking begins to manufacture an
article or thing.253
The courts in the case of Trimurthy Films Pvt. Ltd.254
and D. K. Kondke255
have held that the activity of producing cinematograph films is an
industrial undertaking. In the case of Y. R. Chopra256
the Bombay Income Tax Tribunal held that in the case of a film producer,
each film is a new product, which requires a separate establishment
and new advertising machinery. Hence, each film in the case of a producer
is a separate and independent industrial undertaking. Thus, if a film
is produced in a notified backward area, then a certain percentage
of the profits generated by the film production house could be exempt
from tax in India for the prescribed period.
(iii) Benefits
available to artists, etc.
Income received by a resident of India whether an author, playwright,
artist, musician, or actor in foreign currency and brought into India
in convertible foreign exchange, within six months from the end of
the financial year in which such income was earned from a non-resident
employer for services rendered in connection with such a profession,
would be exempt from tax to the extent as mentioned in the following
table:257
|
Financial
Year
|
Tax
Exemption
|
|
2001
- 2002
|
45%
|
|
2002
- 2003
|
30%
|
|
2003
- 2004
|
15%
|
|
2004
- 2005 onwards
|
0%
|
|
Source:
Section 80RR of ITA
|
(iv) Multiplexes
set up in non-metropolitan areas
With a view to pro mote multiplexes in non-metropolitan areas (I.e.
areas other than Kolkata, Chennai, Delhi and Mumbai), the Finance
Act, 2002 has introduced an exemption from tax for 50% of the income
of the multiplexes for a consecutive period of five years, provided
such multiplex theaters are constructed during the period beginning
on April 1, 2002 and ending on March 31,2005.
(g) Some Indirect
Tax Provisions in India
(i) Excise
Duty
Excise duty is levied on manufacture or production of exciseable goods
in India at rates specified in the Schedules of the Central Excise
Tariff Act, 1985 ("CETA"). Generally, the CETA has provided
for excise duty at the rate of 0% or 16% ad valorem depending on the
nature of the item manufactured or produced. Items such as exposed
and developed films, recorded video cassettes which are intended for
television broadcast and are supplied in formats, like U-matic, Betacam,
or any other similar format, are subject to excise duty at the 0%
rate. On the other hand, unexposed cinematograph film and activity
of cutting, slitting and perforation of jumbo rolls of cinematograph
film are subject to the excise duty at the rate of 16%.
(ii) Sales
Tax
If the goods are sold by a resident of one State to a resident of
another State, then it will be governed according to the provisions
of Central Sales Tax Act, 1956 ("CST") and if the sale is between
residents of the same State, it will be governed according to the
provisions of sales tax legislation of the respective state, for example
the Bombay Sales Tax Act, 1959 ("BST") is applicable to the
state of Maharashtra. Further, the sale of goods made in the course
of export is governed according the provision of the CST, which provides
that there should not be any tax in India on goods exported out of
India.
The Bombay High
Court, in the case of Patel India Pvt. Ltd.258
and Durga Khote Production,259
found that a transaction wherein a film is sold is not a sale of goods
but a work of art and thus not subject to sales tax. However, since
May 1, 2000, the BST has been amended to provide for a levy of tax
on the sale of certain intangible properties such as copyrights and
designs. Further, it provides for a sales tax at the rate of 4%. Now,
since the above items are treated as goods for the purposes of BST,
any assignment of a copyright could be treated as a transaction of
sale of goods. Therefore, when the copyright of a cinematographic
film or any dramatic or musical work is sold, there could be sales
tax implications.
(iii) Entertainment
Duty
In addition to the sales tax and excise duty, entertainment duty is
levied by the state governments on payments received for admission
to the 'entertainment' at the rates specified by the respective State
legislation. Broadly speaking, entertainment has been defined to include
any exhibition, performance, amusement, etc. to which a person is
admitted for payment.
(iv) Service
Tax
An indirect tax at the rate of 5% is levied by the Central Government
on certain services provided by the service providers. Currently,
a service tax is levied in respect of services such as broadcasting,
event management, sound recording, video production, cable operators,
etc.261
