Whenever any amendment is proposed at the GST Council Meetings, it has a history to it, which when understood makes the intention clearer. In this article we would be trying to understand the proposed increase in the rate of GST to 18% in relation to the licensing services to broadcast and show original films, sound recordings, radio and television programmes.
The Indian GST law has a lot of complications due to our federal structure, like requirement of identifying the State to which the revenue has to accrue – leading to place of supply determination related issues. Added to this complication is the existence of multiple rates of GST i.e. 0%, 0.25%, 1.5%, 3%, 5%, 7.5%, 12%, 18%, 28% - leading to classification related disputes.
One such dispute under the supply of services is relating to the rate of tax for the distribution services provided in relation to the right to broadcast and show original films, sound recordings, radio and television programmes.
Arrangement for exhibition of films, programmes, etc.
Generally, in the film industry, the producer of a film who owns the intellectual property rights in the film transfers this copyright to the distributor. He then in turn enters into agreements to enable the exhibition of this work. This can be done either by way of a
- Option 1: Further assignment of the rights that the distributor has received from the producer, whereby the distribution rights in the work are transferred to the exhibitor or sub distributor, or
- Option 2: Leasing the exhibition / distribution rights for a certain period whereby these rights are still retained by the distributor which is only leased for a certain period.
The consideration under the above arrangements is generally by way of a profit share.
Nature of services
Licensing services are those where the owner of the rights in the specified works, assigns it to another person (Option 1). Under this arrangement the important aspect is that
- The assignor owns the rights, which he has either received from someone else by way of an assignment or could be his own generated rights, and
- In the process of this assignment, such assignor gives away his rights to the assignee. This can be perpetual or for a specified period.
(Option 2) This when contrasted with merely leasing the rights to exhibit, these rights are not transferred by the owner, but the assignee is only given the right to exhibit the films or programmes. The assignor still owns the rights in the work. This is generally done by way of a lease.
Possible classification entries
The 2 contending service classification codes and the rates of GST are:
- HSN 997332 - Licensing services for the right to broadcast and show original films, sound recordings, radio and television programme etc. – 12% - for Option 1
- HSN 999614 - Motion picture, videotape and television programme distribution services – 18% - for Option 2
Due to the above difference in rates of tax, many of the exhibition agreements were entered as licensing agreements wherein the distributors (assignor), instead of leasing the exhibition or distribution rights, have assigned such rights to the exhibitors or sub-distributors (assignee) for a certain period. Thereby charging GST @ 12% for these agreements. Commercially speaking, by entering into these licensing agreements the distributors have actually given away their exhibition or distribution rights to the assignee for the agreed period.
Under these assignments, in many instances the consideration would still be a profit or revenue share as existed under the leasing arrangement. Though, since the arrangement is that of transfer of rights i.e. licensing services, the classification would not be altered to leasing of such rights merely due to a revenue/profit sharing arrangement.
The assesses have been charging GST @ 12% under HSN 997332 in cases where the exhibition or the distribution rights are transferred and not merely leased. However, the department is of the view that since the consideration is still a revenue share or a commission, the nature of agreement between the distributor and the exhibitor or sub-distributor would still remain a distribution service and not a licensing arrangement. They have missed to note that the classification is not determined on the basis of the manner of determination of the consideration for the services, but depends on the nature of the arrangement between the parties and what kind of rights and liabilities it creates for them.
Thereby, under the licensing arrangement when the exhibition rights are transferred it cannot be regarded as a distribution service provided. This will be classified under HSN 997332 and liable at 12%.
Settling the dispute before it emerges
In order to ensure that the Government gets its share of revenue for the services provided by the distributor, whether by way of leasing or licensing, it has been thought fit (in the 45th GST Council Meeting) to amend the rate of tax for the HSN 997332 to match it with that of HSN 999614 i.e. 18% and thereby making classification an aspect which will not be relevant at all w.e.f. 1st Oct ‘21.
Further, this will lead to all licensing arrangements to broadcast/to show the original films, sound recordings, radio and television programmes, between the producer and the distributor liable @ 18% which was hitherto only 12%. Though, this is only a proposed amendment, and it would be suggested to await the notification, from which the effective date of change will also become evident.
However, this also brings hope for the industry where it is clear now that the licensing arrangement by the distributors prior to the above rate change would be liable @ 12% only. Another interesting aspect would be to look at the deliberations in the GST Council in this matter to give more clarity and strength to this view.
Thereby, the distributors can consider paying GST @ 12% for the period before this amendment becomes effective in cases where the distribution rights are assigned and not merely leased, irrespective of whether the consideration is fixed or a revenue/profit share. Hence for agreements entered, the parties can ensure that invoice is issued, before the rate of tax increases, to the extent of payment received or service provided to ensure that 12% is liable and not the 18% post the amendment, in terms of the time of supply provision u/s 14 of the CGST Act, 2017.
The views mentioned in this article are strictly personal and cannot be considered as a legal view or accepted solution. For any queries or feedback please write to [email protected]
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