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Total Number of Subscribers: 426 |
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Date: 9th July 2008 |
Compiled by Mr. M. Sathya Kumar |
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Taxing times for IPL? The taxman
is again on the prowl and this time the target seems to be the multi-million
dollar Indian Premier League (IPL).While the Punjab Government is reportedly
giving a "re-look" at the free security and entertainment tax
exemption granted to Punjab Cricket Association (PCA) for hosting IPL
matches, the Eden Gardens is the only stadium where the IPL is paying
entertainment tax. And the income-tax department is supposedly looking at the
income and expenses relating to players, cheerleaders, coaches, and even the
moolah spent on ads. Looks like
the IPL matches, which have become a symbol of the innovative sports world,
have attracted a lot of curiosity from those in charge of the coffers! Mr Aseem Chawla, Partner (Tax Practice Group), Amarchand
Mangaldas, New Delhi, says, "One
of the significant tax challenges with regard to ascertainment of taxability
of team owners is due to the inherent nature of tradability of players in
this format of game. Much would depend on how the contracts between the IPL
and the team owners are interpreted by the tax authorities." When
Business Line asked him, over the email, about what should be the right
course to take, he is of the view that it would be proper if the tax laws and
double taxation avoidance agreements are enhanced operationally to deal with
such crucial issues. "Maybe it is best to look towards the West and see
that how the UK taxes the English Premier League and get some innovative
ideas." Read the Q&A to gains more insights. Excerpts
from the interview: Are
players to be looked at as `assets' of the franchisees from the tax
perspective? When a
franchisee bids for certain player, he wins a `right to play' of such player
during the tournament. The issue which arises here is how to recognise such
right in the books of account. As per Accounting Standard 26 (AS-26) issued
by the Institute of Chartered Accountants of India (ICAI), intangible assets
are to be first recorded at initial cost and then reduced by the amortised
value. The
amortisation method used should reflect the pattern in which the asset's
economic benefits accrue to the enterprise. Here the rights of players will
be valued initially at their bid prices; and after that, based on their
performance, their amortisation value will be calculated. This
probably addresses the concern of a team owner who, after the dismal
performance of some of his celebrated players and his team, intends to
devalue them in his books of account. However, whether the tax authorities
would allow such devaluation as deductible expenditure is doubtful. Do we
have a good definition of an intangible asset? The
definition of intangible asset given in the I-T Act, 1961 is very narrow;
therefore, whether the franchises would be allowed depreciation on such
intangible assets is questionable. In this
regard, Supreme Court's observation in the CIT, Kolkata vs Hooghly Mills
& Co. Ltd case is worth studying. It was held that under Section 32 of
the Act, depreciation is allowable only in respect of buildings, machinery,
plant or furniture, being tangible assets, and knowhow, patents, copyrights,
trademarks, licences, franchises or other business or commercial rights of
similar nature being intangible assets. In the present case, the right to
these players is a commercial right that the franchisees possess; hence,
depreciation can be claimed as deduction by the franchisees. IPL has
icon players. Will big-ticket players attract big-ticket taxes too? It is open
to discussion whether a team owner has to pay capital gain tax if he decides
to transfer a celebrated cricketer to some other team. If the `right to play'
is considered as an asset, the franchisee would be subject to capital gains
tax liability. The
long-term capital gains tax rate at 20 per cent is lower than the regular
effective tax rate of 33.99 per cent on business profit. This huge difference
in the magnitude of the tax rates brings the question to the forefront as to
whether the players are to be treated as stock-in-trade or capital assets. So, are
the players stock-in-trade or capital assets! The term
"capital asset" is defined in Section 2(14) of the Act. Capital
asset is defined as property of any kind held, excluding stock-in-trade and
personal effects. It is common ground that the franchisee owns the right to
the use of the players, that is, own the right of those players playing. Thus, it
can be said that for the franchisees, the players will be a corporeal
property as they possess a right in them. The
players cannot be treated as stock-in-trade of the franchisees, as they are not
in existence for the purpose of being sold but for rendering service. Hence,
these players would fall under the definition clause; the players for the
purposes of IPL will be treated as capital asset for the team owners and
their transfer would be subject to capital gains tax liability. There
have been concerns of taxing foreign players, coaches and even trainers too.
What's your take on that? Foreign
cricketers, who might have received a lower bid than most of the Indian
players, would go home happy as their net fee would still be more, as the
domestic players have to pay 30 per cent tax; foreign players pay only 10 per
cent (plus applicable surcharge and cess). Tax
authorities are already up against the governing body for not withholding tax
at the rate of 11.33 per cent when payments were made to such players. The
taxation of international sportsmen and athletes is specifically enshrined in
Section 115BBA which provides that income earned by non-resident sportsmen by
participating in India in any game or sports and advertisements would be
subject to tax in India. However, one needs to examine this in light of the
relevant tax treaties executed by India with the other countries. Does the
treating of `cricket players' as `athletes' queer the pitch for some foreign
players? IPL has
mainly attracted cricketing stars from New Zealand, Australia, South Africa,
and Pakistan. India has signed double tax avoidance agreements (DTAAs) with
these countries (except Pakistan with which there is a limited treaty). The tax
treaties executed by India contain an Article dealing with taxation of
"entertainers and athletes/sportspersons". The tax treaty with
countries such as Australia, New Zealand and Sri Lanka spells out taxability
of "athletes"; however, the one with South Africa specifies
"sportspersons". Hence, in the case of players of South Africa
there is no controversy, whereas in treaties where the word `athlete' is
used, concerns may be raised. In this regard
one may refer to the commentary on the OECD model tax convention which
indicates that the Article relating to athletes should cover sportspersons in
the broad sense, and not restricted to traditionally thought of athletic
events. With respect to players from countries with whom we do not have a
treaty (for example, Pakistan), they would be subject to tax in India as per
the `source rule' and their liability would be governed under Section 115BBA.
What
about foreign players who are enjoying resident status? As India
does not have a tax treaty with its neighbour, there is a good possibility
that players like Shahid Afridi and Shoaib Akhtar may cross the threshold
limit specified in Section 6 of the Act and thereby become tax residents of
India considering the number of days they spend in India for playing IPL,
training, representing their own country and shooting for advertisements. From the
tax perspective, would physiotherapists possibly escape from the tax net
thrown at them if they were not to be classified as doctors? The point
for physiotherapist is distilled clear. They would fall within the ambit of
independent personal services, as they could be considered as doctors, and
hence their income from IPL would be subject to tax in India, if the conditions
are satisfied. What
about the coaches such as John Buchanan, who is non-resident? As regards
foreign (non-resident) coaches like John Buchanan and fitness trainers, there
seems to be ambiguity. If it can
be said that these persons are employed by the franchisees for their
services, their income would be taxed under the head of `dependent personal
services', otherwise, there is a possibility that their income may not be
taxed in India, subject to relevant treaty provision as generally the residual
clause of most treaties gives the state of residence to tax the income. There
seems to a view that BCCI may lose its charitable status because of IPL? Is
that true? Indian
Premier League seems to have spoilt it for BCCI. As per the Circular No. 395
dated September 24, 1984, promotion of sports/games was considered as a
charitable purpose under Section 2(15) of the Act and, hence, could claim
exemption under Section 11 or Section 10(23C) of the Act. D. MURALI However,
this year's Budget squeezed the breadth of charitable activities to ensure
that only genuine activities such as `relief to the poor' and `education' and
`medical relief' get tax exemptions. Exemptions
for promoting an object of general public utility by undertaking commercial
activities have been done away with. In the light of this amendment, the
exemption claimed by the nodal cricket body may be jeopardised, especially if
IPL is considered as a commercial activity. Lastly,
where do you see all this going. Foreign players being taxed, BCCI losing
status, Pakistani players perhaps complaining that India doesn't have any tax
treaty to help them. There is
still much to do and lots of grey areas regarding tax implications of Indian
Premier League. There are myriad concerns, which are left open to elucidation
and would entail a critical analysis of the facts and circumstances to arrive
at an apposite conclusion. Though the law cannot make available a regulatory
framework for every aspect, it would be proper if the tax laws and double
taxation avoidance agreements are enhanced operationally to deal with these
such crucial issues. Maybe it would be best to look towards the West and see
how the UK taxes English Premier League and get some innovative ideas. KUMAR SHANKAR ROY Source : The Interview
appeared in the Business line |
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