Dr. Sanjiv Agarwal

IPL season III is already on and there is lot of activities about it – on ground, on streets, on TV channels, in FM radio, in theatres and in almost every home. Though cheer girls may bring cheers at the ground but this time, is it going to bring cheers at North Block too? Why? What’s new about it? Who is smart – IPL team or North Block team! Let’s see what’s the hot news on sponsorship of events like cricket twenty 20 IPL league.Apart from sponsorships, there are going to be games, contests, events and what not? So while there is going to be fun all around, some people sitting in north block may be simple watchers of what they are going  to miss – a hefty service tax collection just because IPL is happening now.

Finance Bill, 2010 (Union Budget 2010-11) has brought in certain changes in the scope of service tax. For a mega event like ongoing IPL which started last week on 12th March, 2010 the services which would impact from a notified date after the enactment of Finance Bill, 2010 are as under –

Brand Promotion

Services of promoting of a brand of goods, services, event, business entity etc is now proposed to be under service tax net from a notified date (not now). According to new clause (zzzq) of section 65(105) of Finance Act, 1994, any service provided or to be provided to any person, by any other person, through a business entity or otherwise, under a contract for promotion or marketing of a brand of goods, service, event or endorsement of name, including a trade name, logo or house mark of a business entity by appearing in advertisement and promotional event or carrying out any promotional activity for such goods, service or event will be taxable. For this, brand would include any symbol, monogram, label , signature or invented words which indicate any connection with such goods, services, event or business entity. The business entity could be any association of person, body of individuals, company or a firm but not an individual.

This category of taxable service would be different from business auxiliary service where in promotion or marketing of sale of goods produced provided or belonging to client and promotion or marketing of services are already covered. The new service of brand promotion is supposed to have a much wider coverage and now it is intended that a mere brand promotion would attract service tax whether or not it can be directly linked to any service or goods. Many companies like Sahara (Indian Cricket team), Kingfisher (IPL team), Airtel, Vodafone etc engage in such services wherein brands etc are promoted. Presently, if a brand is promoted without any reference to goods or services (like Tata’s campaign of jago grahak jago, or ideal cellular), disputes were raised on taxability of such activities. Any such endorsement which aids in goodwill or value enhancement or brand establishment will be taxable.  In  such cases, the promoter of brand who could be a film actor, cricket player or a model charge substantial amount under an agreement and escape service tax which may not be possible now.

Games of Chance

The promotion, marketing or organizing of games of chance including lottery will now be a new taxable service from a notified date rather than being clubbed with business auxiliary services.

According to clause (zzzzn) of section 65(105) of Finance Act, 1994, any service provided or to be provided to any person, by any other person, for promotion, marketing, organizing or in any other manner assisting in organizing games of chance, including lottery, Bingo or lotto in whatever from or by whatever name called, whether or not conducted through internet or other electronic network will be a taxable service. Many big events do run games and lotteries based on chance. For example, before a match, there could be a contest as to who will be man of the match or the series or which team will win. The services provided for promotion or marketing or organizing such games of change will now be taxable services

Sponsorship Services (Clause zzzn)

In the definition of sponsorship services, exclusion of sponsorship relating to sponsorship pertaining to sports has been removed and any service provided or to be provided to any person, by any other person receiving sponsorship in relation to such sponsorship, in any manner will be taxed. This has been done with a view to tax all such sponsorships relating to games and sports which involve thousands of crores or rupees. It is generally seen that leading business entities lend/ associate their brand name, services or products by sponsoring popular games, sports, event etc for spreading their name, goodwill, reputation etc in the public at large. The visibility thus created is immense. This is done with an intention to commercially exploit the brand which may otherwise not be possible. Though sponsorships are taxable since July 2006, sports related sponsorships were kept out of tax net to promote and encourage sports activities. Looking to the present day size and ever increasing dimensions of sports sponsorships (IPL, commonwealth games etc), service tax on sports related sponsorships will be applicable. However, government may exempt certain category of sports and games in larger national interest and in the interest of that particular sport. Who knows, even commonwealth games may be exempted.

Companies like Coca cola, HP, Airtel, Aircel, Royal Challengers, Samsung, HSBC, Idea Cellular, Hero Honda, SAIL, Dish TV, etc are going to have good times in this twenty 20 season. Thanks to the timing of the tournament and the Finance Act, 2010 still being a month away from the enactment.

In this match of fixing tax liability on brand endorsements, sponsorships and event promotions, certainly IPL is the winner. For North Block team – may be next time, they will have a strong hold on the same.

Author: Dr. Sanjiv Agarwal, FCA, FCS, ACIS (UK) – Sr. Partner, Agarwal Sanjiv & Company, Chartered Accountants.

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