This article has been written by Tushar Sachdev pursuing an Executive Certificate Course in US Accounting and Bookkeeping from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

Taxation is majorly divided into two types in India. Direct tax and indirect tax. Direct tax is the tax that is directly paid by citizens to the Indian government. An example of direct tax is income tax, in which citizens assess their income annually and pay tax on it directly to the government. Whereas in indirect tax, tax is collected by a person from another person and paid to the government. Examples of indirect taxes are Goods and Service Tax (GST), VAT, Excise, Service Tax, etc. GST is collected by businesses from other people while providing goods and/or services and paid to the government. Different tax laws are framed by the government for charging or collecting taxes and paying them to the government. Let’s dive into the tax policies pertaining to the music industry.

Download Now

Direct tax

There are different types of income earned in the music industry and each is taxed differently. In the music industry, income is earned by selling music directly to any production house for a movie. By way of royalty income for the right to use music copyrighted by the music company or musician, live performance by a musician or income earned by a musician providing professional services to a music company. Also, there are different tax laws for different types of people like for individuals, companies, Partnerships, etc.  Let’s look at the tax consequences of each type of income for different types of people in the music industry.

Income tax

There are different rates of tax for different types of people. Like for individuals, income is bifurcated into different slabs and each slab has a different rate, for example. For Income up to Rs. 250000/- tax is Nil, Income slab Rs. 250000-500000 tax is 5%, Income Slab Rs. 500000-1000000 tax is 20%, Income Slab Exceeding 1000000 tax is 30%. The government has given extra benefits to senior citizens and super senior citizens by providing extra exemptions of up to 3 lakhs and 5 lakhs, respectively, in place of the basic exemption limit of 2,50,000. Accordingly, partnership firms are taxed at a flat rate of 30%, whereas body corporates are taxed at 25%, providing relief at this rate for certain body corporates satisfying certain conditions.

So based on the type of person musicians or music companies are, they are  taxed as per the above rate for income earned by way of producing and selling music during the financial year. Cess at 4% is charged on income tax over and above tax. Also, a surcharge is charged at different rates if income exceeds a certain limit.

Income earned from concerts is also taxed similarly. Income received by musicians for performing in concerts is taxed under the heading “Income from business and profession. Also, the income of organisers will be under the same heading.

Royalty income

Royalty income, received by music companies or individuals involved in the creative industry, is subject to a special tax rate as per the latest amendment to the Finance Bill, 2023. This amendment aims to provide clarity and consistency in the taxation of royalty income, ensuring fairness and transparency in the music industry.

Under the revised tax structure, royalty income is taxed at a reduced rate of 20%. This preferential tax treatment recognises the unique nature of royalty income, which often arises from intellectual property rights, creative endeavours, and licencing agreements. By offering a lower tax rate, the government aims to incentivize and support the creative industry, encouraging artists, musicians, and content creators to continue producing valuable works. Previously, it was taxed at 10%. Also, there is a deduction allowed under Section 80QQB of the Income Tax Act of 1961 up to Rs. 300000/-. A condition of minimum royalty of Rs. 150000/- to be received in a financial year is to be satisfied to claim this deduction.

Applicability

The special tax rate of 20% applies to royalty income derived from various sources, including:

  • Music royalties: Income earned by artists, composers, and musicians from the use or exploitation of their musical works, such as song royalties, performance royalties, and mechanical royalties.
  • Literary royalties: Income received by authors, writers, and publishers from the sale or licensing of their literary works, including books, articles, and manuscripts.
  • Patent royalties: Income generated from the licencing or sale of patented inventions, designs, or processes.
  • Trademark royalties: Income derived from the use or licencing of trademarks, brand names, or logos.
  • Franchise royalties: Income earned from franchising agreements, where a franchisor grants the right to use their business model, trademarks, and processes to a franchisee.

Reporting and compliance

Individuals or music companies receiving royalty income must accurately report and declare it in their tax returns. Proper documentation, such as contracts, invoices, and royalty statements, should be maintained to substantiate the income received. It is crucial to comply with the tax laws and regulations to avoid potential penalties or legal issues.

Impact and benefits

The introduction of a special tax rate for royalty income offers several benefits and implications for the music industry:

  • Encouragement for creativity: The reduced tax rate provides a financial incentive for artists and creators to continue producing original and innovative works, fostering a vibrant and diverse music ecosystem.
  • Fairness and consistency: The amendment ensures uniformity and fairness in the taxation of royalty income, addressing any ambiguities or inconsistencies that may have existed previously.
  • Support for emerging artists: The preferential tax treatment can assist emerging artists and small music companies in retaining a larger share of their earnings, allowing them to invest in their careers and further develop their craft.
  • Economic growth: By supporting the creative industry, the government recognises its significant contribution to the economy. A thriving music industry can generate employment opportunities, boost tourism, and enhance the overall cultural landscape.

Indirect tax

Indirect tax comprises mainly GST and was introduced in 2017. Before that, there were taxes like excise duty, service tax and VAT. The introduction of GST has adversely impacted the music industry. Before GST, musical instruments were sold and VAT was charged @ 5.5% or 14.5%, depending on the state. But after the introduction of GST, GST is levied differently on Western instruments and in a different manner on handcrafted instruments. GST is levied @ 28% on western instruments and GST on hand made musical instruments is nil. So music instruments like drums, guitars, and pianos are charged at 28% and some handmade Indian instruments are not charged any GST, only to promote these artisans and local industry. 

The sector has taken a hit due to the significant increase in prices of western musical instruments due to the high rate of GST charged on these instruments, making students, amateurs and middle class people hesitant to purchase these costly instruments.

CDs, tapes, DVDs, and USBs are subject to GST at 18%. Sound recorders, amplifiers,and sound reproducers are subject to GST at 28%. 

Now let’s take a look at GST on other types of income in the musical industry. 

Live music concerts, dance performances, and theatre shows fall under the category of entertainment events. They are subject to GST.

  1. Events with ticket prices below Rs. 250/- are exempt from GST.

Events with ticket prices below Rs. 250/- are considered exempt from GST. This exemption is in place to support small-scale events, making them more accessible and affordable for both organisers and attendees. It encourages the growth and participation in cultural and artistic activities within the community.

  1. Events with ticket prices above 250 up to 500/- are subject to GST at 12%

Events with ticket prices ranging from Rs. 250/- to Rs. 500/- are subject to a GST rate of 12%. This rate applies to a wide range of entertainment events, including live music concerts, dance performances, and theatre productions. It aims to strike a balance between supporting the event industry and generating tax revenue for the government.

  1. Events with ticket prices exceeding Rs. 500/- are subject to GST at 18%

Events with ticket prices exceeding Rs. 500/- are subject to a higher GST rate of 18%. This rate applies to premium and high-end entertainment events, such as exclusive concerts, VIP shows, and large-scale theatrical productions. The higher tax rate is intended to generate more tax revenue and fund various government initiatives while still allowing for the enjoyment of luxury entertainment experiences.

It is essential to note that GST is applicable not only for selling tickets but to other activities too, like sponsorship services, advertising and hospitality services.

Small event organisers with an aggregate annual turnover of up to Rs. 1.5 crore have the option to avail composition schemes and pay GST at a flat rate of 1% of their turnover. 

Event organisers have the benefit of claiming GST paid on their input goods and services as an input tax credit. Organisers availing of the composition tax payer cannot avail input tax credit. Musicians working as professionals in a music company on a salary basis are not  required to pay any GST, as salary income is out of the purview of GST and is taxed only under the Income Tax Act, 1961. 

A music company selling music to another person is liable to charge and  pay GST @ 18%. Also, any person providing online services is also liable to charge and pay GST. If any person provides OIDAR (online information database access and retrieval services) to a person in India, there will be taxes based on whether he/she is registered or not. If a non-resident provides OIDAR services to a registered person, then the registered person will be liable to pay GST under the reverse charge mechanism, i.e., the recipient of services is liable to pay GST. But if such a non resident person provides OIDAR services to a non resident person, then such a non resident will be liable to pay GST in India.

Therefore, if any Non resident person outside India provides services related to music online in India by way of access to music online to a non registered person in India, then such person will have to get himself registered and pay GST in India.

Conclusion

The tax structure in India is quite vast for any industry and the same is true for the music industry too. There are various tax implications for the music industry in India. It is mainly divided into two parts: direct tax and indirect tax. Various income streams in the music industry, like income from selling music directly, salary income and royalty income, are taxed as per the structure, like individual, Firm or body corporate, at different rates as per the rate applicable to that particular form. Also, TDS is deducted from royalty income and is claimed as a tax credit at the time of paying annual income tax.

With the introduction of GST under the indirect tax system, the musical industry is highly affected due to the high GST rate on western musical instruments. The overall entertainment industry is taxed highly under GST. Even a non-resident providing services in India to a Non registered person is required to get registered in India and collect and pay GST to the Indian Government.

To conclude, tax policies in India have highly influenced the musical industry, especially after the introduction of the Goods and Services Tax.

References

RELATED ARTICLESMORE FROM AUTHOR

LEAVE A REPLY

Please enter your comment!
Please enter your name here