In a bid to address the concerns of several animation, visual effects (VFX), gaming, and other audio visual services companies, a plea has been made to the Ministry of Finance to clarify the applicability of Goods and Services Tax (GST) on export services provided by the industry. These companies, which offer services like sound recording, dubbing, etc, are currently facing distress as the GST department has issued show cause notices to a few companies, demanding payment of GST on their exports.
The animation and VFX companies, represented by FICCI, have highlighted that they provide crucial localisation services to clients both within and outside India, including major corporations such as Netflix and Disney. These services involve activities like dubbing, subtitling, voice casting, translation, song recording, and mixing for movies and web series (hereinafter referred to as ‘localisation services’). The companies receive payment in convertible foreign currency for their electronic delivery of services.
The primary concern raised by the industry is that the imposition of GST on IT-enabled services, including localisation and other similar sectors, would make Indian companies less competitive in the global market. “This could potentially lead to a loss of business for Indian companies as clients might opt for cheaper alternatives from countries that do not impose taxes on such services. Moreover, this move could negatively impact the digital India mission and the country’s ease of doing business index,” mentioned the founder of one of the leading animation studio in India.
The controversy arises from the interpretation of Section 13(3)(a) of the Integrated Goods and Services Tax (IGST) Act, 2017. The GST department argues that the digital files downloaded through the internet are items on which the companies perform activities resulting in the supply of performance-based services on goods physically made available in India. Thus, according to the department, the place of supply for such services would be considered within India.
However, the animation and VFX companies contest this interpretation. They argue that their localisation services do not involve the supply of physical goods, and there are no activities performed on physical goods as required by Section 13(3)(a). The companies point out that the recipient of the service provides the data electronically. Therefore, they believe that the place of supply should be considered outside India, as per Section 13(2) of the IGST Act.
The companies also draw attention to the fact that IT-enabled services have been treated as “export of services” for the purposes of Service Tax Law since 2005. They stress that these services should be treated similarly under the GST regime to maintain consistency and ensure competitiveness in the global market.
To support their case, the animation and VFX industry refers to a similar issue that arose during the service tax regime concerning the export of software services. To address concerns about competitiveness, the Central Board of Indirect Taxes and Customs (CBIC) had issued a circular in 2018 clarifying that software services rendered with data provided by the recipient qualify as zero-rated supply and are not subject to taxation.
Nishith Desai Associates head of technology and media practice Gowree Gokhale shared, “In my view, for growth and sustenance of any industry, a reasonable, clear and stable tax regime is a must. Through various initiatives, the government has indicated a clear focus on growth of the animation and VFX industry in India. In fact, the Indian IT industry could flourish due to an effective tax regime. The approach of GST authorities on interpreting Section 13, seems to be clearly against the growth and even against the spirit of the law.”
Given the potential ramifications for the animation, VFX industry, the FICCI AVGC Forum representing these companies has urged the Ministry of Finance to provide an urgent clarification on the correct GST position regarding IT-enabled services rendered to overseas clients. They emphasise that such clarification is necessary to avoid deterring foreign clients and to protect the competitiveness of Indian companies in the global market.
FICCI assistant secretary general Leena Jaisani commented, “Clarity on the applicability of GST on export services in the animation and VFX industry is crucial to safeguard the competitiveness of Indian companies in the global market. We urge the Ministry of Finance to provide an urgent clarification to avoid deterring foreign clients and ensure a conducive environment for growth and innovation.”
The industry’s plea highlights the need for a balanced approach to taxation, taking into account the dynamics of the digital economy and the global competitiveness of Indian businesses. A swift resolution and clarity on the applicability of GST on export services in the animation and VFX industry are vital to ensure a conducive environment for growth and innovation in this sector which is expected to reach INR 190 billion by 2025.
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