The Business and Taxation of Sports in India
THE COMING OF AGE OF SPORTS IN INDIA
Before we discuss the Taxation of Sports and sporting incomes in India, it is important to understand the context behind the rise of sports as a past-time in India. The level of Investments in sports in developing nations is markedly less as compared to developed nations, It is therefore no surprise that recreational activities such as sports would not lie very high on the list of priorities of a country such as India. A strong correlation between the level of economic development and sporting development in a country has been demonstrated by several documented studies, It has been also been demonstrated using statistical sampling that the probability of a country’s athletes wining gold medals at the Olympics increases in direct proportion to increase in per capita GDP and population[1]
In this context it should be a given that with economic prosperity, rising income levels, and increasing awareness amongst the populace, sports and sporting events would find increasing favor with the Indian populace not just as a test of skill and strength but also as an entertainment and recreational event. A natural consequence of such increase in sporting activity would be the influx of business interests and capital to such events, and athletes by way of sponsorship, leading to an increase in incomes of sporting bodies and a rise in prize purses, appearance fees for the sports persons involved.
Of all the sports in India, as expected Cricket by far still remains the most popular sport, garnering the lion’s share of sponsorship money as well as viewer interest but, thanks to the exploits of star athletes such as Saina Nehwal, Leander Paes, Narain Karthikeyan, Sunil Chetri and others, the profiles and popularity of other sports like badminton, tennis, F1, and football has also increased.
THE NEW MODELS FOR EARNING REVENUES IN SPORTS
India’s most successful professional sports league, The IPL earns hundreds of crores in profit on an annual basis. The success of the league can be demonstrated by the fact that the league earned a surplus of Rs 237 crores in its fifth edition[2] . The success of the IPL has led to a proliferation of interest in the creation of professional sporting leagues and annual events in other sports as well. The inaugural edition of the Indian Soccer League, for example, racked up almost 429 million viewers[3] to emerge as a potent television property. The monetization of such viewer interest is often essential for the continued existence of such leagues and sporting events. This has led to adoption of proven revenue models as prevalent in other countries (primarily the United States of America, a leader in professional sports leagues) and in other cases creation of new business models.
The chief sources of revenue for professional sporting events include:
MEDIA RIGHTS
Media/Broadcast rights include the right to carry and display the respective sports events on traditional as well as new media such as television, theaters, radio, and the internet.
The sale of broadcasting and media rights is now the biggest source of revenue for most sports organizations, generating the funds needed to finance major sporting events, refurbish sports stadia, and contribute to the development of sport at grassroots level. Of the estimated $1.7 billion paid by broadcasters for exclusive rights to broadcast the 2008 Beijing Olympic Games, about half went to the organizing committee for the Games and the other half to the broader Olympic movement, including National Olympic Committees and the international federations for the various Olympic sports.
Meanwhile, the royalties that broadcasters earn from selling their exclusive footage to other media outlets enable them to invest in the costly organizational and technical undertaking involved in broadcasting sports events to millions of fans all over the world. Thus Beijing Olympic Broadcasting, which as host broadcaster for the Beijing Games supplied television signals from all the Olympic venues, deployed 6,000 staff, 1,000 cameras, 575 digital video tape recorders, 350 broadcast trailers and 62 outside broadcast vans. [4]
Television rights pertain to the telecast of shows through terrestrial or satellite television, whether in one country or across different countries. Television rights are often very lucrative, both for the organizers and the telecasters. Television rights are thought to account for about 60% of the income of the Tour de France, which is broadcast in over 180 countries. The English Premier League, whose matches are broadcast in 212 countries, sold domestic and international television rights for the three seasons 2010-2013 for an astonishing figure of £3.2 billion. [5]
Theatrical rights, as well as rights to broadcast sports over radio are some of the other valuable properties in the business of sports. In the internet era rights to distribute content and images online have also become an additional revenue stream for sports franchises. The importance of these new mediums can be gauged by the fact that even periodic updates and the right to feature live score feeds of cricket matches have become hotly contested properties in India.
SPONSORSHIPS
It is widely estimated that FIFA earned almost $ 1.4 Billion by way of sponsorship deals during the 2014 world cup in Brazil [6] . All over the world marketers spent almost $14.35 billion on sports sponsorship, as per several reports sports takes up almost 70% of all sponsorship business worldwide. [7]. In the Indian context brands spent around Rs 4100 crore on various sports sponsorships in the year 2013 [8] Sponsorships provide a stable source of revenue for the federation, league, franchise and athlete and at the same time provide another avenue for brands to reach out to potential customers and clients.
TICKET FEE AND OTHER SOURCES
Professional sporting leagues also make money through franchise fee’s which are sums paid by interested parties in order to secure rights to operate a franchise in such league, other sanctioned events such as the cricket world cup, Olympic games earn revenues for the organizers through gate revenues or ticket fee. Other local sources of revenue include concession stands, restaurants operated by teams in their stadiums, merchandise sales and membership’s packages offered by them to their patrons.
TAXATION OF SPORTING INCOMES
Taxation of incomes in India is governed by the income tax Act, 1961 (“act”) which provides for specific provisions for the taxation of incomes earned from sporting pursuits and performances.
SPORTING EVENTS.
To provide encouragement to sports in India and to promote sporting endeavors, the income tax act provides that Incomes arising from any sporting event held in India to any person or persons can be fully exempted from Income tax. This can be accomplished based on approvals by the central government using the provisions in section 10(39) of the income tax act 1961.
As per the section, any specific income arising can be exempted provided:
Such event is sanctioned/approved by the international body regulating such sport
The event has the participation of more than two countries
The event has been notified by the central government in the official gazette for this purpose
This exemption shall extend only to incomes earned specifically from such events and to no to any other incomes earned by the organizers of such sporting events. Incomes exempted may include gate revenues, sponsorship money etc.
Almost all international sporting events organized in India are tax exempt due to this provision. The earnings of sports persons and the organizers from other revenue sources which are not explicitly covered under the exemption notification follow the general law of taxation and are taxed normally.
FOR LEAGUES/ORGANIZERS
Professional sports leagues, such as the IPL and other “premier” leagues that have emerged in recent years are for profit ventures and are therefore , quite justifiably, not always accorded exemption by the government. The lack of such recognition from the government often forces such leagues to adopt various complicated structures involving multiple layered entities, both offshore as well and local, this increases the cost of compliance but helps bring down the total tax liability.
Other sports bodies such as various sports federations work without profit motives, more often than not, and are therefore organized as non-profit entities in the form of trusts that have exempt status in the form of Section 12A registration under the income tax act.
FOR SPORTSPERSONS
The rise in sporting events and the creating of sporting leagues has brought with it an increase in income for sportspersons, while there exist many unique mechanisms that can be used to manage the tax incidence on such income we have attempted to explain the basic tenets of taxation for individual sportspersons. There are different provisions in place that govern the taxation of resident, and non-resident sportspersons, these have been addressed respectively below.
INDIAN RESIDENTS
Indian tax law stipulates for the taxation in India of all incomes earned by residents regardless of where such income was earned (read taxation of non-residents). There exist several possible scenarios which would affect the effective tax rates of Incomes earned by sportspersons. Depending upon the circumstances can be either classified as incomes from Business and profession, salaries, or income from other sources. Such classification is important as expenses can be taken as deductions from incomes earned from business and profession while no such deductions are allowed under the other heads. Salaries allow for specific structuring that enables the reduction of the eventual tax burden whilst no additional deductions are available for incomes from other sources. Therefore this classification is controversial and has been the subject of several litigations.
In line with prevailing law, all foreign incomes earned by resident sportspersons are also taxable in India, weather repatriated to India or not. This can be best illustrated by way of an example:
Mr. JMS a star golfer is a resident of India and lives in the country for more than 182 days in the calendar year. JMS travels around the world participating in golf tournaments and earns the following sums during the year:
Sponsorship money from his sponsors based in the US
Appearance fee received from the organizers of golf tournaments in Australia and China
Prize money from a golf tournament that he wins in Canada
Fee for acting in an advertisement for a company situated in India
Since he is a resident in India, the sum total of his global incomes shall be considered taxable in India. While the sponsorship fee, prize money and appearance fee may be considered taxable as profit and gains from business and profession (PGBP) and expenses allowed to be deducted from such incomes, the department may take a view that fee for acting in advertisements is income from other sources and no expenses may be allowed for the same.
NON RESIDENTS
Incomes earned in India by non-resident sportspersons, who are also not citizens of the country, are taxed in accordance with the provisions of section 115BBA of the income tax act 1961. Section 115BBA provides for the taxation of incomes earned by way of participation in India in game, advertisement or contribution of articles in newspapers, magazines journals etc. by any sportsperson who is neither a citizen of India nor a resident of the country. The section similarly also applies to non-resident sports associations or institutions and entertainers who earn money from their performances in India.
As per the section, incomes earned by the aforementioned category of assesses shall be subject to tax at a flat rate of 20% in India without any deductions in respect of any expenditure of allowances under any other section.
In the case of non-residents it is also worth examining the provisions of the relevant Double Taxation Avoidance Agreements (DTAA) since such provisions are applicable as per section 90(2) of the income tax act wherever they are more beneficial.
DTAAs usually specify a separate article (article 17 as per the model convention) that deals with incomes of entertainers and sportspersons who perform internationally. The model convention as well the most DTAAs entered into by India provide for taxation of incomes earned at the country of source, which for the purposes of this study is India. As per the provisions of article 17(1) other incomes earned by the sportspersons by way of consideration for interviews, articles, press conferences etc. shall also be deemed to be closely associated with the performances of the sportspersons and shall be subject to tax in the country of source.
Further, incomes earned by agents, star companies, and other mechanisms on behalf of the sportspersons is also subject to tax in the country of source per the articles. Though their own incomes remain outside the scope of both 115BBA of the domestic statue as well as article 17. With reference to star companies, where any sportsperson is paid a salary instead of payments for a separate performance then the proportionate amount of salary earned for performance in the source country (India) will be liable to tax in India.
Star companies, or entities formed in low tax jurisdictions to avoid taxes by way of diverting incomes from the sportspersons themselves and tax them in the hands of such entities instead of the sportspersons have been addressed by way of clause 17(2) of the model convention which stipulates that the incomes of such companies be taxed in the country of source. Clause 17(2) can further be used state of source to tax at the level of the team the portion of the performance income which cannot be taxed in the hands of the individual performers, regardless of whether the team has a permanent establishment in that country.
A reference may also be made to the landmark case of Agassi Vs Robinson where it was held that endorsement incomes paid by non-resident companies which are received by a non-resident sportsperson for specific performances in the UK shall be proportionally subject to taxation in the UK to the extent that such payments pertain to the performances in UK. Therefore any revenues earned by a sportsperson for endorsement etc. for a non-resident entity can be taxed in the country where such activities are performed!
In addition to the aforementioned articles 17(1) and 17(2) most tax treaties signed by India also include article 17(3) by virtue of which India reserves the right to exclude from the purview of articles 17(1) and 17(2) any professional incomes earned by sportspersons for performances that are substantially supported by public funds. In such circumstances the right to tax shall lie with the country of residence and not the country of source.
COMPLIANCES FOR NONRESIDENT SPORTSPERSONS
Nonresident sportspersons earning incomes from Indian sources should obtain permanent account number (PAN) which allows for the deductions made from their incomes to be linked to their name. While there is no requirement for the filing of income tax returns where only incomes subject to section 115BBA have been earned and appropriate tax has been deducted thereon.
On the other hand, sportspersons are advised to obtain a tax clearance certificate from the relevant tax authorities before their departure from India in conformity with section 230 of the income tax act.
[1] http://www.tandfonline.com/doi/abs/10.1080/16184740108721902#.Vafnck0w-Uk
[2] Gaurav Laghate, “IPL’s TV ratings on sticky wicket but advertisers unfased”, Business Standard, 18 May 2013
[3] http://articles.economictimes.indiatimes.com/2014-12-31/news/57558204_1_atletico-de-kolkata-indian-super-league-hero-isl
[4] http://www.wipo.int/ip-sport/en/broadcasting.html
[5] http://www.wipo.int/ip-sport/en/broadcasting.html
[6] Débora Montesinos, “FIFA to reap US $1.4 billion in sponsorship revenues from Brazil 2014,” Portada, January 27, 2014, latam.portada-online.com.
[7] http://adage.com/article/special-report-2014-sports/sports-sponsorship/291159/
[8] http://www.eventfaqs.com/mailers/2014/March/SportzPower-roupM_ESP_India_Sports_Sponsorship_Report_2014.pdf