Abstract
India’s Goods and Services Tax (GST), launched in 2017, has transformed the nation’s indirect taxation environment, with significant implications for intellectual property (IP) creation. This article discusses how certain GST exemptions, like those applicable to the temporary transfer of copyright in original literary, dramatic, musical, or artistic works, serve as indirect tax incentives encouraging innovation and creativity. By lessening the tax load on creators and IP service providers, these exemptions reduce economic hurdles for SMEs and startups, promoting investment in R&D and IP commercialization.
Also, the zero-rating of exports under GST improves Indian IP service exports’ global competitiveness, promoting international market expansion. Through descriptive examples, the article illustrates concrete advantages, including higher income for authors and better cash flow for tech startups.
Challenges such as possible tax evasion, bureaucratic complexities, and tax system distortions are also analyzed, showing the importance of strong policy enforcement. Based on reliable sources, such as GST notifications and economic studies, the article deduces that although the exemptions are the linchpin of IP development, their success lies in finding a balance between supporting innovation and tax compliance.
Introduction
India’s Goods and Services Tax[1], replaced several indirect taxes both centrally and at the state level with one indirect tax on goods and services, which simplified a disturbed tax regime. As per the GST Act, this effect was aimed at making it easier for businesses to comply with tax obligations, minimise tax on tax, and create a single national market to encourage trade. GST is primarily an economic and financial tool but also relevant to intellectual property (IP), which has become a foundation for economies orientated towards innovation, creation and knowledge-driven outputs.
IP is generally divided in to patents, trademarks, copyrights and trade secrets, and forms the means of enhancing economic growth by promoting invention as well as cultural production. In India, various startup and small and medium enterprise (SME) firms operate in IP intensive sectors (i.e., technology, screenbased industries, creative industries etc.). Nurturing IP development is a priority in an increasingly global marketplace. However, for many people and firms creating, protecting and commercialising IP can be costly, which leads to significant barriers associated with both knowledge and resources especially for individuals and firms with limited resources.
To help facilitate the development and monetisation of IP, the GST regime contains a range of exemptions for specific IP services, which provide indirect tax incentives at a cost effective level to contemporaneous participants engaged in these areas. Different to the direct tax incentives under the Income Tax Act, exemptions operate as a cost reduction, which reduces operational costs for those incubating, commercialising and licensing IP.
This article reviews GST exemptions and their impacts on IP development, by analysing the meaning and interpretation of the exemption on copyright, but also GST exemptions on exports of copyright, and then consider their economic development issues, implications and challenges, and potential benefits for the future.
GST Exemptions for IP Services
Within the provisions of the GST, nearly all services, including IP-related services, are taxed at a default of 18%. However, limited exemptions do exist that relief select IP transactions in accordance with Notification No. 12/2017-Central Tax[2] (Rate) dated June 28, 2017 issued by the Central Board of Indirect Taxes and Customs. A prime example of exemption is “services by way of a temporary transfer or permitting the use or enjoyment of copyright” as defined in Section 13(1)(a) of the Copyright Act, 1957, which covers original literary, dramatic, musical, or artistic works.
The exemption allows creators authors, composers, artists to temporarily license their work without GST being incurred. For example, if a writer licenses his novel to a publisher for a predetermined time, the writer incurs no GST liability on the royalty, allowing the writer to keep all of the income, which in turn incentivizes the writer to create. In another example, if a composer licenses a song for a film soundtrack, he receives tax-free income, which reduces financial anxiety.
A further important provision is zero-rating of exports under Section 16 of the Integrated Goods and Services Tax Act of 2017[3]. IP services provided to clients outside India – for example, software licensing or a design consultancy agreement are not subject to GST, while the providers can claim input tax credits. This zero-rating confirmed in CBIC regulations, will increase the cost-effectiveness of Indian IP services, thus promoting firms to grow or innovate in the international market.
While these exemptions were directed to specific IP types, some services are still taxed as per the GST schedules with a minimum of 18%, including things like patent licensing or trademark assignments. Now there has been commentary to concur concessions to research and development (R&D) or other IP services, however no statutory changes have been made, meaning that authority remains reluctant to extend fiscal relief.
Impact on IP Development
The GST exemptions create a significant impact on India’s IP ecosystem by reducing costs and encouraging creativity. For individual creators, the copyright exemption means they get higher income from licensing, which helps sustain their lives in the creative sector. A 2020 report by the Confederation of Indian Industry[4] noted tax exemptions for cultural goods stimulate artistic production, consistent with GST’s copyright exemption policy.
Startups and SMEs, often the leaders in IP intensive fields, derive considerable benefits. A tech startup licensing its proprietary software, temporarily available without GST, grows its cash flow for R&D or scaling operations. The zero-rating of exports enhances that same startup’s opportunity to compete within its sector, globally, without tax on overhead. NASSCOM’s 2022[5] analysis found India’s IT sector, heavily dependent on IP export, realizes a 15% annual growth rate, in part due to tax incentives the government has provided.
The exemptions provide an economic stimulus to the IP-driven industries, creating jobs and increasing competitiveness. By removing tax barriers to formalize industries like creative and technology, the government advances its “Make in India” goal. That is to say, over time, the benefits of a strong, sustainable IP ecosystem could outweigh any short term government service revenue loss resulting from tax exemptions.
Examples
Example: Priya Sharma (Indian author), licenses her novel for a span of five years through a publishing house. She receives a royalty for the rights to distribute her novel for those five years. Section 12/2017-Central Tax (Rate)[6] states that the temporary assignment of an original literary work as a copyright is exempt from GST in India.
Impact: Without that exemption, Priya would be responsible for paying 18% GST on her royalty of Rs. 10 lakh (Rs. 1.8 lakhs), leaving her with a net income of Rs. 8.2 lakhs. She does not need to pay any GST, and she keeps the entire Rs. 10 lakhs (Royalty) to use for her future writing or personal expenses.
The broader implication: This policy enhances the ecosystem of literary production in India. The ability to produce new works is enhanced when authors lack the burden of governmental tax policy and when the upsides for publishers are not obstructed by taxation. Authors are encouraged to produce works, and ultimately are incentivized to earn money. Publishers are incentivized to invest resources into producers of literary works, and the cultural output increases.
Challenges and Criticisms
While GST exemptions have benefits, there are also downsides. The ambiguity in establishing what is a “temporary transfer” presents the opportunity to abuse the tax rule on a permanent transfer that could be disguised or misclassified as a temporary one, meaning that some type of audit would need to be put in place. The 2021 PriceWaterhouseCoopers[7] report on GST compliance noted such difficult interpretive issues as a major concern.
There is also an administrative burden. Determining eligibility for exemptions requires tax and intellectual property expertise which would unnecessarily increase compliance costs for both businesses and tax authorities. Disputes about the categorization of items i.e. whether software licenses are copyright or patent-related might also result in increased litigation due to grey areas.
Conclusion
India’s exemptions from GST for services related to IP specifically copyright related to transfers and exports are potentially great vehicles for promoting development of Intellectual Property. Without our initial investment and discounts to creators, primarily in the form of time and money, India will be unable to inspire and generate creators, startups, and exporters as required for innovation to flourish.
Exemptions also fit within the context of global movements such reduced VAT in the EU for cultural goods and services. Ultimately, India’s success with their exemption structure will depend upon addressing the areas of misuse and compliance, addressing the administrative burden, and reforming the exemptions so that there is a fair use of services across the categories of IP.
Author: Sambhavi Adarshi, Central University of South Bihar, Gaya
[1] Central Goods and Services Tax Act, No. 12 of 2017, Gazette of India
[2] Notification No. 12/2017-Central Tax (Rate), Gazette of India, Extraordinary, Part II, § 3(i) (June 28, 2017)
[3] Integrated Goods and Services Tax Act, No. 13 of 2017, Gazette of India, Extraordinary, Part II, § 1 (Apr. 12, 2017).
[4] Confederation of Indian Industry, Report on Tax Relief and Artistic Production (2020)
[5] National Association of Software and Service Companies, Analysis of India’s IT Sector Growth (2022)
[6] Notification No. 12/2017-Central Tax (Rate), Gazette of India, Extraordinary, Part II, § 3(i) (June 28, 2017)
[7] PricewaterhouseCoopers, Study on GST Compliance Issues in India (2021)
Link to similar articles: https://jpassociates.co.in/fluid-marks/
Link to IPindia’s official website: https://ipindia.gov.in
