New Delhi: Is Mahendra Singh Dhoni a depreciable asset or stock-in-trade? The classification of India’s One Day International cricket captain and the man who received the highest bid on Wednesday during player auctions for the Indian Premier League (IPL) will determine the manner in which successful bidders will be taxed if they trade their expensive acquisitions.
Cricket, some analysts have said, will never be the same after IPL. Nor, it turns out, will the local tax industry which is now debating issues related to how teams and players will be taxed—especially after the teams start trading players.
IPL, organized by India’s top cricket administrative body, raised Rs2,910 crore from auctioning eight teams. Wednesday’s player auctions netted Rs161 crore with Dhoni set to earn around Rs6 crore a year for three years.
New ball game: Is Dhoni a depreciable asset or stock-in-trade?
The biggest tax challenge is posed by tradeable cricketers. Tax experts said much would depend on the nature of contracts between IPL and the teams (or franchisees as BCCI terms them). Details of these contracts were not immediately available and executives at GMR Holdings, which owns the New Delhi team, were not immediately available for comment.
Accounting classifications such as stock-in-trade (in plain English, a product ready to be sold) are important in determining tax liability and the whole IPL process has thrown up a lot of interesting questions, said Nikhil Bhatia, partner at audit and consulting firm KPMG, who specializes in international taxation.
If the players are treated as stock-in-trade then a sale will be treated as income and taxed accordingly. Alternatively, if a player is considered an asset, the club will be liable to pay capital gains tax, in case the sale price is higher than the acquisition price.
“It’s an interesting thought, if franchises will be seen as capitalizing (building assets, in this case, a team of players by acquiring them) or not,” said Tushar Chhabra, head of advisory services, Elite Wealth Management Co., who, on behalf of his clients, was associated with IPL in the league’s early stages.
For instance, if Ricky Ponting, the Australian cricket captain, is traded by the team that owns him, Kolkata, for a higher price a little more than a year later, would the franchisee pay long-term capital gains as he could well be regarded as an asset?
Even though Kolkata teammate Murali Kartik will get paid $25,000 more.
The long-term capital gains tax rate at 20% is lower than regular effective tax rate of 33.99% on business profit.
A tax practitioner, who did not want to be identified said that if a player is not classified as an asset, and a transfer is at a price lower than the original bid, it could be treated as a business loss, and lower the tax liability for the franchisee. Successful bidders at Wednesday’s IPL auction have three-year rights over the players.
If there are complications in accounting treatment of players, there are no problems in the way their pay packets are going to be taxed.
Ponting might have something to cheer after all, although he attracted a surprisingly low bid of $400,000. Even if his Kolkata teammate Murali Kartik, who is not considered good enough to play for India, will get paid $25,000 more than him, Ponting’s take-home package may be higher as IPL’s overseas players have to pay a basic tax rate of just 10% as against the maximum basic income tax rate of 30% Indian players will attract.
The eight teams that make up IPL will not just be made up of players of different nationalities. Tax rates and the way the tax authorities treat the players’ earnings will differ. And not all overseas players will get the same tax treatment as Ponting from authorities—everything depends on their country of origin, since only some countries have a full-fledged tax avoidance treaty with India.
Ponting’s take home may be higher as overseas players have to pay a basic tax rate of just 10%
Ponting and other Australians in IPL would not face such a problem as India and Australia have a double tax avoidance agreement which allows nationals of either country to ask their home authorities for a tax credit. Similar agreements exist between India and New Zealand and India and Sri Lanka, two other countries which have a high profile presence in IPL.
Indian players might have attracted the biggest bids, but they are set to pay the steepest taxes.
“Players will be taxed as per law,” said Lalit Modi, vice-president, Board of Control for Cricket in India, and architect of IPL.