A community for people who love the Visual Arts
Somebody, an artist or a gallery owner, asked me recently about taxes pertaining to art works, artists and art galleries. And it dawned upon me that its such a fuzzy topic in the minds of people of our community. Although I am not an authority on tax related matters, I stand in this interesting position of a person who has studied finance and is trying to establish himself as an artist. So here I am, trying to keep things simple as possible to help our artist friends make sense of the complex world of taxes and other related issues around sale of art in India.
Now a days, many brick-and-mortar as well as online galleries have mushroomed that deal with sale of works of art that include drawings, paintings, sculptures, murals, etc. Artists too directly sell their works, sometimes in due course of time, through their websites or through contacts. Now, art sales can occur in one of the many way that that have been discussed here under different scenarios. Here are the 5 different cases of earnings related to a piece of art. There could be more too, but here are some of the important ways that are easily visible.
Case 1 - Artist makes/creates art on his own, sells it later when somebody likes it. This person purchases from the original artist and becomes new owner. Ownership of the artwork changes hands from artist to New Owner.
Case 2 - New Owner sells art work to another person (Subsequent owner/ or third owner). There can be two scenarios here -
2 (a) - Such sale happening within 3 years of new owner possessing the art work, considered short term in tax world.
2 (b) - Such sale happening after 3 years of new owner possessing the art work, considered long term in tax world.
Case 3 - Artist makes art work, exhibits in a gallery. Art work is sold in/through the gallery and gallery retains a commission.
Case 4 - Artist makes/creates art work only on request from a patron, that is, on order only. Such art work is made on what artists term as - commission art, for a fee.
Case 5 - The artist or someone who owns an art work gives it to someone else for display, or as a show piece, but only for a short period of time, without the act of selling the art work. And the painter or owner of the art work thereby charges money to the owner of the place/space, for the displaying his/her work.
There could be more ways how art works become a part of a commercial transaction, these are some of the more visible ones. In addition, there are other pertinent issues discussed in the second half of the article. Lets walk through them to see the tax implications.
Case 1 – Its considered as sale of goods. Sales tax applicable in the hands of artist.
In this case, service tax will not be applicable on transfer of title of goods. An art work created without any order and on its own by the artist with an intention to sell later is considered “goods” created/manufactured by the artist. And when such an art work is sold, the artist is transferring the title permanently to another person, hence there is no service tax. It’s a sale and attracts sales tax.
Case 2(a) - Short term capital gains applicable on the amount of resale of the art work, in the hands of the existing owner, not the artist.
Case 2(b) - Long-term capital gains is applicable here. The monetary gains out of such a transaction is considered a long-term capital gain sale. Such gains made would be computed on basis of current cost indexation, as provided under LT Capital gains provisions. The calculation is done taking into the account the prevailing cost inflation index. Note - The sales tax (value-added tax) you would pay on the purchase would also form part of cost of acquisition to compute your capital gains made.
Case 3 – Sales tax applicable in the hands of the artist on the art work sold. Service tax is applicable in the hands of gallery on the commission/fees collected or, on the percentage of sale amount thus collected. So, purchaser is essentially paying Price of art work + the applicable sales tax to artist. Artist pays commission to gallery. Gallery pays tax on commission earned.
When artist sells his paintings through an art gallery, the gallery is considered acting in the capacity of an agent of goods. A sale by the gallery, or in the gallery, is a transfer of title of goods from the artist to the purchaser. The gallery never holds title to the art work. Therefore, the artist receives a price for transfer of goods from artist to the purchaser and that is considered as a sale for the artist as in case 1. The commission earned by the gallery is taxable as a service tax.
Case 4 – This is a service provided by the artist and so attracts service tax in the hands of the artist.
The artist has rendered a service on demand. Its like the tax on food ordered in a restaurant after an order is placed and the purchaser becomes the consumer of services thus rendered.
Case 5 – Service tax is applicable on the amount earned by the owner of art work/artist. Or, the income may fall under the head income from other sources in the artist’s hands/owner of the painting as rent received for allowing art work to be displayed somewhere else.
OTHER RELEVANT ISSUES
Issue 1 -Cost of upkeep and maintenance spent on old artworks -
The cost of maintenance and restoration of old or damaged but highly valued artworks may also be considered during Case 2(b). If you have purchased an old work of art and have spent money on its restoration, its still unclear if we can claim the restoration cost for deduction purpose while calculating your capital gains, by treating it as a normal expense towards upkeep and maintenance. Tax provisions regarding this is not clear yet (at least to me).
Issue 2 – Art work received as gift or on discount
If you receive gifts of art works whose aggregate value exceeds a certain amount (I think it is INR 50,000) during a year, such a gift received by you is subject to income-tax, taxable at tax slab rates. In addition, if you purchase such art works at discounted prices and the value of the discount exceeds a certain amount (again, I think its INR50,000 too) in a year, the value of discount received is also subject to income-tax as a deemed gift.
Now, what constitutes a discount is contentious since the art works’ market value could be subjective and is a highly debatable issue. Another way to arrive at the market value is, if the art work has been recently purchased from a dealer, the dealer’s sale price can be considered as the market value.
Issue 3 – Income from art when printed
Any income earned while you own the painting, such as rent for allowing it to be displayed in an exhibition, or a fee for allowing it to be reprinted in a book, would be taxed as your normal income under the head “income from other sources”.
Issue 4 – VAT
Websites usually quote a price of the artwork only. Packing and shipping charges are extra and are charged at actual amount expended. VAT is applicable too on sales within India, which is currently around 14%. Check for exact rate.
Conclusion and disclaimer
To conclude, this article is just to generate awareness among artists and art dealers/art galleries regarding taxes applicable on works of art that include drawings, paintings, sculptures, designs, etc. The article highlights just some of visible areas with respect to taxation of art works in India. It is not conclusive or the final word on taxation as the tax provisions on art works are still evolving and there are many issues still unclear which we encounter. To get the correct and final understanding of taxation related to art, consider seeking the advice and opinion of a chartered accountant or a tax consultant.
Author: Soman Patnaik, artist and CFA, finance consultant.