When Rajya Sabha passed the Constitutional Amendment Bill paving the way for the Goods and Services Tax (GST), the largest ever tax reform in the country in August, it was regarded as a game changer for the economy by industry experts. It’s a known fact that the government has to pass few hurdles to make this a reality, but overall the reaction has been positive. When it comes to media and entertainment industry, same thought was reiterated by M Venkaiah Naidu, Minister of Information and Broadcasting at CII Big Summit 2016. He even said the media and entertainment industry needed to outline a firm roadmap to ensure the convergence of networks, devices and content, the core elements of the digital entertainment process.
Even broadcasters like Punit Goenka MD & CEO, Zee Entertainment Enterprises Limited (ZEEL), seemed positive about it. “GST roll-out in the coming year could boost advertising spends as a part of potential savings in tax outgo might be reinvested.” For broadcasters and radio companies, where advertisement is an important source of income, it is not going to be much of a challenge because their transactions are business-to-business in nature. So they will be able to recover the additional tax from their advertisers. Moreover, with the input credit being available to content producers (film, TV and broadcasters), it will help reduce the production cost to some degree.
Coming to the taxation part, currently consumers pay a service tax ranging between 14.5-15 per cent for all broadcast services like Television (Cable + DTH), films as well as digital content. Apart from this, an entertainment tax ranging between 8-12 per cent is further levied increasing the average tax to as much as 25 per cent. Once GST comes into action, consumers will have to pay a single tax, the likely rate for which will be anywhere between 18-20 per cent. Hence the overall rate of tax on consumers will reduce significantly.
Other important part is that distinction between service tax and VAT will go away. Frank D'Souza, Senior Tax Partner at PwC explains, “There are certain transactions in rights to distribute or right to use a copy mark. There has been a debate whether that’s a transaction in goods or services. This is relevant because if this is a transaction in goods then VAT would apply and if it’s in service, service tax will apply. There have been situations where service authority says it’s liable to service tax and VAT authorities will contend for VAT. With GST that debate will be resolved because then the classification is immaterial. Whether it’s services or goods same tax will apply. It will reduce the taxation in fact. All these kinds of litigation will go away.”
He goes on to explain how this will play out for the media and entertainment industry when it comes to entertainment tax, “Now there is no distinction between VAT and service tax under GST then anything is creditable. For instance, in film production on costs which are incurred one might pay service tax or VAT depending on what the kind of service or product. On the output side when the film is monetised on theatres then it’s not liable to service or VAT. On input side when you have incurred all this cost you can’t get full credit of it because a significant portion of your income is not liable to tax. There is a loss of credit. Under GST that will go away because everything will be liable to GST. Today it is liable to entertainment tax. Now if it’s state level levy it will get subsumed in GST. There won’t be a separate entertainment tax. However, we have to wait and watch how that plays out because local bodies under constitution, specifically municipalities, have the right to levy entertainment tax over and above that. If that happens then that’s something which will not be creditable. There are still four or five open issues and rules that are still being framed.”
He goes on to talk about the debate that’s going on levying tax on free supply and how it will affect the media industry. “There are still some open issues and rules are still being framed. One has to wait for clarification on how that (debate on tax on free supply) will be addressed in broadcasting space. For instance when it comes to set top boxes and decoders provided by broadcasters free of cost to MSO to be able to downlink the signal, should GST be charged on the supply? There will be these issues which will get resolved over a period of time. But on overall basis, it will be positive for sector with little bit of plus or minus. Two things I will keep on a lookout on what people will do as far as entertainment tax is concerned when it comes to various local bodies and the place of supply rule. Now the latter’s going to be important to see how they define the place of supply rules. Is it where the broadcasters sit and releases signal or where the MSO collects the signal in each of the state? That’s going to determine in terms of where the compliance has to take place.”