When the finance minister in his budget speech acknowledged that the film industry has been experiencing difficulties while discussing the proposals relating to customs duties, it appeared that the industry was finally going to get a respite from controversies relating to the valuation of imported content. While the FM did rationalise the customs duty structure, on the flip side, he has imposed a service tax on transactions entailing licensing of copyright.This is a big blow to the sector which is already burdened with one of the most unfavourable tax regimes in India (only tobacco and alcohol could be considered to be in the same league).

Film Imports

The number of international releases in India has increased substantially with the change in taste of the Indian audience. Hollywood studios and certain other distributors (such as UTV and PVR) import and distribute foreign films into India. Import of films in the cinematographic format (such as 35mm and 70mm film reels) was liable to customs duty only on the cost of such media and cost of transportation and freight.

So, in case an Indian distributor wants to procure theatrical distribution rights of an international film say, The Dark Knight for Rs 5 crore and imports a 35mm film, he is liable to pay customs duty only on the cost of the media (including freight and insurance) of say, Rs 10 lakh (depending upon the number of prints). Now, the Finance Bill proposes to levy a service tax of 10.3% on the value of copyright in film ie, on Rs 4.9 crore. Thus, a significant amount of tax has been slapped on import of theatrical films.

Distribution of films

Good distribution revenue will always bring a smile on any film producer’s face. Film distribution for theatre viewing was not liable to VAT in most states and where those states which levy VAT on distribution, the tax is typically not collected by the state governments. However, exhibition of films is liable to entertainment tax charged by various state governments.

The Finance Bill has now proposed to levy a 10.3% service tax on licensing arrangements for distribution of film in theatres. Thus, for example, for Munnabhai MBBS does a total net ticket collection Rs 50 crore (excluding entertainment tax) and the distributor charges the theatre owner for their share for, say Rs 25 crore, who has, in turn, paid the film producer Rs 20 crore for the film. Earlier, the distribution rights licensed from the producer to the distributor and the distributor to exhibitor were not liable to indirect tax.

The state governments were already charging entertainment tax on the film, say 25% (the rate could vary from state to state), on gross ticket collections that is Rs 12.5 crore. Now, in addition to the entertainment tax, service tax will also be required to be paid and borne by the producer, distributor or exhibitor, resulting in a significant hit on net earnings. In the present case, service tax adds to about 5.2% of the net total earnings to the film and hence, total tax burden will go up to about 30%.

Home Entertainment

Sale of music and video of a film marks a substantial portion of a film’s revenue portfolio. Producers’ licence rights in home entertainment (music & video) and VAT at 4% is generally applicable on such rights. The home entertainment company then procures a stamper which is used to make VCDs and DVDs for distribution. The budget has proposed that home entertainment rights granted by film producers are subjected to service tax at 10.3%. Thus, say for a film like Radio, the film producer earned Rs 5 crore on distribution of music rights.

Now, it is proposed that in addition to VAT of Rs 20 lakh (Rs 5 crore x 4%), a service tax of Rs 51.5 lakh (Rs 5 crore x 10.3%) will apply. The manufacture of VCDs and DVDs by home entertainment companies is exempted from levy of excise duty and hence, any service tax charged by film producers will be an additional cost. This cost will be borne either by producer or home entertainment company ultimately reducing the net earnings from a film.

Event promotions Via theatres

Now, you can now also watch IPL T20 matches in theatres— currently, exhibition of such shows is liable to entertainment tax levied by most state governments. It is proposed that grant of rights to exploit any event including events relating to art, entertainment, business, sports or marriage will be liable to service tax. Let’s take the case of a distributor who has rights for theatrical exhibition of IPL T20 matches and charges cinema exhibitors Rs 30 crore and theatres gross up total ticket sales of Rs 60 crore (excluding entertainment tax). In addition to the entertainment tax of Rs 15 crore (Rs 60 crore x 25%), he will now also have to pay a service tax of Rs 3.09 crore (Rs 30 crore x 10.3%).

Tax on brand promotion

Earlier, brand endorsements for promotion of goods and services were covered under business auxiliary services. Now, the budget proposes to cover brand endorsement under the service tax net. Thus, where a cricketer promoting a Tata Nano paid a service tax at 10.3% of the value charged, now, a cricketer promoting the name ‘Tata’ without reference to any specific product or service provided by the Tata Group will also be liable to service tax.

(The authors are senior tax professionals, E&Y)

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June 2021