Here is a sector by sector analysis of the implications of the Goods and Services Tax (GST) for the M&E industry by Utkarsh Sanghvi, Partner - Indirect Tax, Media & Entertainment, EY India
The Media and Entertainment (M&E) industry was marred by multiplicity of indirect taxes in India and it was looking forward to a singular tax regime in GST. Today, the M&E industry is subjected to service tax, VAT, entertainment tax, central excise and advertisement tax by Central and State Governments. Given that taxes charged by the Central Government were not available as set-off against State Government taxes and vice versa, as also no credit available against any entertainment or advertisement tax, there was a cascading impact of taxes.
Under GST regime, while all the indirect taxes were subsumed through a Constitutional amendment, local body entertainment tax was not subsumed. The industry made several representations to suggest that such a move is against the principals of uniformity of taxes and contrary to the beneficial tax treatment it receives internationally (‘art and culture’ is considered as priority sector). However, such an anomaly continued in GST and the sector has a so-called ‘hanging sword’ on it, especially because this is the only source of taxation local bodies will have in the new regime.
With finalization of GST rates on goods and services and certain GST rules at the 14th GST Council meeting held at Srinagar recently, the industry is deep-diving to analyse the implications of GST on their businesses. Here, we have attempted to provide our analysis of its impact on the following sub-sectors of the M&E industry:
TELEVISION
With increase in the rate of tax from current 15% to 18% under the GST regime, broadcasters would have an increase in working capital requirement to meet the incremental liability. As the transactions are B2B in nature, broadcasters should be able to recover GST at an increased rate. However, where the broadcasters were advertising for exempted sectors, cost of input taxes may increase, resulting in possible shrinking of advertising budget.
Also, the incremental liability would be adjusted by marginal increase in availability of input tax credit on goods procured, which currently is not available under the indirect tax regime. Thus, the broadcasters are likely to have neutral impact in GST.
PRINT
While the circulation revenue earned from sale of newspapers and magazines is exempted under GST, the advertisement revenue is taxed at 5%. Newsprint, imported or domestically procured, which is used for printing the newspaper or magazine, is subject to 5% tax. Thus, publishers would be eligible to avail proportionate credit of input taxes paid on their inputs. The Print industry serves many local and regional advertisement needs. In case recipient of the service is not eligible to claim credit such as classifieds, Government, Petroleum sector, etc., there could be possible drop in the advertisement revenue. Thus, the benefit of proportionate input tax credit could be fully or partially set off against loss of revenue. Publishers could foresee a neutral to slightly positive effect under GST regime.
RADIO
Radio companies would be able to recover GST, even though at increased rate, as transactions are primarily B2B in nature. There might be slight increase in working capital requirement which will be compensated with marginal increase in input tax credit of VAT (which was not available under service tax regime). Radio companies will continue to have reversal of input tax credit on account of sponsorship income. Thus, the impact of GST on radio companies is likely to be neutral.
DTH COMPANIES
At first instance, DTH companies appear to benefit under the GST regime, as entertainment tax levied by the State Government is being subsumed. At present, most DTH companies do not avail input tax credit of SAD or VAT/ CST on procurement of Set Top Boxes (‘STBs’). Such input tax credit is likely to be available to DTH companies under the GST regime. However, some of the State Governments are proposing to levy a local body entertainment tax in addition to GST of 18%. This could result in significant burden on the industry and if levied by most States, it will impact negatively on the sector.
FILM EXHIBITORS
In the existing tax regime, cinema exhibitors were exempted from service tax and State VAT, and entertainment tax was the only tax imposed on movie tickets by States and local bodies. The average entertainment tax collected nationally by the Government across all States and languages was in the range of 8% to 10% of gross box-office revenue (based on figures published by RBI and assumption on share of entertainment tax). Hence, logically, the GST rate should not have been more than 12% in order to avoid any loss to the exchequer. Instead, the Government has equated the film industry with gambling and betting industries and taxed it at the highest slab of 28%. This has significant implication on regional films. In addition to this, local bodies across States have also been empowered to impose entertainment tax, which was earlier to be subsumed within GST. This means that, effectively, the total tax on cinema exhibition sector can be as high as 70% to 80% in States like Maharashtra. This will impact the sector negatively and drive up the prices of movie tickets.
FILM PRODUCTION
A film producer earns revenues from sale or licensing of theatrical and non-theatrical rights. Theatrical rights, either perpetual or temporary, are not subject to service tax or VAT. However, non-theatrical rights when transferred perpetually are subject to VAT and when transferred temporarily subject to service tax and VAT. Thus, film producers are not able to claim full set-off of input taxes paid on various services such as actors’ fees, directors’ fees, photography services, etc. Under GST, most of the input credits shall suffer 18% tax and the income by way of transfer of copyright, either temporary or perpetual, shall be subjected to 12% tax. This will result in inverted duty structure and hence, shall have possible blockage of credits. Additionally, with high rate of taxes on tickets (along with proposed local body entertainment tax in States such as Maharashtra, Madhya Pradesh, Gujarat, Rajasthan, etc), the royalty paid by exhibitors is likely to fall. Thus, producers could be negatively impacted in GST.
ADVERTISING AGENCIES
It is welcome news for ad agencies, that advertisements in Print media are to be taxed for the very first time under the GST regime. This would result in a minimal input tax credit reversal for the agencies. Also, the roll-out of GST would lead to effective increase in advertisement spends for bigger advertisers such as FMCGs, retail and trading sector, to whom impact of cascading taxes has been reduced.
EVENT MANAGEMENT
Event management companies are subjected to 18% GST, an increase of 3% from service tax. Given that events are held across India and the globe, event managers will need to forgo input tax credit in the States where they are not registered for GST. Thus, to the extent of non-availability of credit, it will be an additional cost as compared to service tax regime. In light of all of this, overall impact on event managers appears to be negative. However, if the business is planned well in GST, there could be increase in business.
SPORTS
While sponsorship income continues to be under reverse charge under GST regime, sports companies would have to carry out reversal of input tax credit on sponsorship income. In addition to GST, if States charge local body entertainment tax, the impact on the sector would be negative.
DIGITAL COMPANIES (INCLUDING OTT PLATFORMS AND MCNS)
Digital companies are likely to have neutral negative impact under GST regime. With increase in rate of tax, the working capital requirement will increase. Also the ability to pass on the increased cost to the consumers would be tested.
CONCLUSION
Introduction of GST appears to be a mixed bag for the M&E industry. Though GST might resolve the current bottlenecks in the M&E sector, it throws up many challenges such as blockage of credit in non-registered States, increase in compliances, reversal of credits, local body entertainment taxes and additional working capital requirements. The M&E sector hopes that the Government recognizes the pivotal role it plays in nurturing ‘art and culture’ of the country and amends its tax policies to unlock the potential growth.
