Why local body taxes on films are a bad idea

On Monday, over a 1,000 cinema screens in Tamil Nadu shut down indefinitely. They are protesting a local body tax of 30 per cent, over and above the goods and services tax (GST), which came into effect on July 1. The GST is 18 per cent for tickets below Rs 100 and 28 per cent for those priced above. What complicates the situation is a price cap on cinema tickets in Tamil Nadu: Rs 50 for single screens and Rs 120 for multiplexes. 

“The effective tax will be 52-53 per cent (on a ticket capped at Rs 120) There will be nothing left for guys (theatre owners and production firms) to earn,” says Nitin Sood, chief financial officer, PVR Cinemas. The government has held several meetings with representatives of the local film industry. At the time of writing there had been no resolution. 

If the additional tax goes through, it will set a terrible precedent. It could end up harming not just the GST roll-out, but also the Rs 14,200-crore Indian film industry, which desperately needs more investment in screens, especially if other states follow suit. More than three-fourths of the industry’s revenues come from the box office. However, there are only 9,000 screens left in India — one for every 154,000 Indians, compared to, say, one for every 7,950 Americans. About 150-200 screens are added every year, but twice as many shut down. The gap keeps getting larger thanks to the excruciating process of opening new screens and taxation. The result: Revenue growth has been crawling over the last three years. Dangal, the biggest Indian hit, sold twice as many tickets in China, a foreign market, than in India because it was released across more screens there.

You could argue that entertainment tax, which varies wildly across India, has always been a state subject. Allowing local body taxes was one of the compromises under the GST. The Tamil Nadu government is simply using its discretion just like the one in Kerala did by stating that it would not impose any. 

There is, however, more to it, says trade analyst Sreedhar Pillai. “In Tamil Nadu, whoever controls the film industry controls the state,” he says. The film-crazy state has had five chief ministers from the industry. In 2011, a vetting process was introduced to grant tax exemption to local films. A government-constituted panel allows all kinds of films, many of which have nothing to do with ‘Tamil culture’, to get exemptions. This has led to allegations of dodgy dealings. It was along with the price caps the state’s lever for controlling the industry, say analysts. “Once GST comes, the local minister’s power is zero,” says Pillai. 

Ignore the politics for a while. Could the local tax be a simple case of the state government trying to make up for a shortfall in revenues due to the GST? Not really, says Sood as he explains the arithmetic. “About 65-70 per cent of the box office is Tamil films, most of which are exempt. So, the average realisation (of tax) was 17 per cent (on non-Tamil films) before GST. This will now be 14 per cent since half of the 28 per cent GST will be shared with the state. And (under GST norms) the central government will make up for the shortfall in revenues for five years after the GST implementation,” he says.

This then was the perfect time to let go of price caps, as the industry had been demanding. There is talk about how average occupancy in the state is a high 50-55 per cent compared to the usual 35 per cent in other states because of price caps. But the fact is that selling tickets in black and unaccounted revenues is an issue in Tamil cinema. In the Hindi film industry, where there are no price caps, multiplexes and studios have helped clean up the system completely. If the price cap goes, more investment in a grossly under-screened state is bound to flow in. This will, in turn, benefit the production sector, too. More screens mean more revenues per film and therefore more taxes and jobs. 

GST along with the removal of price caps can still herald a new beginning for the Tamil film industry. Can local politics rise above itself to make it so? 
Twitter: @vanitakohlik

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel