Media & Entertainment Industry in GST Regime

CA Rajaram Aajgaonkar has analyzed the provisions of the Goods And Services Tax (GST) with specific reference to the Media and Entertainment industry. He has meticulously explained the implications on different categories of taxpayers such as film and TV producers, amusement parks, authors, music composers, photographers, artists etc

The system of Indirect Taxes was developed in India over a period of time. Based on various Central and State Acts, various taxes were levied on manufacture or distribution of goods and services; such as Central Excise, Service Tax, Central Sales tax, State Sales tax, Octroi, LBT, Entertainment tax etc. As is done in many developed countries, India wanted to migrate to one major indirect tax since last many years but due to political reasons, this could not be achieved. Ultimately all the formalities were concluded, including passing of bills and amending the Constitution and Goods and Services Tax (GST) became operational from 1st July, 2017.

Media and Entertainment Industry in India has been growing at high rate due to increase of income of the subjects. In initial years, the market for entertainment was very under-penetrated in India. Though Entertainment is a major requirement for the well being of human beings and the society, it was always considered as an optional activity and as a domain of rich and well to do people. Due to the same, it was subjected to high rate of tax under various provisions of taxing statutes. Media and entertainment industry, being predominantly in nature of service industry, was not subject to excise duty but it was liable to service tax and VAT. The supply from the industry, mainly being in nature of intangibles, there were differences of opinion in respect of various modes of supplies of entertainment; whether they were in nature of goods or services. Goods being mainly liable to tax by the state and services being liable to tax by Central Government, there was a war of turf between the Central and State laws regarding taxing the use and consumption of entertainment services; which caused a lot of litigation. Fortunately, with GST triggering in, it is expected that the life of entertainment industry will be easier as the industry will be liable for only one tax on the entertainment; subject to levy of permissible local taxes. Still, it is expected that the overall impact will be positive for the industry.

To understand the change, it will be desirable to understand the rates of taxes levied under the old regime and under GST in respect of various products / services offered by the entertainment industry.

The industry will be entitled to use the Input Tax Credit (ITC) of GST paid to various suppliers, subject to the conditions.

Some of the goods and services on which ITC is  available under GST to the players of the entertainment industry are as follows:-

There were certain issues about the tax liability in respect certain transactions of the entertainment industry before and after the advent of GST. Some of them were as follows:-

(1) In case of certain lease of film / television content rights, there was a controversy as to whether the transactions were that of sale of goods or providing services. If the transactions were considered as that of sale of goods, VAT would be applicable, which was payable to State Government. If the transactions were treated that of services, Service Tax would have been applicable, which would have been payable to Central Government. Therefore, the transactions triggered turf war between the two Acts. As a result, in many  cases, the transactions were made liable to VAT as well as Service Tax, thereby increasing the burden of taxes. In the state of Maharashtra, such burden was at 21% (15% Service Tax and 6% VAT). Now with the advent of GST, the transactions will be regarded as supply of services, which will attract rate of 12% as applicable to temporary or permanent transfer or permitting the use or enjoyment of copy rights.

(2) Before GST regime, the tickets of films used to attract Entertainment Tax based on the State laws. There was no set off of the Entertainment Tax against Service Tax or VAT paid by the distributor and so the levies were cumulative. The ultimate customer used to bear the burden of taxes paid by the distributor as well as the Entertainment Tax paid by the theatre owner. With the introduction of GST, the entertainment tax levied by the State Government is abolished.

However, the tax can be levied by the municipality or local authorities as prescribed. Such tax is not entitled to get adjusted against GST paid and that can become an additional levy. The State of Tamilnadu has levied such tax @ 30% on film tickets, which resulted in strike by the film distributors and the theatre owners as the tax burden becomes heavier than before.

(3) The theatrical rights of films were not liable for VAT or Service Tax. Now with GST triggering in, sale or lease of all the rights will attract GST. To that extent, the burden on the industry will increase. The silver lining is, the producers as well as the distributors will be able to take full Input Tax Credit (ITC) on their input costs, which was not available in full. The level of credit will depend on the inputs of goods and services used by the producers and whether they are being acquired from the registered dealer. Certain costs which constitute a major element of cost for production of films and television content such as food, beverages, outdoor catering, vehicle hire etc. will not be entitled for ITC due to specific provisions.

In case of film distributors, they will be able to take benefit of ITC of GST paid by producers and similarly the theatre owners will be able to take ITC of GST paid by the distributors. The rate of tax payable by the ultimate customers of the industry, being 28% on the tickets purchased, the ITC is likely to be fully absorbed.

(4) The reverse charge mechanism, as was applicable in Service Tax, is also applicable to GST. In such scenario, the recipient of service pays the tax instead of the supplier. The scope of reverse charge mechanism has been expanded in GST as compared to Service Tax. Though there are certain categories of services which are liable for reverse charge mechanism as was in Service Tax, the major change is that the reverse charge mechanism will also be applicable in respect of goods and services procured from persons who are not registered under GST. Therefore, purchases from the suppliers of goods and services, who are not liable for GST due to their turnover being below the basic threshold limit of Rs.20 lacs (Rs.10 lacs in case of specified states), GST will have to be paid by the registered person consuming the goods or services. In entertainment industry, large section of service providers and even suppliers are small suppliers or service providers. Purchases from them will attract GST in hands of the entity, who is registered and using the goods / services. Apart from paying the tax, the compliance level will be substantial due to preparation of invoices required to be done. The fortunate part is, GST paid under the reverse charge mechanism will be available as Input Tax Credit. Nevertheless, it is bound to increase the compliance cost as well as the basic cost of input. As the recipients of services have to take goods / services from suppliers in small locations, especially when they go for outdoor shooting, the compliance needs as well as cost may increase.

(5) One more important issue is that in case of a film producer or a television content producer, GST rate applicable for exploitation of films or television content is 12%. The major portion of input in a film or a TV serial is services given by artists, technicians and other persons and various rentals paid which attract 18% GST. So major inputs are received with 18% GST credit but the output is charged at 12% GST rate. In case of many films, which do not fair well or could not be exploited to the extent of breakeven level, Input Tax Credit of GST paid will remain unutilised and may have to be written off. Similarly in case of TV serials, which cannot be sold at remunerative price, ITC may remain unutilised. To that extent, the profitability of the industry may get hampered though a preferential GST rate of 12% has been notified.

(6) A major cause of concern for various amusement and entertainment parks is that the rate applicable to them has been notified at 28%. This rate is quite stiff and it equates to the rate applicable to the services offered by casinos, race courses etc. It may not be appropriate to consider the entertainment parks, where generally a family goes for entertainment; with casinos, race courses etc. Many of the entertainment parks also educate the visitors in respect of history, geography, science, vocation etc. These centres earlier used to attract entertainment tax based on the rates notified in the State and also Service Tax since last couple of years. Many newly set of entertainment parks also had tax exemption for certain period and many others were taxed at lower rate of entertainment tax as compared to films and similar other sources of pure entertainment. Now these parks will attract higher rate of GST and the exemption granted by the State will get nullified. The high GST rate can have substantial repercussion on the industry and such parks or entertainment centres may struggle to survive as today’s generation is preferring sedentary entertainment mainly provided by films, television, internet etc.

(7) It has been a practice of many States to give exemption for regional films as well as films spreading positive messages to Society to give relief of entertainment tax or to grant exemption for a period. This power of the State will get abolished as GST will be levied and the State may not be able to tamper with to give relief to such films.

(8) The production of feature films and TV serials entails shooting for late hours and at various locations. It is a common practice in the industry to serve food and beverages to staff and others present, give outdoor catering services at various shooting locations and provide mode of conveyance. These expenses constitute substantial cost of production but GST paid on the same will not be allowed as ITC.

(9) Under GST regime, though the entertainment tax has been merged with GST, an authority is given to a Panchayat /Municipality /Regional council/ District councils to levy and collect taxes on entertainment and amusement. This appears to be a backdoor entry of entertainment tax.

As of now, such taxes are levied only in a few States. Considering the fact that most of the States are keen on augmenting their resources to cover up their budgetary deficit, many of the States are likely to follow the suit. If that happens, the likely gains, which the industry may make by GST, will be easily wiped out and the industry may struggle under the heavy burden of tax.

(10) Place of supply of service may also cause some issue for the entertainment industry. In case of shows of entertainers, dramas, etc. and activities such as that of event management, which are provided at various locations from time to time and expenses are incurred for such performance at various locations outside the state of registration of the service provider, he may not be able to claim the benefit of ITC for GST paid on products and services consumed by him out of the State of his registration, unless he takes registration in such a State as a casual taxable person.

(11) Similarly, in case of outdoor shooting, which takes place outside the State of registration of the producer, he may not be able to take credit of GST incurred on certain purchases and services procured in that State, in the absence of registration in that State. In such a case, it may be advisable to appoint an intermediary in the form of line producer registered in that State for undertaking the credit of GST paid in the State, which can be transferred by him to the producer by billing to him.

(12) In case of online entertainment services such as digital streaming, online music and games; if the services are provided by a person located in non taxable territory and services are to be received by consumers resident in India, there is an onerous duty casted on him. Such supplier is required to appoint a representative in India for registering and paying GST on the services rendered by him.

(13) Supplier of services by an author, music composer, photographer, artist or like by way of transfer or permitting the use of enjoyment of copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 have been now made subject to reverse charge by Notification dated 28th June, 2017.

GST appears to be a positive legislation for entertainment industry in general. The positive impact of the same hinges on its smooth implementation and abstinence of further taxing by State Government and local authorities to increase the burden on business as well as consumers. Its success will also depend on fairness in implementation.