GST: What Narendra Modi's indirect tax reform means for Indian cinema

At midnight on 30 June, Prime Minister Narendra Modi announced the start of a new indirect tax regime, applicable across India, known as GST (goods and services tax). The new taxation structure subsumes multiple levies such as central sales tax, octroi, entertainment duty (in some states), service tax, and value-added tax (VAT).

Announcing the reform, the Prime Minister said, "If we take into consideration the 29 states, seven Union territories, seven taxes of the Centre and eight taxes of the states, and several different taxes for different commodities, the number of taxes add up to a figure of 500! Today all those taxes will be shredded off to have one nation, one tax."

Despite the announcement, GST has had mixed reception at least in the film business. According to the new tax structure, film tickets costing more than Rs100 will be charged 28% tax, while those costing Rs100 or less will incur 18% tax. Though the reform eliminates the uncertain rules of entertainment tax, service tax and other corollaries, its advantages depend upon the existing tax structures that it replaces in the states.

Akshaye Rathi, distributor and exhibitor, explained: "The entertainment tax was not a central flat-rate tax, it was a state-imposed levy. So in Mumbai it was 45% while in other towns of Maharashtra it was 40%. In Punjab, films were tax-free. Jharkhand levied 110% tax while Madhya Pradesh levied only 30%. The impact must be measured on the previous entertainment tax rates in every single state."

GST brings in a uniform indirect tax structure across the country. All movie tickets will now be taxed at either 18% or 28%. However, this also means that even those states which did not levy any tax on movie tickets will now see 18-28% added to the price of tickets.

Ultimately, this means an additional cost for the average movie-goer.

Ticket prices

Before GST, a movie ticket would cost the sum of the base price of the ticket and the entertainment tax levied in the state in question. The percentage of entertainment tax varied from 2% in states like West Bengal to 110% in Jharkhand.

For instance, before GST, the state of Punjab had no entertainment tax. If the base price of a ticket was Rs100, the cine-goer would spend Rs100 on the ticket and an additional Rs150 on food and beverages. The 12.5% VAT on food and beverages would bring the cost of snacking to Rs169. Thus, the final cost of the movie-going experience would be Rs269.

At the same time, in Uttar Pradesh, which levied an entertainment tax of 60%, the consumer would pay Rs160 for the same movie ticket while spending Rs169 on food and beverages. The total expense would thus rise to Rs329.

With GST, other things remaining the same, the Punjabi movie-goer will now pay Rs118 for the ticket and Rs177 for his food and beverage, thus making for a total expense of Rs295, same as the UP consumer. Thus, while the UP cine-goer would save about Rs34, the Punjabi would spend about Rs26 more.

Rathi cited Maharashtra's example when he said, "Now, in Maharashtra, it [the tax on a movie ticket] has reduced and the net has remained the same... For the single-screen audience, it gets better because a majority of the single screens in Maharashtra had an average ticket price of Rs100-120. So, the GST is going to be lower at 18%. That benefits the owners and the audience. Even if the tickets are cheaper, the cinema owners are going to earn as much as they were doing earlier."

The rise of smart phones, piracy, and ticket prices had led to reduced footfalls in cinema halls over the past couple of years. GST may solve some of these issues by providing an approximately uniform pricing solution.

Manoj Desai, owner of the G7 multiplex in Mumbai, spoke about his post-GST plan. Desai said, "What the other theatres are planning does not worry me. I haven't asked if other theatres have raised their prices, or why. The 18% that I have received for GST, I have given to the public. The rates for tickets in my theatres ranged from Rs 110-190, which I have reduced to the brackets of Rs60, Rs80, and Rs100."

This means an average movie watcher at Desai's theatres will be able to watch a film for anywhere between Rs71 and Rs118. He said, "I have given the public as much as I can. Irrespective of whether I get anything out of it, my situation at least won't be the same as that of the makers of Tubelight. I only hope the public will fill the theatres."

Asked if the decision was fuelled by the reduced footfalls, Desai said the number was low to begin with. "Today, pictures are released on smartphones the day they do in theatres. Piracy is a major threat. When I made Khuda Gawah in 1992, for five years I could not release it on television. Now, there are no restrictions like that. Pictures that are still running in theatres are announced on television."

What's in store for regional cinema?

The major damage, though, may be to regional cinema, which often enjoyed tax rebates in the home states. Now, the additional 18-28% GST feels like a burden.

Rathi elaborated, "Regional cinema across the country will be affected. Bengali cinema in Bengal used to have an entertainment tax of just 2%. Marathi cinema in Maharashtra was tax-free. Now, suddenly, there will be 18-28% GST. That is obviously injurious to the health of the regional film industries."

Samit Kakkad, producer-director of Marathi films Huppa Huiyya (2010) and Half Ticket (2016), said, "Not only the audience, it will also affect the making of a film because rates will go up. This will be tough for Marathi cinema because as it is we struggle to control our budgets while making a film. Now it will go up further. Levying 28% tax on lab and camera equipment is not good for Marathi cinema, or any cinema for that matter."

Last month, actor Kamal Haasan echoed a similar sentiment when he said, "We welcome GST and one India, one tax. But this rate will ruin regional cinema. Regional films, Hollywood films and Hindi films cannot be put on the same slab and film tickets can't be fixed like an essential service."

Haasan lashed out at GST, calling it 'punishment' for regional cinema.

Further, the GST act still allows states to levy municipal taxes in addition to GST. The current theatre owners' strike in Tamil Nadu revolves around the state government's imposition of an additional 30% local body tax on movie tickets, taking the total taxation on film tickets in the state to 48% and 58%.

Director Shankar, whose 2.0 with Rajinikanth and Akshay Kumar is set to be released next year, tweeted: '48-58%... too much tax... save Tamil cinema.'

There are some positive signs though. The West Bengal government has offered a rebate on movie tickets after the rollout of GST.

Effect on Hindi/commercial cinema

As for the effect of the tax reform on Hindi cinema, there seems to be little issue. Most stars have welcomed GST. For an industry that has long raised its voice against the high 45% entertainment tax in Mumbai, the reduction offered by GST is a relief. However, the threat of an additional municipal levy, a la Tamil Nadu, has made filmmakers jittery.

The uncertain nature of cinema production and its success makes taxes of any kind a serious burden for producers. Said Rathi, "Having said that, 18-28% is good, compared to the previous 45%. But, honestly, for a sector like cinema, where the success rate is just 10% return on investment, we were hoping that we fall in the 5%-12% bracket."

For Hindi cinema, Delhi and Mumbai remain the biggest markets. The two regions account for a big part of the revenue of Hindi films. With GST, Delhi audiences will see an 8% increase in the price of tickets. To tackle this problem, producers and distributors are already on the move. 

A week before GST was rolled out, Dharma Productions CEO Apoorva Mehta, Tips CEO Ramesh Taurani, and producers Babloo Pachisia and Fox Star Studios' Vijay Singh approached Maharashtra chief minister Devendra Fadnavis on the subject. Led by Central Board of Film Certification (CBFC) chairman Pahlaj Nihalani, the group approached the chief minister with the request to prevail upon the Centre to reduce GST on movie tickets to 12-18%, and also exempt them from any local/municipal tax.

At the same time, Siddharth Roy Kapur, accompanied by a number of top officials from multiplex chains across the country, met Union finance minister Arun Jaitley to discuss the matter.

Under the earlier taxation system, only the distributor or exhibitor who sold tickets for a film had to pay the duty to the government. Under GST, everyone from the producer through the distributor to the exhibitor has to pay a portion of the tax to the government, with each succeeding entity having to pay the balance that is outstanding against their name after setting off the tax paid by the earlier entity in the chain. (See charts below to understand how GST works. The rate has been taken as 20% only for ease of calculation.)

Of course, all of it is eventually recovered from you and us, the movie-goers.