What the M&E sector wants from Budget 2021: Deloitte India

The recent COVID-19 outbreak had a mixed impact on the Media and Entertainment (M&E) sector. The Indian digital segment has experienced a rapid growth of ~35% with the upsurge in paid subscriber base across all over the top (OTT) platforms. This exponential growthis likely to help India emerge as the world’s sixth-largest streaming market by 2024. Further, TV broadcasters have also witnessed a growth of 13% [IBEF report on Media and Entertainment (November 2020) https://www.ibef.org/industry/media-entertainment-india.aspx].

On the other hand, with multiplexes and cinema houses shut for most part of the year, these companies have been amongst the worst hit in this sector with huge losses and major cash crunches. Post partial re-opening, the business has been slow to pick up pace. The shift of media and film consumption through digital means has increased competition and will be a major hamper to the recovery of businesses, especially the smaller players. Print and publishing houses have also experienced slowdown of consumption, store closures and disruptions to warehouse/ distribution centres. Further, the inability to hold events has impacted the revenue of these businesses too. Workers and daily wage earners dependent on this sector have also been affected.

Keeping aside the impact of COVID-19, the M&E sector has been facing challenges such as lack of low-cost funding, tax effective consolidation options and a need for enhanced government incentives backed with policy initiatives.

With the Union Budget 2021 around the corner and considering the issues being faced by the industry, Deloitte India has listed the expectations of the M&E sector from a tax perspective as under:

Key expectations from Union Budget 2021

Inclusion of the M&E sector within the meaning of ‘Industrial undertaking’

Consolidations in the M&E sector will help in rapid growth and generation of substantial employment opportunities, faster digitisation and help smaller players affected by COVID-19 merge in order to sustain and recover. The benefit of carry forward of losses and unabsorbed depreciation is inter-alia allowed in cases of amalgamation of a company owning an ‘industrial undertaking’, which does not currently include M&E sector. This sector requires huge investments in digitisation, technology set-up and distribution network. Accordingly, the Government should consider including the M&E sector within the definition of ‘industrial undertaking’.

Deduction of expenditure on production of films to cover films released on digital platform

Currently, the provisions permit deduction of expenditure incurred on production of films and acquisition of film distribution rights, respectively, based on when the copyrights/ distribution rights in films are exploited or depending on the date of release of the film. However, the same do not specifically cover films which are showcased on the digital platform. With the increase in the popularity of digital content, unless there are clear provisions for the deduction of expenditure for production expenses by digital platforms, this could become a hot bed for litigation. Accordingly, the Government should consider specifically extending this rule to cover deduction of expenditure on production of films released on digital platform.

Simplified taxation regime for event industry

The Government should consider setting up a simplified taxation regime for events industry (including sports events) to provide clarity and attract hosting oflarge global events in India. This is an area with huge potential that remains untapped, which can be incentivised by removing ambiguities in taxation regime.

Further, similar to the single window clearance for foreign filmmakers in India, the government should consider providing single window clearance for events industry as well. This would give a boost to the events industry, generate employment and encourage tourism.

Refund of Inverted duty for Producer/ Production companies

One of the major challenges faced by the M&E sector is the accumulation of input tax credit for the producers.

Under GST, both permanent and temporary transfer of copyright is taxable at 12%. On the other hand, the producers have to pay GST of 18% under reverse charge mechanism on procuring services from an author, music composer, etc., which were earlier exempt from tax under the erstwhile regime, leaving the producers with accumulated credit to the extent of 6%. While there are provisions under GST relating to the refund of taxes on account inverted duty structure, but the provisions are only restricted to ‘inputs’ and does not cover ‘input services’ and, therefore, the GST paid on procurement of input services is excluded from the scope of claiming refund on account of inverted duty structure. Given the issue, the Government should amend the refund provisions to include ‘input services’ so that producers would be able to claim the refund of accumulated credit.

Continuity of local entertainment tax (LBET) by Municipal Corporations on movie tickets

Another challenge faced by the industry is the continuity of the levy of local entertainment tax by the municipal corporations on movie tickets. With the advent of GST, it was expected that entertainment taxes and duties, including local levies, would be subsumed in GST and was expected to bring a relief to M&E industry. However, the constitutional amendment for the implementation of GST allowed the levy of LBET on the sale of movie tickets. In the upcoming Budget, it recommended that the LBET levy must be subsumed within GST so that there is uniformity in the taxes across the nation and there is no additional compliance at the state level.

Reduction in the rate of GST in case of exhibition of movies by multiplexes and cinemas

The Government should also consider, if not permanent, a temporary reduction in the rate of GST in case of exhibition of movies in multiplexes and cinemas to 5%. Currently, a staggered GST of 12% (for ticket price less than 100) and 18% (for ticket price more than 100) is being charged and bringing the rate down to 5% will significantly help the industry.

GST input tax credit recovery by line producers

The Government should also issue clarification on the taxability of services provided by the line producers to the film producers wherein there is an ambiguity in the industry as to whether or not it should be classified as intermediary services. Shooting of films entail logistics arrangements based on the location where such shooting takes place. The line producers generally provide such logistical arrangements. In case such services are classified as intermediary services under GST, then there could be a challenge in the recovery of input tax credit in case the recipient producer is not registered in the state in which the line producer is registered.

Other expectations from the budget include:

Tax holiday period, subsidies, etc. for assisting cinema houses with its recovery;
Tax incentives for setting up multiplexes/ conversion of single screen to multiplexes (similar to section 80IB of the Act);
Including advertisement income within the scope of the reduced withholding tax rate of 2%, since such income plays a major role in this sector and the 10% rate blocks a substantial amount of the working capital of the businesses in this sector; especially where multiple entities are involved since profit margins are quite thin

According to Deloitte India, the Union Budget 2021 should aim at accelerating recovery of impacted businesses, which will in turn boost the economy. Containing the deficits and encouraging growth should be the key to achieving this. With the above measures, there is a possibility of significant growth and rebound of impacted industries in this very important sector.