Apart from the core issues that the industry has been facing – piracy, low average revenues, poor infrastructure and inflation – a new challenge in the form of taxes has emerged over the last decade. Both direct and indirect taxes have their own impact on the business of the industry.
Under the direct tax regime, higher income tax and withholding tax rates are creating cash blockage on one hand, and also posing imminent problems for legal agreements on the other.
However, it is indirect tax that is causing big-time problems for the industry. Given the central and state structure of taxation in India for the levy of indirect taxes, the film industry is subjected to multiple taxes at various points in its supply chain, without availability of credit in most cases. On transfer of copyright, service tax is levied by the central government, VAT is levied by state and entertainment tax is levied by local civic bodies on exhibition. None of these taxes can be settled-off against the other.
What further adds to the problems is that you cannot take full credit of the huge service tax paid against the service tax payable owing to inherent restrictions in the said law. This cascading effect is adding to the costs and eating the margins substantially. Further, continual reforms in taxes over the years have only made the compliances more cumbersome.
From the next financial year, the current indirect tax regime in India will be replaced by a comprehensive dual GST to be levied concurrently by the central government (CGST) and the state governments (SGST). However, from the basic analysis of the proposed modal law, it appears that the road ahead for the industry is still potholed as there is sufficient room for manoeuvring. Let’s wait and we’ll know how the final law unfolds and impacts the industry.
On the other hand, getting finance had been an issue for the industry. However, the advent of studios in Bollywood has helped the industry explore new avenues of sourcing finance such as market equity, private investors, continuous line of credit from banks and the alike. However, for individual producers, this is still a distant reality and they have to resort to traditional sources of finance which are super expensive.
It is true that banks usually don’t finance films very easily but that’s because filmmaking is a very risky business. Returns are not guaranteed even if you have the biggest star in your film. At PEN, we have been lucky to have been supported by Yes Bank, which has given us loans. That’s also because we have been in the industry for a very long time and have a clear balance sheet. The bank will provide you loans depending on whether or not you can repay them. Since they don’t loan you their own money but the public’s money, they have to doubly make sure they can recover the loan.
Contrary to the myth that they prefer not to extend loans to filmmakers, they do finance films made by big production houses. They carefully scrutinize the studio’s balance sheet and track record before financing. I believe they are fully justified in being cautious as filmmaking is a creative business and one needs to understand it in order to make money.