Why GST helps and hurts the media and entertainment industry

The industry may struggle to comply with rules initially

Last Monday, over 1,000 cinema screens in Tamil Nadu downed their shutters indefinitely. They were 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. By Thursday, the state government had agreed to relook local taxes and theatres re-opened on Friday.

This is just one of the challenges for India’s Rs 126,200-crore media and entertainment industry as the GST rolls out across the country. “The first six to eight months will be a challenge. But the gains in the long term far outweigh the initial hardships as GST will allow us to move from unorganised to organised sector,” says Shrikant Bhasi, founder and chairman of Carnival group. “It forces us to automate. Earlier, even small invoices were billed from the headquarters in Delhi, but now if the expense is at multiple locations, it has to be billed from there in order to get input credit for GST,” says Gautam Sinha, CEO, Times Internet.

Bhasi and Sinha have put their finger on the first big gain that GST could bring: transparency and therefore more revenues.

Take, for instance, cable TV, which covers about 100 million of India’s 180 million TV homes (the rest are DTH and other technologies). Almost 80 per cent of the estimated Rs 24,000-crore that cable operators collect, leaks out of the system. Just about 20 per cent goes to broadcasters, making for a structurally skewed TV business that is abjectly dependent on ad revenues.

Since GST forces matching of input and output across the supply chain, cable operators will have to start showing their revenues and pay taxes on it. If that happens, it could release anything between Rs 15,000 and Rs 20,000 crore into the television ecosystem alone.

The other gain could be better margins in several segments. “About 30 per cent of our expenses every year are VATable. But we never got the benefit of VAT paid on purchases of goods and equipment for sets. Under GST, we can set it off,” says Sanjay Dwivedi, group CFO, Balaji Telefilms.
 

The gains and the pains

Many of the gains and challenges depend on the segment of the media industry that a company operates in and its ability to deal with tedious process and paperwork associated with GST; what consultants call ‘compliance issues.’

“TV is pan India, but radio has licences that are specifically meant for certain geographies. So radio will need to be more compliant,” says Uday Pimprikar, tax partner, EY. For instance, earlier companies needed to be centrally registered. Now “you need to have registration in each of the states you have operations in,” says N Subramanian, CFO, Entertainment Network India Limited (ENIL), whose brand Radio Mirchi has 50 stations in 22 states. It will now need to register in each of these states. This will put pressure on margins since costs go up especially in small towns which are not big ad revenue generators. Subramanian reckons that registering, putting in people and a framework for GST compliance in each state will add an estimated Rs 4-5 lakh per person, per annum to fixed costs at every location.
 

Multiple registrations also complicate the transfer of services among offices of the same company since under GST each registration is treated as a distinct person. Subramanian shares an example: Imagine a company headquartered in Mumbai releases an ad that ENIL carries across its 22 stations across India. In the pre- GST era, ENIL would have raised one bill from Mumbai – the city where ENIL is headquartered. However, now each station will raise a bill on the Mumbai office, which, in turn, will raise one on the client. This creates more than just procedural issues. If the ad was worth Rs 1 crore, how much was apportioned to each station was a matter for internal accounting before GST. Now the tax authorities could potentially question why Chennai or Delhi has billed, say, only Rs 10 lakh.  Typically, apportioning is done based on estimates of market size, impact, play-out time and a whole host of variables that the taxman is not aware of. This could potentially lead to unnecessary litigation.
 

Then there are newspapers, the selling of which, “is a very unorganised business. The level of literacy, accounting and book-keeping is low in dealers. We will have to train them,” says Aloke Poddar, CFO, Prabhat Khabar. Pimprikar points to film production which benefits from the ability to set off all the service tax it pays on talent and production against GST on revenues. But this raises another set of worries. “As long as I paid service tax, it was all right. Now if the artiste doesn’t pay it and file his returns, I can’t set it off. The process has got completely inter-linked,” says Anup Vijai, COO, Contiloe Pictures.

This is a genuine worry across the industry.  “Much depends on the server capacity and how robust it is. If it is not working or if the output credit doesn’t match the input, the difference will be taxed,” adds Poddar. "GST will open a Pandora’s box (of issues),” says R K Agarwal, CFO, Jagran Prakashan.

Sunjoy Wadhwa, Chairman, Sphereorigins, a TV production firm, sums it up: “The implementation has just started. It will be some time before we understand the repercussions.”

The two sides
 

Pros 
 

• Will bring the unorganised sector into the organised fold

• Improve transparency; currently only 20 per cent of the money collected by cable operators goes to broadcasters
 

Cons
 

• Companies will need to register in each of the states they operate in

• Newspaper vendors and dealers are

• Ill-equipped to handle complicated book-keeping that GST entails