The GST is finally here. It is a major reform that can streamline India’s complicated indirect taxation. Instead of multiple sales, service, entertainment, VAT, excise and octroi-like taxes, there will be one GST, making accounting easier and avoiding situations like taxes on taxes.
The GST also hopefully reduces the impact of abrupt changes in industrial tax rates. Every budget tinkered around with them. The hope is that now with one GST, things will be more stable, and hence, more predictable.
Except, there is no one GST. It should perhaps be called GST5. For, at its introduction, the GST has five different rates: 0%, 5%, 12%, 18% and 28%. Then there are also goods that fall outside the purview of these rates. And in a few cases, local bodies such as municipal corporations can impose their own taxes too.
Hence the GST5 is a halfway house to the final idea: to primarily have one rate of indirect tax in the country. Since that hasn’t happened yet, various goods and services have been placed in one of the five buckets.
The decision to do so is based on a mixture of commonsense and morality — that we Indians love to bring into our tax rates. Hence, sinful items such as liquor and cigarettes will be taxed higher. Fresh milk won’t be taxed. UHT milk, or milk sold in cartons will have a tax of 5%. Condensed milk will have a tax of 18%.
The reasoning behind GST5 could be to ensure that the shift to one GST is gradual. If only one rate was decided, it would lead to big changes in prices of some items taxed at very different rates earlier. GST5 helps find a suitable rate that’s close to the pre-GST era.
However, GST5 also has problems. It still leaves scope for arbitrariness in terms of which item to place in what rate. And that creates scope for industry to lobby politicians to place their items in a lower tax bucket. It also makes certain industries uncompetitive. One example is the film industry.
For some strange historical reason, watching movies in a theatre is seen as a luxury, a hedonistic pleasure bordering on sin. Little wonder, we have entertainment taxes as high as 100% on ticket sales in some states.
These laws were made well before the era of television, let alone internet or digital entertainment. So today we have a situation where you pay a higher tax to watch a movie in a theatre, but less if you want to watch it on TV or your home, and none if you watch a pirated one.
The current GST rate for cinema tickets is 28%, on par with gambling. Local bodies can further tax cinemas, increasing the burden on ticket buyers.
The set-top box subscription you have at home will be taxed at 18%. So for some reason, the government wants to charge you more if you watch a movie in a theatre than on TV. And of course, many who watch pirated content pay absolutely nothing.
In this scenario, the film industry is the one that’s getting penalised most. There are no logical reasons, only flimsy ones such as — these filmi types are so rich anyway (not true, wages across the industry are meagre, barring a few powerful people); films make so much money, look at Baahubali (not true, only 10% films are theatrical hits, Baahubali was an exception), and why should we care about such an unnecessary industry anyway (we should, because it has a huge impact on the economy and around the world).
Due to such unreasonable biases, we have hit the industry with a rate that will render it uncompetitive. For every ticket sold, a high GST would be deducted. Then, nearly half of what is left will be kept by the theatre owner.
After that, there will be a distributor margin of 10-20%. Whatever is left (say 25-30%) will go to the makers of the film. TV and subscribed digital content neither have such high taxes, nor so many middlemen. Also, compared to TV, there is relatively higher piracy in films.
In other words, this current structure will only mean one thing — the eventual decline of India’s film industry, whether in terms of overall profitability, volume of output or revenues.
As content becomes better and more easily available on your phone or TV, the incentive to go to the theatre will reduce for the moviegoer. And even if they do go, most of what they pay will be eaten up by taxes and middlemen.
This doesn’t leave filmmakers with much business. Sure, there will be the occasional superstar movie that will do wonders at the box office. But exceptions do not make an industry. A healthy, regular output does. The film industry drives a lot of our economy.
When people come to theatres, they step out of homes and do more retail shopping. Films drive our music industry. They also represent a key part of brand India to the world.
Overall, the bigger issue is to move GST5 to GST1, where one reasonable GST rate covers every good and service in the country. Until that happens, the government would do well to move the film industry to a lower tax bucket, so it remains competitive and continues to entertain us for times to come.