February 2011 Key recommendations for Media & Entertainment Sector presented to the Finance Ministry
February 2011
Key recommendations for
Media & Entertainment
Sector presented to the
Finance Ministry
2
Table of Contents
Topic Page No.
Summary of the issues to be considered by the Hon’ble Union Finance
Minister
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Issues in detail 6
Film 7
Multiplex 8
TV Broadcasting 9
Radio 15
Animation, Visual Effects, Gaming and Comic (AVGC) Industry 16
3
Summary of the issues to be considered by the
Hon’ble Union Finance Minister
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Film:
1. VAT & service tax should not be levied simultaneously on copyright to avoid multiple
taxation.
2. The 90 days criteria in Rule 9-A & 9-B of Income Tax Act should be done away with or
the time period is reduced accordingly as most of the films do not have shelf life of 2-3
weeks.
3. The other revenue streams like music rights, satellite rights, home video rights etc. should
be included along with theatrical distribution/exhibition rights in rule 9-A&9-B of Income
Tax Act.
4. Necessary equipment and hardware for film production must be allowed to be imported
without the additional burden of customs duty.
5. Existing Customs Duty of 5% for unexposed cinematographic color film should be
removed.
Multiplexes:
1. Entertainment tax should be included in GST.
2. Multiplex operators should be exempted from payment of duties on import of
cinema equipment, till GST is introduced.
3. Multiplex operators should be exempted from levy of service tax on property rentals,
till GST is introduced.
4. Multiplex operators should be exempted from levy of service tax on payments made
by them to distributors for exploitation of cinematographic rights, till GST is introduced.
TV Broadcasting:
1. Digitisation is the utmost necessity for the growth of the industry. Thus there is a need
for clear and well defined roadmap for the transition from analog to the digital mode
across the country. Thus following are important to facilitate digitization –
a. Rationalization of duty on Set Top boxes for 3 years
b. Reduction of Service tax rates
c. Rectification of investment restrictions (FDI limits to be increased)
2. Infrastructure status should be granted to the cable industry. This will garner domestic
funding. Granting of infrastructure status to the broadcast infrastructure providers namely
teleport operators, Multi system operators, local cable operators, DTH operators, et al,
shall go a long way to ensure well rounded growth of the sector
3. Entertainment tax is extremely heavy and is levied differentially on subscribers
depending upon their place of residence. Entertainment tax is recommended to be shifted
from State List to Concurrent List
4. Service tax applicable to DTH industry should be reduced by 4 % for three years in order
to sustain amid multiple taxation regime (as some States have levied entertainment taxes
on such services as well)
5. Multiple Tax Levies
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a. DTH & Cable services should be brought under unified GST regime resulting in
rationalization by levy of a single unified tax replacing multiple tax levies
b. Central Government had constituted a committee to study the present structure of
levies on telecom industry and to suggest a unified and single levy so as to
rationalize the present structure of levies. A similar committee needs to be
constituted for broadcasting, DTH and cable sector also to suggest a unified levy
6. Rationalization of Duty Structure
Due to greater convergence among Telecom, IT and Broadcasting & Cable Television
Sectors, level playing field conditions would require rationalization of taxation of these
sectors
a. Duties, structure/concessions applicable to IT sector to extend to broadcast
industry as technology is converging. Excise and VAT parities with Telecom
sector
b. Provide same incentives to the broadcasting industry as given to Telecom industry.
c. Removal of anomalies on service tax on subscription
d. Incentive scheme on STB/Dish for popularization of DTH in remote & uncovered
areas of the country.
e. Concessional duty on set-top box and dish for DTH/Addressable Cable TV Sector
Radio:
1. 10.3 per cent service tax on revenue should be do away with for a free to air medium
like Radio as there is no service tax on print media.
2. There should be Customs Duty Exemption on radio equipment used for stations in small
towns.
Animation, Gaming, VFX, and Comic industry:
1. Tax Holiday for 10 years:
Direct Tax Holiday
Exemption from Service Tax on input services and output services in relation
to AVGC industry
Exemption from import duties on equipment required for setting up and operation
of animation and gaming studios which are currently taxed at the effective rate
between 26.85 % to 14.71 %
2. Consoles are for gaming what DVD player is for movies and set-top boxes are for TV.
Needs to be cheap and ubiquitous. Request reduction in import duties on Consoles which
are currently taxed at the highest effective rate of 26.85% as under:
Option I : 5 % BCD, 4 % CVD, 4% SAD + Cesses
Option II : 0 % BCD, 10% CVD, 4% SAD + Cesses (for gaming consoles)(Similar
to PCs)
3. NFDC Fund (for co-production in AVGC Sector) and Market Development Assistance.
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Issues in detail
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FILMS AND MULTIPLEXES
Film:
VAT and Service Tax on Copyright: The Budget 2010, introduced the levy of service
tax on Copyright Services with effect from 1 July 2010, whereby, the temporary transfer
of / permitting use or enjoyment of copyright has been made liable to service tax. Under
this new category, all forms of licensing of copyright would be liable to service tax,
except original literary, dramatic, musical and artistic works. Separately, the Government
of various states have classified copyright as goods and made the transfer / licensing of
copyright liable to VAT. Therefore, the levy of service tax and VAT on the same
transaction / consideration has led to a double taxation and is causing great distress to the
industry.
It is therefore recommended that the Government should not levy both VAT and
Service tax on Copyright resulting in multiple taxation on the same item
Reduction/Removal in 90 days criteria for exhibition of the film under rule 9A and
9B-Rule 9A, 9B specifies that in case if films are released within 90 days of the end of the
year then, production cost will not be allowed in full but allowed only to the extent of
revenue generated from exhibition of the film during the concerned financial year.
However, in the current scenario, most of the films do not have a shelf life of more than 2-
3 weeks. Accordingly, the criteria of 90 days should either be reduced or removed
completely, so that production cost can be allowed in the same year in entirety.
Distribution as per Rule 9A & 9B- The distribution as mentioned in Rule 9A & 9B
covers only theatrical distribution. In case if the films are released within 90 days of the
end of the year, then production cost would be allowed only to the extent of revenue
generated from theatrical exhibition. It would be pertinent to note here that in the current
scenario, share of revenue from other streams like music rights, satellite rights, home
video rights etc. is increasing and accordingly, those revenue streams should be included
in the above rules in order to give maximum deduction of production cost.
Customs Duty: There is also customs duty levied on import of equipment and other
hardware used in the production and post production of filmed entertainment
programmes. At a time when India is trying to position itself as a hub for production of
entertainment and competing in the International market on an equal footing, the
necessary infrastructure and equipment is of vital importance. To provide impetus to the
technological up gradation of facilities and infrastructure the necessary equipment and
hardware must be allowed to be imported without the additional burden of customs duty.
It is also requested that the Government should alleviate the film industry‟s problem by
withdrawing the existing Customs Duty of 5% for unexposed cinematographic color film.
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Multiplex:
Inclusion of Entertainment Tax in GST : It is requested that the Government include
Entertainment Tax in the forthcoming Goods & Services Tax (GST) regime. If the levy of
Entertainment Tax is kept out of GST, it would be particularly unjustifiable in States such
as Maharashtra where the rate of entertainment tax being levied on films is pretty high
(45%). Hence the Government should include Entertainment Tax in GST as proposed
earlier
Import duty on cinema exhibition equipments: At present, custom duties applicable
are Basic 7.50% + CVD 10.30% + Additional CVD 4% aggregating to an effective duty
charge of 24%. In this sector there is high technology obsolescence. While multiplex
operators collect and pay high entertainment tax, they cannot set off the import duty
paid on cinema equipment imported, with the entertainment tax collected. Multiplex
operators should be exempted from payment of duties on import of cinema equipment,
till GST is introduced, and entertainment tax is subsumed in GST, to result in seamless
pass-through of these indirect taxes.
Service tax on property rentals: Presently, service tax is levied on property rentals,
and passed on to tenants, which include multiplex operators. This becomes an additional
cost for multiplex operators whose operations even without such service tax, are barely
viable. While multiplex operators collect and pay high entertainment tax, they cannot set
off the service tax paid on property rentals with the entertainment tax collected. It is
suggested that multiplex operators should be exempted from levy of service tax on
property rentals, till GST is introduced, and entertainment tax is subsumed in GST, to
result in seamless pass-through of such indirect taxes.
Service tax on payments to distributors: Service tax is levied on payments made by
multiplex operators to distributors for exploitation of cinematographic rights. This
becomes an additional cost for multiplex operators whose operations even without such
service tax, are barely viable. While multiplex operators collect and pay high
entertainment tax, they cannot set off the service tax paid on payments made to
distributors with the entertainment tax collected. Some States levy a VAT on such
payments and hence, there is double taxation on the same payment. It is suggested that
multiplex operators should be exempted from levy of service tax on payments made by
them to distributors for exploitation of cinematographic rights, till GST is introduced,
and entertainment tax is subsumed in GST, to result in seamless pass-through of these
indirect taxes.
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BROADCASTING: TV AND RADIO
TV Broadcasting:
Digitization With Addressability
It has been a long cherished goal of the broadcasting industry to endow more choice to
the television viewing consumer. With more and more set top boxes replacing the old
analog technology, the resulting transparency shall ensure greater revenues to the
exchequer. Also with set top boxes having facets of multi functionality and
convergence, the usage of other telecommunication services shall be more widespread
and broad based and will further result in greater broadband penetration particularly in
rural and cable dark areas.
India Going Digital – Key Factors that will facilitate the process
Focus Areas to facilitate addressable digitization
Technology/standards
1. Need to prescribe any technology/standards for digitization keeping in mind the
following-
Availability of compliant devices
Possibility of replacing the technology by another productive technology whenever
available
Two possible strategies-
Mandating the most appropriate technology available
Allowing service providers to choose and deploy the most appropriate technology
2. Choice of a technology cannot be one time decision and has to be reviewed periodically
3. The Cable Act provides that the cable operator shall use only those equipments which are
BIS compliant in his cable television network to ensure standard quality
Analogue
Technology
/standards
Investment
required
Regulatory
Issues
Incentivize
stakeholde
rs
Raise
Awareness
Digital Transition from Analog to Digital
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Investment required
It is very important to upgrade the existing cable infrastructure in the
Country. Following are the key cost components-
Cost of set-top box
Distribution network up-gradation cost
Training of manpower for operation and maintenance of the network
Incentives to stakeholders for implementing digitization with
Addressability
1. Cable TV networks can be widely used for broadband services. So infrastructure status
should be granted to it like telecom sector
2. Require rationalization of the taxes and levies on the distribution sector
3. It should be ensured that service tax, entertainment tax and VAT be subsumed in GST
Regulatory Issues
1. It is recommended that for implementing the sunset date for Analogue Cable TV
services, the Cable Television Networks (Regulation) Amendment Act 2002 be suitably
amended
2. Licensing of MSO/LCO
MSO as an entity requires to be recognized in the Cable Television Networks
(Regulation) Act
It is advised to bring the Cable TV service providers under a progressive, predictable
and transparent licensing regime
Formulate & ensure adherence to the separate licensing framework for both MSOs &
LCOs
Raising Awareness among the stakeholders
Massive education programme have to be taken up to educate the stakeholders about the
benefits of a digital addressable cable TV network
LCOs- They have to be sensitized to the changing technology, business models &
redefined roles of other stakeholders
Consumer – Firstly education will enable them to understand the advantages in terms of
quality, choice and new value added services etc. Secondly, they have to be educated &
motivated to use the capabilities of the set top boxes efficiently and effectively
Through digitization following Losses to the Government
can be reduced- Central and state governments suffer significant revenue losses in income tax,
service tax and entertainment tax as a result of leakage in the value chain; estimated
annual losses are as follows:
o Service tax: ~INR 1,300 crore (as per TRAI)
o Also Entertainment tax and Income tax collections (both from distributors and
broadcasters) are also being affected.
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Vast incremental employment potential (~1 million jobs) in the media sector remains
untapped due to the inability of the sector to grow and achieve its full potential.
o Associated socio-economic and revenue loss implications for government
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To facilitate digitization following needs to be ensured-
Rationalization of duty on Set Top boxes
Issue: Currently, the import duty structure for a Set Top Box is as high as a basic import
duty of 5% + SAD of 4% + CVD of 8%. Moreover, the excise duty on a Set Top Box is
also high at 10.3%.
Impact: However, the Government does not make any revenue from this source in the
analog cable market since no Set Top Boxes are actually sold. As the digitization
process acquires critical masses, more such boxes will be sold resulting in increased
collections by the exchequer. Digitization will thus increase tax collections to the tune
of ~7,100 crores annually.
Recommendation: There is thus a need to provide fillip to the importation and
indigenous manufacture of set top boxes; towards this end import and excise duties on
set top boxes should be subjected to a moratorium for three years coinciding with the
sun set date for analog transmission as laid down by the TRAI in its latest
recommendations on digitization.
Reduction of Service tax rates
Issue: The DTH industry has been in the red ever since inception with negative
EBITDAs more a norm than an exception. Without government intervention and
assistance, the very survival of the DTH industry is at stake as its investments are
comparatively very high.
Impact: Mounting losses in the DTH space do not augur well for the digitization
roadmap that the country has embarked upon in right earnest.
Recommendation: The service tax applicable to the DTH industry should be reduced by
4 % for three years in order for it to sustain amid the multiple taxation regime afflicting
the sector as some States have levied entertainment taxes on such services as well..
Rectification of investment restrictions
Issue: TRAI‟s August 2010 Recommendation on „Implementation of Digital
Addressable Cable TV Systems in India‟ estimates the investment required for
digitization of analog cable systems at INR 30,000 – INR 50,000 crores.
The current limits for foreign investment in different segments of broadcasting sector
together with the TRAI recommendations thereto are as follows:
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S.No. Segment Existing Limit TRAI
Recommendations
(2008)
TRAI
Recommendations
(30 June 2010)
1. Teleport(Hub) 49% 74 % (49 % on
automatic route)
74% *
2. DTH 49% 74 % (49 % on
automatic route)
74% *
3. HITS 74% (49% on
automatic route)
74 % (49 % on
automatic route)
74% *
4 (a) Cable Networks-MSOs
operating at National or
State level
49%
74 % (49 % on
automatic route)
No distinction
between MSO/LCO
in 2008
74% * provided they
undertake
upgradation of
networks towards
digitalisation with
addressability
4 (b) Other MSOs 49% Status Quo*
5. Cable Networks-Local
Cable Operators
49% 26% *
6. FM Radio 20% 49 % 26% *
7. Downlinking of TV
Channels
100% Status Quo *
8. Uplinking of TV News &
Current Affairs Channels
26% 49 % Status Quo *
9. Uplinking of TV Non-
News & Current Affairs
Channels
100% Status Quo *
10. Mobile TV No Policy 74% 74% *
* FDI below 26% is recommended through automatic route.
Impact: On the other hand, unlike in telecom, where a flat 74% foreign investment has
been allowed, investment norms in broadcasting and distribution are inconsistent, and
with artificial barriers (e.g. segregation of MSOs, MCOs, Direct to Home, Headend in
the Sky, etc). In most cases, the limits are lower than 50% (~49%, 26% or 20%) and in
many cases, no automatic approval is available. Thus, even though these are all similar
in principal, i.e., they are all ways to deliver media content, they are subjected to
different investment norms.
Recommendation:
(1) TRAI had recommended on April 26, 2008, an increase in FDI/FII limits to 74% in
all distribution sectors. This policy change will have to be a pre-requisite for the on-
ground roll out of the digital service regime so as to allow serious players and
existing operators in dire need of funding to arrange for and fund their upgradation
and expansion.
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(2) In broadcasting, the limit of 26% ownership in news channels has achieved little
except stop much-needed investments from flowing into the sector. As long as
majority ownership and editorial content remains in Indian hands, there is no reason
why foreign ownership cannot go up to at least 49%.
Infrastructure status to the cable sector:
Issue: The Cable industry that has grown for the last twenty years in an unorganized
manner has been catering to 90 million households by deploying out dated analog
technology. The cable TV network, like telecom infrastructure, is important
infrastructure for the country. Besides delivering digital television signals, it can be
effectively used to deliver broadband services. Internationally, cable TV networks are
widely used for broadband services
Impact: But there is currently a lack of transparency owing to under-declarations,
resulting in considerable loss to the government in terms of tax collections. This has
resulted in banks and financial institutions steering clear from the cable sector, thereby
impairing quality of service, technological upgradation and the required switchover to
digitization with addressability. TRAI has conservatively estimated that a sum of INR
50000 Crores is required to ensure the transition from analog to digital technology in the
cable sector.
Recommendation: The Cable sector needs to be given “Infrastructure” status, in order
to garner domestic funding. Granting of infrastructure status to the broadcast
infrastructure providers namely teleport operators, Multi system operators, local cable
operators, DTH operators, et al, shall go a long way to ensure well rounded growth of
the sector.
Non uniform tax structure for broadcasting services across all states :
Issue: The rate of entertainment tax varies from State to State, e.g in Maharashtra it is
45%, in Uttar Pradesh it is 30%, in Rajasthan it is 10%, in Uttaranchal it is 30%, in
Karnataka it is 5%.
Impact: The entertainment tax burden is not only extremely high but it also results in
levy of differential tax on the subscribers depending upon their place of residence.
Recommendation:
Uniform tax structure across all sates for the Broadcasting services:
Since levy of entertainment tax is a State subject, the Centre presently has a limited role
to play. It is therefore, suggested that it would be in the interest of Industry if the
Finance Ministry sensitizes the state governments on the benefits of an uniform and
rationalized entertainment tax structure that will provide much needed fillip to the Cable
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and DTH industry which in turn would lead to an upward movement in employment and
income levels in the respective states.
Customs duty and other levies on broadcasting sector
Issue: In the present era of convergence of telecommunication, information technology
(IT) and broadcasting technology, there is a need for coherently aligning taxation policy
with regard to the importation of underlying equipments. It is pertinent to point out that
by way of Notification No. S.O. 44(E) dated 9.1.2004 issued by the Ministry of
Communication & Information Technology (Department of Telecommunications), the
Central Govt. has notified `Broadcasting Services and Cable Services‟ to be
“Telecommunication Service” under TRAI Act 1997.
Impact: The Planning Commission in its Report: Going Digital has noted that on
account of convergence of Information and Communication Technologies now it is
possible to have triple play i.e. single system/ equipment can provide telephony, internet
and television services. However, the rates of Customs duty applicable on
broadcasting/DTH/cable TV equipments vastly differ from the rates applicable on IT
products and Telecom products. This anomaly has led to the levy of higher duty on
broadcasting equipments, thereby creating a non-level playing field in this sector.
Recommendation:
Rationalization of Duty Structure
Since now there is a greater convergence among Telecom, Information Technology and
Broadcasting & Cable Television Sectors, the level playing field conditions would
require rationalization of taxation of these sectors. A number of items pertaining to the
DTH/cable TV industry which have the same functional use as that of similar items on
the telecom side are not coming under the same classification leading to differential
rates of custom duty. Thus, there is a need to ensure a level playing field by
rationalization of custom duty structure for these items.
• Duties, structure/ concessions applicable to IT sector to extend to broadcast industry
as technology is converging
• To treat broadcasting industry including Cable and DTH as part of Telecom
infrastructure to provide level playing field.
• Provide same incentives to the broadcasting industry as given to Telecom industry.
• Separate classification of Cable TV equipment by Commerce Ministry and parity
with Telecom sector.
• Excise and VAT parities with Telecom sector
• In order to promote indigenous production of STBs, the Excise Duty may also be
exempted for a period of 10 years
• Removal of anomalies on service tax on subscription.
• Govt. of India may recommend to State Governments to have uniform entertainment
duty on cable/ DTH services.
• Incentive scheme on STB‟s/ Dish for popularization of DTH in the remote and
uncovered areas of the country.
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Concessional duty on set-top box and dish for DTH/Addressable Cable TV Sector
Levy of both Service tax and VAT on “Copyright services”
Issue: Finance Act 2010 has introduced a new Service Tax category i.e. Copyright
Services whereby under the taxing entry for copyright services , temporary transfer of or
permitting use of / enjoyment of copyright has been made liable for Service Tax.
Effectively it appears that all form of exploitation of copyright by the rights – holder,
will attract the levy of Service Tax.
Impact: Governments have already classified “copyright” as goods, hence and transfer
of copyright is already liable for payment of VAT / CST. Now, with the introduction of
this service tax category, the same transaction attracts both levies i.e. Service Tax and
VAT, leading to double taxation, causing great hardship to the industry.
Recommendation: Such position is also contrary to the intention of the Constitution of
India; hence needs to be corrected.
Radio Broadcasting
Service Tax on Radio Advertising: A free to air medium like radio should not be
subjected to a high 10.3% service tax charge on revenue. It should be made at par with
other media – like print media where there is no service tax.
Customs Duty Exemption: Small towns, which have a low commercial potential and
where the Government is encouraging private players to open radio stations to provide
free information and entertainment to the citizens, should have a reduced cost of set up.
There should be Customs Duty Exemption on radio equipment used for stations in small
towns.
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ANIMATION, VISUAL EFFECTS, GAMING AND
COMIC (AVGC) INDUSTRY In the Internet Age, Digital Content is the key driver for Entertainment, Education and
propagation of Art & Culture and India with its unmatched heritage has a clear edge to
emerge a global giant in the AVGC sectors which is the core of the Digital Content
Economy. Recognizing this, most countries are making significant investments into this
space. While we have it all to make it to the top, if the suggested interventions are not
implemented now, India has a great fear of missing the bus to become a leader in the global
digital content economy.
Overview:
• Global AVGC industry is growing at a pace of 10 -12% and is expected to be around 170
billion USD by 2013.
• While India AVGC industry is growing at a pace of 20-24%, still is at a nascent stage and
continues to be a miniscule 0.54% of the Global AVGC industry.
• India AVGC Industry has potential to capture a bigger share in the Global AVGC Industry
on account of strengths like favorable demographics, cost arbitrage, growing media
platforms, rich cultural heritage etc.
• However, Government intervention is required to out-pace global competitors and
overcome:
Internal challenges like longer gestation, higher cost, lack of funding, higher
import duties, lack of trained man power, attractive studio set-up offers from
foreign countries.
External challenges like co-production treaties, subsidies, content reservation etc.
provided to foreign competitors in other countries such as Malaysia, Singapore,
China, Korea, Canada etc which have recorded impressive growth numbers in
revenue and employment in this sector.AVGC sector of India needs immediate
Government intervention towards creating a platform for growth. Short term
policies & fiscal interventions required to help AVGC sector achieve scale for
creation of a robust creative economy.
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The key recommendations for the Indian Government are:
Tax Holiday for 10 years:
Direct Tax Holiday
Exemption from Service Tax on input services and output services in relation to
AVGC industry
Exemption from import duties on equipment required for setting up and
operation of animation and gaming studios which are currently taxed at the
effective rate between 26.85 % to 14.71 %
Reduction of Import Duty on Consoles: Consoles are for gaming what DVD player is
for movies and set-top boxes are for TV. It needs to be cheap and ubiquitous. So, it is
requested for reduction in import duties on Consoles which are currently taxed at the
highest effective rate of 26.85% as under:
Option I : 5 % BCD, 4 % CVD, 4% SAD + Cesses
Option II : 0 % BCD, 10% CVD, 4% SAD + Cesses (for gaming
consoles)(Similar to PCs)
Setting up of co-production Fund under NFDC: Intellectual Properties originating
out of India can be coproduced/co-funded by NFDC. NFDC may retain a percentage of
revenue share from the future revenues in perpetuity in proportion to the investment in
the IP. This model would eventually fund itself after 5 years from the revenues
generated out of the global sales of these animated properties. An expert committee for
selection of projects can be set up jointly between the government and domain experts.
The provision of funds needs to be provided for the minimum period of 5 years to 10
years to build a robust foundation of creating original content and registration,
protection and exploitation of these IP‟s from India. The coproduction fund may be
extended to animation, gaming, VFX (films with a minimum of 40% animation and
effects) as well as comics industry.
Market Development Assistance (MDA): MDA will assist in building Brand India in
International market and encourage Co-productions. This in turn will encourage the
small and new companies to expand their business outside India. So, It is recommended
that there should be provision under Market Development Assistance for a
reimbursement of 50 per cent of expenses like travel and registration fees to
international market events such as exhibiting Indian companies by setting up Indian
Pavilions in world markets. This will enable local production companies to place into
international markets, collecting and disseminating information and help supporting the
infrastructure needed for a healthy media market to develop.
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In lieu of receiving the above stated benefits from the Government, AVGC India
Promises:
To capture 12 – 15% market share in the Global AVGC Industry by 2020.
To reach a size of 20 billion USD industry within 10 years time.
A quick analysis of the loss to the exchequer in the short term due to exemption and
the gain in the long term, due to industry achieving scale & size as under:
Income Tax
o The loss to exchequer by giving the benefit of Income Tax exemption to AVGC
for 10years would be around 3,364 INR crores at present rate of growth
o After withdrawal of exemption, there will be an contribution of Income Tax of
INR 20,296 crores in the next five years
o Benefit of tax holiday will outstrip the otherwise projected revenue of INR 8,368
crores in 15 years at the present rate without intervention
o Detailed calculation attached at Annexure 1.
Service Tax
o The loss to exchequer by giving the benefit of Service Tax exemption to AVGC
10 years would be around 646 INR crores.
o After withdrawal of exemption, there will be an additional contribution of
Service Tax of INR 2106 crores in the first year itself.
o That is, the loss to exchequer would be well recovered within one year post
exemption.
o Detailed calculation attached at Annexure 2.
Custom Duties
o Loss to exchequer by reducing the customs duties on consoles for the first year
would be 2.09 crores under Option I and 1.06 INR crores under Option II.
o There will be an additional custom duty collection in the 2nd year itself of 4.52
INR crores under Option I and 6.42 INR crores under Option II
o That is, the loss to exchequer will be well recovered within the 2nd year itself
and there will be additional contribution by AVGC industry to the exchequer
from the 2nd year onwards (additional contribution of 2.43 crores / 5.36 crores in
the 2nd year itself)
o Detailed calculations along with assumption for the above are attached at
Annexure 3.
Cultural Impact:
o To boost, preserve and maintain Indian culture in young Indians through
Animation and Gaming medium
o Propagation of Indian Art, Culture and values to the world using digital medium
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o Dying art forms will get a new lease of life in the Digital domain. Restoration
and preservation of Indian folk Art, Heritage and Art forms such as Warli,
Moghul Minatures, Madhubani etc.
Education:
o AVGC for Mass Education. Digital Content technologies can significantly
contribute to increase the quality of Primary Education in India. AVGC sectors
can work closely with Ministry of HRD for creation of interactive edutainment
content that can be streamedinto every primary school using broadband
infrastructure that is being rolled out down to the village level.
Indirect benefits:
o Increased tax revenues from domestic exploitation of IPs housed in India.
o Increased foreign exchange earnings from international markets for exploitation
of IPs housed in India.
o Increased tax revenues in terms of indirect and direct taxes as a direct result of
industry growth on account of IPs being housed in India.
o Widening of industry will lead to employment generation which in turn will
contribute to tax revenues in terms of taxes on salaries.
o India becomes a preferred destination for global AVGC players to setup a
development and production base.
At this critical juncture when so many countries around us are surging ahead in the
AVGC sector, let us understand what India stands to lose if immediate action is not
taken by Government.
Loss of business opportunities to competitors in other countries
o De-acceleration of the growth of the Indian AVGC industry.
o Continued domination of US, UK, Canada, France and Japan.
o Aggressive and substantial incentives by Asian countries like Malaysia,
Singapore, China, Korea, Taiwan will undermine efforts of Indian AVGC
industry.
o IP creation in India will not be attractive thus limiting Indian AVGC industry to
support roles only.
o Lack of Government support may force Indian companies to exit to other
investor friendly countries.
Brain drain of professional expert in the field of art and animation.
o Loss of opportunities for employment for youth interested in this sector and
development of ancillary industries.
o Enforced westernized and Japanese culture in impressionable children/youth
leading to inevitable erosion of Indian culture.
o Stagnation of tax revenues - Potential to off-set revenue foregone with higher tax
revenues from larger industry size.
21
The entire AVGC sector of India is dedicated and determined to take India towards a
consolidated leadership position in this era of Global Digital Content Economy. We
earnestly ask for Government‟s intervention and facilitation towards the above mentioned
recommendations to help the Indian AVGC sector emerge as a winner.
22
ANNEXURE-I: Income Tax Computations:
INCOME TAX - ANIMATION & GAMING - AT PRESENT RATE
Year Revenue Profits Tax
2010 3,300 330 59
Revenue in 10 years = 3,364 crores
2011 4,152 415 125
2012 5,226 523 157
2013 6,582 658 197
2014 8,294 829 249
2015 10,456 1,046 314
2016 12,210 1,221 366
2017 14,264 1,426 428
2018 16,671 1,667 500
2019 19,492 1,949 585
2020 22,801 2,280 684
2021 25,266 2,527 758
Revenue in next 5 years = 4,704 crores
2022 27,999 2,800 840
2023 31,031 3,103 931
2024 34,394 3,439 1,032
2025 38,124 3,812 1,144
Assumptions
1. The revenue projections are as per industry estimates
2. Under present scenario, rate of growth for Animation is likely to drop from the present 24% to 15% in 2016 and further to 10% in 2021.For Gaming, rate of growth is likely to drop from the present 24% to 20% in 2016 and further to 12% in 2021.
3. Profit margin is 10% of revenues
4. Tax rate in 2010 is taken @ MAT rate of 18% for AY 2011-12 assuming the industry is enjoying tax holiday under section 10A under the STP scheme
5. Tax holiday under SEZ has not been considered
6. Tax rate for year 2011 and onwards is taken @ 30% since AY 2011-12 is the last year of tax holiday for STP scheme and SEZ regime is not taken into account
7. Tax rates are assumed to be constant throughout
8. Tax rate is excluding any applicable surcharge and cess
23
INCOME TAX - ANIMATION & GAMING - WITH SUGGESTED INCENTIVES
Year Revenue Profits Tax
2010 3,300 330 59
Revenue foregone in 10 years = 9,611 crores
2011 4,152 415 125
2012 5,605 561 168
2013 7,567 757 227
2014 11,351 1,135 341
2015 17,026 1,703 511
2016 25,539 2,554 766
2017 38,308 3,831 1,149
2018 50,950 5,095 1,528
2019 67,763 6,776 2,033
2020 90,125 9,012 2,704
2021 1,03,644 10,364 3,109
Revenue collection in 5 years thereafter = 20,296 crores
2022 1,19,190 11,919 3,576
2023 1,37,069 13,707 4,112
2024 1,50,776 15,078 4,523
2025 1,65,853 16,585 4,976
Assumptions
1. The revenue projections are as per industry estimates
2. For both, revenues would grow @ 35% from 2012 and 2013, @ 50% from 2014 to 2017, @ 33% from 2018 to 2020, @ 15% from 2021 to 2023 and @ 10% thereafter.
3. Profit margin is 10% of revenues
4. Tax rate in 2010 is taken @ MAT rate of 18% for AY 2011-12 assuming the industry is enjoying tax holiday under section 10A under the STP scheme
5. Tax holiday under SEZ has not been considered
6. Tax rate for year 2011 and onwards is taken @ 30% since AY 2011-12 is the last year of tax holiday for STP scheme and SEZ regime is not taken into account
7. Tax rates are assumed to be constant throughout
24
8. Tax rate is excluding any applicable surcharge and cess
INCOME TAX - ANIMATION - AT PRESENT RATE
Year Revenue Profits Tax
2010 2,300 230
41
Revenue in 10 years = 2,298 crores
2011 2,852 285
86
2012 3,536 354
106
2013 4,385 439
132
2014 5,438 544
163
2015 6,743 674
202
2016 7,754 775
233
2017 8,917 892
268
2018 10,255 1,025
308
2019 11,793 1,179
354
2020 13,562 1,356
407
2021 14,918 1,492
448
Revenue in next 5 years = 2,732 crores
2022 16,410 1,641
492
2023 18,051 1,805
542
2024 19,856 1,986
596
2025 21,842 2,184
655
Assumptions
1. The revenue projections are as per industry estimates
2. Under present scenario, rate of growth is likely to drop from the present 24% to 15% in 2016 and further to 10% in 2021. Similarly, for Gaming, rate of growth is likely to drop from the present 30% to 20% in 2016 and further to 12% in 2021.
3. Profit margin is 10% of revenues
4. Tax rate in 2010 is taken @ MAT rate of 18% for AY 2011-12 assuming the industry is enjoying tax holiday under section 10A under the STP scheme
5. Tax holiday under SEZ has not been considered
6. Tax rate for year 2011 and onwards is taken @ 30% since AY 2011-12 is the last year of tax holiday for STP scheme and SEZ regime is not taken into account
7. Tax rates are assumed to be constant throughout
8. Tax rate is excluding any applicable surcharge and cess
25
INCOME TAX - ANIMATION - WITH SUGGESTED INCENTIVES
Year Revenue Profits Tax
2010 2,300 230 41
Revenue foregone in 10 years = 6,602 crores
2011 2,852 285 86
2012 3,850 385 116
2013 5,198 520 156
2014 7,797 780 234
2015 11,695 1,169 351
2016 17,542 1,754 526
2017 26,314 2,631 789
2018 34,997 3,500 1,050
2019 46,546 4,655 1,396
2020 61,907 6,191 1,857
2021 71,193 7,119 2,136
Revenue collection in 5 years thereafter = 13,941 crores
2022 81,871 8,187 2,456
2023 94,152 9,415 2,825
2024 1,03,567 10,357 3,107
2025 1,13,924 11,392 3,418
Assumptions
1. The revenue projections are as per industry estimates
2. Revenues would grow @ 35% from 2012 and 2013, @ 50% from 2014 to 2017, @ 33% from 2018 to 2020, @ 15% from 2021 to 2023 and @ 10% thereafter.
3. Profit margin is 10% of revenues
4. Tax rate in 2010 is taken @ MAT rate of 18% for AY 2011-12 assuming the industry is enjoying tax holiday under section 10A under the STP scheme
5. Tax holiday under SEZ has not been considered
6. Tax rate for year 2011 and onwards is taken @ 30% since AY 2011-12 is the last year of tax holiday for STP scheme and SEZ regime is not taken into account
7. Tax rates are assumed to be constant throughout
8. Tax rate is excluding any applicable surcharge and cess
26
INCOME TAX - GAMING - AT PRESENT RATE
Year Revenue Profits Tax
2010 1000 100 18
Revenue foregone in 10 years = 1,365 crores
2011 1300 130 39
2012 1690 169 50.7
2013 2197 219.7 65.91
2014 2856.1 285.61 85.683
2015 3712.93 371.293 111.3879
2016 4455.516 445.5516 133.66548
2017 5346.6192 534.66192 160.398576
2018 6415.94304 641.594304 192.478291
2019 7699.13165 769.913165 230.973949
2020 9238.95798 923.895798 277.168739
2021 10347.6329 1034.76329 310.428988
Revenue collection in 5 years thereafter = 1,972 crores
2022 11589.3489 1158.93489 347.680467
2023 12980.0708 1298.00708 389.402123
2024 14537.6792 1453.76792 436.130377
2025 16282.2008 1628.22008 488.466023
Assumptions
1. The revenue projections are as per industry estimates
2. Under present scenario, rate of growth is likely to drop from the present 30% to 20% in 2016 and further to 12% in 2021.
3. Profit margin is 10% of revenues
4. Tax rate in 2010 is taken @ MAT rate of 18% for AY 2011-12 assuming the industry is enjoying tax holiday under section 10A under the STP scheme
5. Tax holiday under SEZ has not been considered
6. Tax rate for year 2011 and onwards is taken @ 30% since AY 2011-12 is the last year of tax holiday for STP scheme and SEZ regime is not taken into account
7. Tax rates are assumed to be constant throughout
8. Tax rate is excluding any applicable surcharge and cess
27
INCOME TAX - GAMING - WITH SUGGESTED INCENTIVES
Year Revenue Profits Tax
2010 1,000 100 18
Revenue foregone in 10 years = 3,009 crores
2011 1,300 130 39
2012 1,755 176 53
2013 2,369 237 71
2014 3,554 355 107
2015 5,331 533 160
2016 7,996 800 240
2017 11,994 1,199 360
2018 15,952 1,595 479
2019 21,217 2,122 637
2020 28,218 2,822 847
2021 32,451 3,245 974
Revenue collection in 5 years thereafter = 6,355 crores
2022 37,319 3,732 1,120
2023 42,917 4,292 1,287
2024 47,208 4,721 1,416
2025 51,929 5,193 1,558
Assumptions
1. The revenue projections are as per industry estimates
2. Revenues would grow @ 35% from 2012 and 2013, @ 50% from 2014 to 2017, @ 33% from 2018 to 2020, @ 15% from 2021 to 2023 and @ 10% thereafter.
3. Profit margin is 10% of revenues
4. Tax rate in 2010 is taken @ MAT rate of 18% for AY 2011-12 assuming the industry is enjoying tax holiday under section 10A under the STP scheme
5. Tax holiday under SEZ has not been considered
6. Tax rate for year 2011 and onwards is taken @ 30% since AY 2011-12 is the last year of tax holiday for STP scheme and SEZ regime is not taken into account
7. Tax rates are assumed to be constant throughout
8. Tax rate is excluding any applicable surcharge and cess
28
Annexure-II: Service Tax Computations
SERVICE TAX
CURRENT - WITH NO INCENTIVES
ANIMATION AND GAIMING - COMBINED
Revenue in INR Crores
Exports Revenue Domestic
Console and Hardware Revenue
Subject to VAT (Copy right)/ Non-taxable
Remaining subject to service Tax
Service Tax @ 10.3% Cumulative
% % INR in Crores % % %
INR in Crores
INR in Crores
INR in Crores
C 2009 2000 90% 10% 200 20% 30% 50% 100 10 10
P 2010 3300 90% 10% 330 20% 30% 50% 165 17 27
P 2011 4152 90% 10% 415 20% 30% 50% 208 21 49
P 2012 5226 90% 10% 523 20% 30% 50% 261 27 76
P 2013 6582 90% 10% 658 20% 30% 50% 329 34 109
P 2014 8294 90% 10% 829 20% 30% 50% 415 43 152
P 2015 10456 90% 10% 1046 20% 30% 50% 523 54 206
P 2016 12210 90% 10% 1221 20% 30% 50% 611 63 269
P 2017 14264 90% 10% 1426 20% 30% 50% 713 73 342
P 2018 16671 90% 10% 1667 20% 30% 50% 834 86 428
P 2019 19492 90% 10% 1949 20% 30% 50% 975 100 529
P 2020 22801 90% 10% 2280 20% 30% 50% 1140 117 646*
P 2021 25266 90% 10% 2527 20% 30% 50% 1263 130 776
P 2022 27999 90% 10% 2800 20% 30% 50% 1400 144 920
P 2023 31031 90% 10% 3103 20% 30% 50% 1552 160 1080
P 2023 34394 90% 10% 3439 20% 30% 50% 1720 177 1257
P 2023 38124 90% 10% 3812 20% 30% 50% 1906 196 1454
*Loss to exchequer in 10 years.
Presumptions 1. Actual 2009 and Projected 2010 Revenue figure as per KPMG FICCI Report
2010 2. Increase in revenue at the projected rate of as per Income tax computations
29
3. Revenue from export estimated at 90% as discussed industry persons 4. Other assumptions: Revenue towards sale of hardware - 20%, Non-taxable or VATable revenue - 30%, Service Tax
- 10.3%
PROJECTED - WITH INCENTIVES
Revenue in INR Crores
Exports Revenue Domestic
Console and Hardware Revenue
Subject to VAT (Copy right) / Non-taxable
Remaining subject to service Tax
Service Tax @ 10.3%
% % INR in Crores % % %
INR in Crores
INR in Crores
C 2009 2000 90% 10% 200 20% 30% 50% 100 10
P 2010 3300 90% 10% 330 20% 30% 50% 165 17
P 2011 4152 86% 14% 581 20% 30% 50% 291 0
P 2012 5605 82% 18% 1009 20% 30% 50% 504 0
P 2013 7567 78% 22% 1665 20% 30% 50% 832 0
P 2014 11351 74% 26% 2951 20% 30% 50% 1476 0
P 2015 17026 70% 30% 5108 20% 30% 50% 2554 0
P 2016 25539 66% 34% 8683 20% 30% 50% 4342 0
P 2017 38308 62% 38% 14557 20% 30% 50% 7279 0
P 2018 50950 58% 42% 21399 20% 30% 50% 10700 0
P 2019 67763 54% 46% 31171 20% 30% 50% 15585 0
P 2020 90125 50% 50% 45063 20% 30% 50% 22531 2321
Additional Revenue
P 2021 103644 46% 54% 55968 20% 30% 50% 27984 2882 2106
P 2022 119190 42% 58% 69130 20% 30% 50% 34565 3560 2640
P 2023 137069 38% 62% 84983 20% 30% 50% 42491 4377 3296
P 2023 150776 34% 66% 99512 20% 30% 50% 49756 5125 3868
P 2023 165853 30% 70% 116097 20% 30% 50% 58049 5979 4525
30
Presumptions 1. Actual 2009 and Projected 2010 Revenue figure as per KPMG FICCI Report 2010
2. Increase in revenue at the projected rate of as per Income tax computations 3. Revenue from export estimated to reduce at 4% per annum from the actual estimates (90%) - as discussed industry
officials 4.Other assumptions: Revenue towards sale of hardware - 20%, Non-taxable or VATable revenue - 30%, Service Tax - 10.3%
31
Annexure-III: Customs duty Computations CUSTOMS ON CONSOLES
Total
Imports
(in INR
Crores)
Effectiv
e Duty
Rate
Duty
Paid
Cumulati
ve
% Revenue (In INR Crores)% Revenue (INR Crores)%
Current 149.28 70% 104.50 30% 44.78 26.85 12.02
Year 1 197.05 70% 137.94 30% 59.12 26.85 15.87 15.87
Year 2 260.11 70% 182.08 30% 78.03 26.85 20.95 36.82
Year 3 343.35 70% 240.34 30% 103.00 26.85 27.66 64.48
Year 4 453.22 70% 317.25 30% 135.97 26.85 36.50 100.98
Year 5 598.25 70% 418.77 30% 179.47 26.85 48.19 149.17
Year 6 789.69 70% 552.78 30% 236.91 26.85 63.61 212.78
TOTAL 2641.66 1849.16 792.50 212.78
Year 1 197.05 50% 98.53 50% 98.53 13.99 13.78 13.78
Year 2 260.11 30% 78.03 70% 182.08 13.99 25.47 39.26
Year 3 343.35 20% 68.67 80% 274.68 13.99 38.43 77.68
Year 4 453.22 15% 67.98 85% 385.23 13.99 53.89 131.58
Year 5 598.25 10% 59.82 90% 538.42 13.99 75.33 206.90
Year 6 789.69 10% 78.97 90% 710.72 13.99 99.43 306.33
TOTAL 2641.66 452.01 2189.65 306.33
Duty
Collection
at Current
Custom
Duty Rates
Duty
Collection If
Customs
Duty
Reduced
Gray Market Taxed Import
Effective Duty Rate(%age)
Duty Paid (In INR Crores)
Cumulative (In INR Crores)
Duty Collection If Customs Duty Reduced
Year 1 15.03 14.81 14.81
Year 2 15.03 27.37 42.18
Year 3 15.03 41.29 83.48
Year 4 15.03 57.91 141.39
Year 5 15.03 80.94 222.33
Year 6 15.03 106.84 329.18
329.18
Presumptions
1. In the event Customs Duty is reduced the Gray market for consoles will start converting into legitimate imports rapidly.
2. Rate of increase in imports is presumed at 32 percent per annum
32
Import Value:
Duty paid in 2010 (in cr) % Import Value
Sony 22.4 26.85% 83.43
Microsoft 26.85% 45.00
Others (20%) 5.6 26.85% 20.86
TOTAL 149.28
Custom Duty rate calculation:
Current Option 1 Option 2
Value 100 Value 100 Value 100
BCD 10% 10 BCD 5% 5 BCD 0% 0
110 105 100
CVD 10% 11 CVD 4% 4.2 CVD 10% 10
CVD Cess 3% 0.3 CVD Cess 3% 0.1 CVD Cess 3% 0.3
121.3 109.3 110.3
BCD Cess 3% 0.64 BCD Cess 3% 0.28 BCD Cess 3% 0.31
122.0 109.6 110.6
SAD 4% 4.9 SAD 4% 4.4 SAD 4% 4.4
126.85 113.99 115.03
26.85 13.99 15.03