DTH needs tax relief

Written by Sachin Menon | Updated: Oct 25 2013, 08:21am hrs
The challenges faced by the direct-to-home (DTH) industry are classic examples of how a flawed taxation structure can seriously impede growth of an otherwise promising industry. Such a superior technology for entertainment would have become unaffordable to the masses when compared to the services offered by cable TV operators of which the distribution is run mostly by unorganised players. Almost 50% of the subscription collected from the Indian public by DTH operators is the pass through of license fees and taxes imposed by the state and central governments! No other industry is penalised like this, except for the alcoholic beverages or the tobacco industry. As a result, the less-taxed cable TV industry is thriving at the cost of the government and public and the DTH industry is bleeding despite providing a technologically superior and better product.

At present, DTH or cable TV entertainment has become part of each and every household. In the past two years, DTH technology has taken a giant leap and has established itself sturdily in an analogue-cable-dominated market. It has revolutionised the TV viewing experience in the country by providing superior technology (digital picture quality and stereophonic sound) in comparison to analogue-cable TV. DTH, being a satellite-driven technology, has reached the remotest areas of the country where cable TV is unviable due to geographic conditions. Apart from that, DTH also offers variety of value-added services to viewers such as freedom to choose channels, movie-on-demand, electronic program guide, etc, which is not available with cable TV. Thus, technologically, DTH is superior alternative for viewers compared to analogue-cable connection and hence, it is crucial to give a boost to DTH technology which will be in the best interest of the public which has the right to receive the best products at competitive rates.

Furthermore, promotion of digitisation, or DTH, is also in the interest of the government as well as the broadcasting sector. This is because, under cableraj, the prime concern of the broadcasters as well as of the government is under-reporting of subscriber numbers by cable operators, which means loss of revenue for broadcasters and leakage of tax revenue for the government. The cable TV distribution is highly unorganised and is dominated by antisocial elements in most part of the country. Various surveys have shown that cable operators disclose not more than 10% of the actual subscriber numbers, leaving the large pie of subscription revenue untaxed. In order to bring such untapped revenue into the tax net, it is essential that correct subscriber numbers are reported and for that digitisation of the content distribution sector is crucial. This would lead to more transparent distribution of revenue for stakeholders in the value chain. Further, seen from another angle, digitisation is also in the interest of national security since it can track and check any misinformation dissemination to the masses. Thus, it is the need of the hour for the government to promote DTH in the interest of revenue and general public.

However, the government has left DTH industry reeling under the heavy burden of multiple taxes and license fees. When the government opened up the sector in 2003, no entertainment tax was being levied. Provision of DTH services was only subject to service tax. Currently both, entertainment tax (in the range of 10% to 30%) and service tax are levied on the subscription revenue earned. This means there is a simultaneous levy of central and state taxes, leading to double taxation. Further, apart from the disparity between DTH and cable, there exists a disparity between the DTH and the movie industry as well. Movies are only subject to entertainment tax and not service tax. Local cable operators get away by under-reporting subscriber base, gaining clear cost advantage over the DTH industry. Additionally, the industry also bears the burden of VAT on sale of customer equipments (set-top box) and customs duty on import of technological equipments and customer equipments. Unlike cable operators, DTH industry players are also required to pay to regulatory authorities license fee (10% of the gross revenue) in addition to entry fees at the time of commencing business in India.

Such multiple levies add up to as high as 50% of revenue, which is the biggest impediment for growth of the sector. Thus, DTH operators, from the largest to the smallest, are bleeding and their appetite for fresh investment is declining. The many taxes levied are killing the digital entertainment segment. Ultimately, it is the aam aadmi who bears the burden of taxes, making digital entertainment unreachable and unaffordable, and therefore, unappealing.

Since promotion of the industry is in the interest of all stakeholders, i.e., the government, consumers and broadcasters, it is of paramount importance that the government take the best foot forward to rationalise taxes currently imposed on the DTH industry. In order to make digitisation affordable to the viewers, the government should consider providing exemption from service tax, like it has done for the movie industry. This would bestow a level playing field to DTH, cable operators and the movie industry, and would instil life into the stagnant DTH sector.

The author is partnerindirect tax, KPMG in India