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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

3

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

4

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

7

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

10

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


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


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.






24


INCOME TAX - ANIMATION - AT PRESENT RATE


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


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.







25

INCOME TAX - ANIMATION - WITH SUGGESTED INCENTIVES


2010 2,300 230 41


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


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


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.







26

INCOME TAX - GAMING - AT PRESENT RATE


2010 1000 100 18


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


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


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.







27

INCOME TAX - GAMING - WITH SUGGESTED INCENTIVES


2010 1,000 100 18


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


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


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.







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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

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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

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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

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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

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