Dangal, the Nitesh Tiwari-directed wrestling drama starring Aamir Khan that released in about 9,000 theatres in China, has earned more than Rs1,100 crore, to become an all-time blockbuster Hindi film in that country. The figure is way higher than the Rs387.38 crore it made back in India.

The film opened in China on 4 May and earned $2.27 million (Rs14.67 crore) on the first day itself. Of course, one big factor for the film trumping its India collections could be the difference in ticket prices in the two countries, with China charging a much higher price.

But that is not the only reason for the film’s success. The film exhibition infrastructure in China is highly developed, argues Utkarsh Sanghvi, partner, indirect tax, media and entertainment, EY India. According to him, China has 40,000 theatre screens. In comparison, India has around 8,500. To be sure, in 2007 both the countries had 13,000 screens. While China went on to build on that number to touch 40,000, the number of screens in India declined. Sanghvi makes the point on Dangal’s success in the context of the goods and services tax (GST) imposed on cinema tickets in India which is steep and not conducive to the development of the industry in his opinion. In fact, the Multiplex Association of India has been fighting a losing battle with the government on the issue. Initially, the government put cinema tickets in the 28% tax bracket, upsetting the industry, which had pitched for a 5% tax rate in view of the fact that the film exhibition business has been struggling with fewer screens and lower footfalls.

After a representation from the Multiplex Association of India, on 11 June, the GST Council reduced the tax rate to 18% (from 28%) on cinema tickets costing Rs100 or less. However, for tickets costing Rs100 or more, the tax remained at 28%.

The average entertainment tax on cinema tickets in India was around 8% to 10% before GST

Clearly, this is not good enough for the industry.

According to an analysis by EY, the average entertainment tax on cinema tickets in India was around 8% to 10% before GST. However, in some places like Mumbai in Maharashtra, the entertainment tax was steep at 45%. But that was an exception rather than the rule. However, the government seems to have taken that as the norm while fixing the tax rate. Even within the state of Maharashtra, entertainment tax varied between 15% and 45%. In fact, Marathi films were exempt from tax in the state. “The government took Mumbai as an example and looked at the issue in a narrow way. So from 8% average tax rate to 28% was a steep increase. This is also steep considering the industry has been asking for 5%," says Sanghvi. In fact, unlike India, China’s film exhibition industry grew on the back of a low 5% tax rate and investments in the industry by the government. “The fate of Dangal may have been different in India if we had more screens," he adds.

The fear is that at the current GST rates, single-screen theatres will be hit hard. “Some 2,000 single screens are expected to close down if the current GST rates are implemented," Sanghvi points out, the reason being that at the moment single screens are either exempt from taxes or pay a nominal tax depending on their location. Unfortunately, the government has failed to recognize the contribution of the industry. “A tax rate of anywhere between 5% and 12% would have been okay. Right now it is a cause of worry," says Sanghvi.

However, the bigger worry could be if the local bodies also decide to levy an additional tax. According to a 25 May Mint report, entertainment may become even more expensive as states prepare to empower local bodies to impose additional entertainment tax outside the ambit of the GST.

The report said that watching movies at multiplexes or television at home may become costlier as local bodies (municipal corporations, municipalities, panchayats, local and district councils) may impose additional entertainment tax. The television services include direct-to-home (DTH) and cable. According to several media industry executives and tax experts, states such as Maharashtra, Madhya Pradesh, Gujarat and Rajasthan have already said they will levy an additional entertainment tax on cinema, and cable and DTH services, the report said.

In its representation to the government, the Multiplex Association of India maintained that cinemas could end up paying not just GST but local body entertainment tax to the tune of 10-25%.

Dish TV India Ltd chairman and managing director Jawahar Goel is also worried about the local-body tax. “If imposed on DTH services, local-body tax would not just be a cost burden but a compliance nightmare as well."

The government has clearly not been kind to the entertainment industry. It could have dealt with the industry with a soft touch to let it grow.

Shuchi Bansal is Mint’s media, marketing and advertising editor. Ordinary Post will look at pressing issues related to all three. Or just fun stuff. Respond to this column at shuchi.b@livemint.com.