Multiplex, OTT players wary of extra burden from Karnataka entertainment cess

The recent passage of the Karnataka Cine and Cultural Activists (Welfare) Bill, 2024, has left theatre owners and OTT players operating in the southern state worried.

The law levies a 2% cess on movie tickets and OTT subscriptions to support film workers and cultural activists. While this additional levy may seem nominal, multiplex and streaming platforms warn that any extra burden on the industry, which is already struggling with declining footfalls at the cinemas and stagnating subscription revenues, will increase prices for viewers, further hurting business.

Also, there is apprehension that Karnataka's decision may set off a domino effect, prompting other states to enact similar legislations, hurting cinemas and streaming platforms.

Industry players see the move as unnecessary at a time when the theatrical business is struggling, with few films finding favour with the audiences. “Any extra burden on the business is extremely disheartening. The government is looking to earn more but this move comes at a time that the industry is going through a terrible phase. It’s a bad sign and we haven’t been able to make any representation on the same,” said Amit Sharma, managing director, Miraj Entertainment, which operates multiplex theatres.

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Calling it an irrational scheme, independent distributor and exhibitor Akshaye Rathi said that the entertainment industry is often a soft and easy target and while a 2% cess is not huge, it could open up a pandora’s box for a sector not robust at this time. “What we instead need is policies that generate more employment for the segment and help treat it like the means of soft power it is,” Rathi said.

The new Karnataka legislation stipulates that this cess will be applied on cinema tickets and subscription fees, and must be paid based on the revenue generated within the state. Additionally, it requires companies to deposit the cess by the 9th of every month. This initiative is designed to provide financial aid to cine and cultural activists, thereby enhancing the welfare of individuals working in Karnataka's cultural industries, the state government has said.

“Karnataka has a 14% market share in India’s box office market of ₹12,000 crore and a cess of 2%, will mean an impact of ₹35 crore outgo for the industry. Within India’s subscription revenue market of ₹10,000 crore, Karnataka has a market share of approximately 10%, which would mean and outgo of ₹20 crore. The increased cess will be passed on to the consumer eventually for both cinema and OTT business,” Karan Taurani, senior vice-president at Elara Capital Ltd said.

“The Karnataka government's Bill to levy a 2% cess on cinema and OTT subscriptions is a significant move to generate additional revenue. While there have been similar cess impositions, such as the entertainment tax on movie tickets, this is one of the first instances of targeting digital platforms,” said Nilesh Tribhuvann, managing partner at legal firm White & Brief - Advocates & Solicitors.

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This cess could increase subscription costs if implemented, potentially impacting consumer choices and platform revenues. Given state governments' financial pressures, it's plausible that other states might follow suit, making this a broader trend in the regulatory landscape, Tribhuvann added.

Ameet Datta, partner at legal firm Saikrishna & Associates, pointed out that in the pre-GST era, there have been precedents of imposing a cess on entertainment mediums, such as Kerala in 2013 and Madhya Pradesh in 2015. Kerala's cess on cinema tickets to fund a cultural works welfare fund was upheld because states could impose entertainment tax under entry 62 of the State List in the Constitution of India. This changed with the introduction of GST. In the 2015 Madhya Pradesh case, the Supreme Court struck down a law levying a tax on DTH (direct-to-home) services. “If implemented, the new law will lead to confusion due to a lack of clarity on how and what aspects of OTT or television channel services revenue the cess will be levied on, considering these services already ensure the payment of GST and operate pan-nationally,” Datta emphasized.

Meanwhile, a broadcast industry player pointed out that TV channels and OTT services are already subject to GST. An additional entertainment tax could be seen as double taxation, which might be contested in court. With many TV channels and OTT services operating or billing from outside Karnataka, their service provision in Karnataka constitutes inter-state transactions and the exclusive authority to tax such services rests with parliament.

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