SC’s dual tax ruling to hurt broadcasters, consumers

A recent Supreme Court ruling allowing both Central and State governments to impose separate taxes on direct-to-home and cable TV services has rattled the broadcast sector, already reeling from shrinking margins and digital disruption.

While the order technically applies to the pre-GST (goods and services tax) era, its implications are far-reaching. Broadcasters face potential wave of retrospective tax demands, and the verdict may set a precedent for state-level levies on digital streaming, gaming, and other online content platforms- currently outside such frameworks.

Experts warn it could drive up compliance costs, hurt profits and accelerate market consolidation. “Dual financial burden could affect the profitability and sustainability of broadcasting operations, particularly for indigenous players operating on thinner margins. Coupled with revenue constraints, broadcasters will pass this increased liability down the value chain to consumers,” said Gaurav Sahay, founder partner, Arthashastra Legal.

Legal uncertainty and litigation risks arising from dual taxation may also disincentivize investment and innovation in broadcasting, impeding its strategic evolution, he said.

The 23 May judgment stated that since broadcasting is a taxable service under the Finance Act 1994, Parliament has power to impose service tax, while state legislatures are equally competent to levy entertainment tax on those providing services.

Karthik Mani, partner, indirect tax, BDO India, an accounting firm said that broadcasters had typically paid service tax on their revenues, and the dispute was with respect to levy of entertainment tax by states on the same revenue.

Since the SC has upheld the validity of levy of entertainment tax charged by state governments, in the cases where demand of entertainment tax had been raised on broadcasters, they will now have to also pay the same, said Mani.

However, under GST regime, from 1 July, 2017, entertainment tax levied by states and service tax levied by the Centre were subsumed under GST.

That said, for the pre-GST period, it would be difficult for broadcasters to collect the entertainment tax, and they may need to bear the impact of past demands, added Mani.

The timing is especially challenging. Traditional broadcasters are navigating multiple headwinds – rising content costs, declining advertising revenue and intense competition from OTT platforms. Further cost burden could shrink access to premium content for price-sensitive users and lower investment in regional programming.

“With compliance now required under two regimes, increased operational costs are likely. Broadcasters, working with tight margins in a highly competitive environment, may inevitably transfer this burden to end consumers via higher subscription fees or reduced service quality,” said Prateek Bedi, assistant professor, finance and accounting at IMI (International Management Institute). “Over tie, consumers may see fewer choices and less regional or vernacular content – a cost not captured in monetary terms but critical for cultural inclusion.”

The decision also threatens to raise the bar for market entry, especially for smaller startups and content creators who lack the compliance muscle of larger incumbernts.

A senior broadcast industry executive, seeking anonymity, emphasized that local players are already facing stiff competition from global streaming giants with deeper pockets and efficient tax planning mechanisms.

“The imposition of concurrent state entertainment taxes risks widening this gap by escalating operating costs for domestic players, possibly leasing to market consolidation and reduced consumer choice,” the executives said.

The bigger worry, though, is what this means for digital platforms. “The court emphasized that entertainment delivered digitally qualifies as a ‘luxury’, which opens the door for states to now explore levying entertainment taxes on digital content consumption, in addition to existing GST.” said Snigdhaneel Satpathy, partner at Saraf and Partners.

Such a shift would further fragment India’s tax environment, raising compliance costs for tech platforms, and risk pushing subscription costs higher – mirroring the pressure now faced by most broadcasters, Satpathy said.

Senior executives said industry bodies are still deliberating on a collaborative response, and discussions are ongoing. The potential liability would vary by broadcaster, depending on their market share and geographic reach.

Source: Livemint