Taxes are of two kinds. A progressive tax can be an instrument of state policy, yielding benefits for the many at the expense of a few. But a tax can also be debilitating. A higher rate can sometimes be counterproductive, restricting the growth of the sector, and eventually resulting in lower revenues. With the introduction of the Goods and Services Tax, the Tamil Nadu film industry is squeezed on every side; in protest, cinema halls across the State have downed their shutters indefinitely . What is hurting is not the 28% GST on tickets priced above ₹100, or even the 30% levy imposed by local bodies as entertainment tax, but the fact that these come on top of the existing State government-imposed cap on ticket rates. The cap of ₹120 means that the exhibitors might earn more from their lease of cinema space to popcorn vendors than from screening the film. Indeed, given the differential rates, the exhibitor might not be able to earn much more from charging ₹120 for a ticket than he could from charging ₹99. Increasing tax rates while maintaining an overall price cap makes no sense at all. Governments are free to not incentivise certain services or forms of consumption. However, in this case, the end result of the squeeze on the margins of exhibitors and distributors is making the entire film industry unviable. The price cap on tickets was sought to be justified on the ground that otherwise there would be exploitative premiums charged on keenly awaited films during the early days of their release, when demand runs high. It was believed that this protected members of fan clubs of popular film stars, most of whom are from the lower social strata. But with the piling up of different taxes, it is the exhibitors who are at the wrong end of the exploitation.
Although some Tamil films qualify for exemption from entertainment tax, on account of their ‘social messaging’, such certification depends all too often on pulling the right political strings. In an industry where politicians of every hue are involved, tax exemption has been open to widespread abuse. Local bodies have not earned much from entertainment tax, but what the government loses in terms of revenue, the party in power gains in terms of power and influence over the film industry. Given that the GST rates cannot be altered, being fixed nationally, the sensible solution is to give up the price cap on tickets and reduce the entertainment tax. Price caps on tickets have inhibited the building of new cinema halls in Tamil Nadu, even as old ones shut shop. Also, if the government’s true objective is to safeguard the interests of the filmgoer, then it must be ready to forego tax revenue. The lesson that Tamil Nadu needs to understand is that a high rate of taxation can be debilitating in a price-controlled situation.
