Mumbai

Now showing at your nearest screen: how Bollywood evades tax

Behind the glitzy silver screen lies a dark secret. A recent report of the Income Tax Department wipes the gloss off Mumbai’s film industry, exposing its bad tax conscience: a combination of tax dodging and economic offences. Tax avoidance, tax evasion and dodgy financial dealings seem to be more the norm than the exception with producers, distributors, exhibitors, and artists who evade with ease the regulatory framework under the Income Tax Act, 1961, the report reveals.

This academic assessment by tax sleuths was carried out to map challenges they face when assessing Bollywood files. It more than exposes industry’s penchant for money laundering, hawala transactions and hot-money routes to fund cinema. Leading actors and actresses, it reveals, together account for “the bulk of black money in the movie industry”. “Bulk of the receipts goes unaccounted in their case, given the access to highly paid professional advice that they utilise in managing their finances.”

The first-of-its-kind IT analysis establishes major evasion practices such as suppression of receipts from movies, ancillary sources, inflation of expenses and a huge amount of out-of-books payments/receipts, all a “well-established practice rampant in Bombay (sic) film industry.”

The Income Tax analysis is based on past cases, existing audit books and several assessment orders passed under section 14A. It documents how violation of section 44AA (mandatory maintaining of books of accounts), section 44AB (mandatory audits of books), and section 285-B (statements of payments made over Rs 50,000 by the producers) has become rampant.

The report says: “It is usually done by understating collections, fictitious expenses, showing invisible commission to multiplexes, unaccounted royalties, and foreign earnings. One of the major issues is involvement of black money and underworld links of industry, thus making the issue complex and risky.”

The IT Act, 1961 provides for different sections and rules to impose tax on revenue sources of the industry. Sections 44AA, 44AB, and 285-B, Rules 9A and 9B for producers and distributors respectively, and the TDS provisions of Sections 192, 194 C and 194 J are also to be used when making payments to/for actors, directors, editors, special effects experts, logistics contractors, and recording and dubbing studios, among others.

The report finds significant funding from hawala and hot-money routes, portending a grave threat to tax mobilisation, and even to general law and order. “The movie industry is operating in a volatile environment that is threatening its traditional sources of revenue,” the report says. “It is highly exposed to the black economy and poses myriad challenges to the tax administration.”

In 2011, a leaked cable released by Wikileaks had spoken of the film industry’s underworld connections, and that “it welcomed funds from gangsters and politicians looking for ways to launder their ill-gotten gains, known in India as ‘black money’”. In 2012, a sting operation by news website Cobrapost had caught leading producers and directors allegedly admitting on camera how the industry is being used to convert “black” money into “white”.

Further verification and investigation by The Hindu into these dodgy tax practices stood validated from the personal account of scores of technicians, line producers, distributors, confirming the practices as commonplace on film sets.

Common practice

According to the report’s findings, a film is produced and supplied through a complex channel of studios, distributors, exhibitors and artists, organised around star value and fame. The process of accumulating ill-gotten funds starts with production. The producer lines up ad hoc unaccounted funds in the guise of loans under bogus names. All the bogus credits and hawala entries are offset by ‘bogus debits and factious expenses (report)’.

“The core issue is really of financing: unless a ‘star’ signs the film, banks stay away from funding. Funding in an ad-hoc manner, from property dealers and other business sources, leaving clear room for grey transactions carried out of books,” says Jagdish, a sought-after production assistant. Jagdish has worked in 50 TV soaps and over a dozen films including Zid, a film that was produced by director Anubhav Sinha, who was caught in the Cobrapost sting allegedly agreeing to launder money. “The black-to-white ratio in medium-budget films not financed by banks but by multiple, small financier ranges in 60:40 ratio, even much higher in some cases,” says Jagdish.

In this context, the legend surrounding the Kumar Sanu produced film Utthaan is unique. The entire movie was allegedly made using only cash. “At the end of each day,” a production assistant said, “a vehicle filled with bags of cash would deliver per diem to not only workers and technicians, but also senior artists. Not much has changed since as some transactions are still done in cash.”

A senior filmmaker said: “In my previous film (a sex thriller), we paid our DOP (director of photography) nearly Rs 25 lakh in cash to avoid dual taxation issues as he lived in the United States.”

Some major production houses have registered their companies overseas, thereby arousing suspicion among taxmen. The Hindu is not naming few production houses documented in the report for their overseas funding as the report does not provide solid data, and this publication was unable to independently verify these allegations.



Arjun RampalFardeen KhanJitendra KapoorSukhwinder SinghUdit NarayanAroona IraniTanushree BasuSanjay Dutt
Name Addition to Income Section Imposed
Rs 10,09,657 Section 37
Rs 6,07,223 Section 14A (Read with 8D)
Rs 49,90,921 Section 14A (Read with 8D)
Rs 8,55,994 Section 44
Rs 5,35, 143 Section 69(C)
Rs 1,48,533 Section 14A (Read with 8D)
Rs 16,17,766 Section 40(A)
Rs 37,90,385 Section 14A
Graphic: Surajit

Cash rich Industry

  • Rs 28,300 cr
    is what India's film and television industry contributes to the Indian economy, according to a report by the PricewaterhouseCoopers
  • Rs 92,645 cr
    is the total gross output of the industry
  • Rs 100 cr club
    comprises nearly 20 films. The industry itself is pegged to touch Rs 135 billion by year end
  • 4.6% Growth rate
    is the compound annual growth rate (CAGR) fot the year 2005-2010 was 4.6%. It doubled to 9% in 2010-2015
  • 2 million
    are the number of people the industry employs

Revenue

  • $13.3 billion in 2013
  • $7.7 billion in 2008


How they do it:

Producer:

Producers are the most important agents, the report says. They manage the entire process from story selection to casting to distribution. Here’s what the report observes:

· Producers obtain loans indirectly in the name of firms with family members as partners. Large amounts are withdrawn from these firms to finance unaccounted expenses and on-spot payment.

· Capital is raised from the “black market” and thus goes unrecorded in the books of account.

· The securities given to financiers to raise loans are never accounted for by producers.

· There is also inflation of production expenses as leading artists are paid cash in excess of the contracted amount. This necessitates overblown production expenses.

· Bogus payment to musicians is a common way to manipulate ‘on-money payments’ to playback singers and music directors.

· Marketing and advertising expenditure is manipulated.

· Producers are also found debiting production expenses as non-production or overhead expenses. This is akin to debiting the cost of stock in trade as an expense in the profit and loss account. This is done as production expenses are liable to be amortised, but by claiming certain expenses as non-production expense the assessee deducts the entire expenditure in a single year.

· Producers often claim deductions under Sections 80I/80IA/80j, etc, which they shouldn’t.

Distributor:

Often, distributors are the source for the money a producer invests. The report observes:

· Apart from capital and loans raised from deposits from cinema owners, he is found raising money from his near ones. More often than not, bogus borrowings are entered in name of cinema owners.

· The distributor makes benami payments to the exhibitors, who own well-known cinema halls. This is to generate good market reports for the movie upon release. These payments are finally adjusted by debiting bogus expenses under the head: “publicity, etc”.

· Publicity expenses are shared between distributors, producer and exhibitors, and agreements are entered into to cover all situations. These expenses are inflated by the distributors in their accounts.

· Distributors are found inflating salaries and travel expenses.

· As soon as the movie is declared a hit, producers and distributors bring in intermediaries to divert profit. A distributor acquires world rights for a particular territory, then show he has raised finances by selling those rights to sub-distributors for a part of his territory. Such sales offers scope for manipulation by way of bringing in unaccounted funds by passing off profits of distribution to benami parties.

· When a film flops, it is purchased on a minimum-guarantee-basis by a distributor, who may have suffered losses in earlier years as well. To help a near relative or sister concern having substantial income from their other business including distribution of feature movies, the distribution rights of the flop movie are transferred to relatives or sister concerns to reduce taxation.

· In cases of commercially successful movies, distribution rights are passed on to a “benamidar” or to a bankrupt dormant distributor. Such distributors accommodate huge profits against previous losses on the payment of small commissions.

· Distributors also claim deductions under Section 80HHC for the income earned from sales proceeds or movies in overseas territories. They claim deductions on the basis that sale of overseas rights constitute sale of goods.

· Most films are sold or leased for distribution for a particular period and the rights are re-issued subsequently to various distributors for different periods. It seems that Rule 9B is silent on such issues.

· In the case of reissued rights acquired by distributors, the normal system of accounting adopted by them for amortising costs should prevail.

Exhibitor:

Exhibitors (Cinema/Theatre Owners) provide the last mile connectivity of the movie’s journey. Here’s what they do to evade tax, according to the report:

The exhibitor organises the sale of tickets in the black market.

Theatre owners let out their cinema halls to outside exhibitors. In many instances, such outsiders are only “benamidars”, relatives or employees of the owners. This is done to split the income.

Understate receipts from canteen contractor, vehicle-shed contractor, etc.

Exhibitors inflate expenses by debiting fictitious commission to procure movies from distributors.

Capital expenditure is incurred on theatre buildings by lessee-exhibitors and such expenses are then either claimed as revenue expenditure or a claim for depreciation is made.

Exhibitors earning substantial income ostensibly acquire distribution rights in obscure movies to reduce profits.

Artists:

The report observes how most of the receipts go unaccounted, given the access to highly paid professional advice.

The report says:

· Artists claim they maintain their accounts on a cash basis, and therefore all receipts of a particular year constitute taxable income. In many cases, advances received from producers towards yet-to-commence projects are shown as liabilities in the balance sheet although the said amount is taxable.

· Royalties of old movies, music, songs, etc are not accounted for.

· They do not maintain proper books of accounts, and generally file statements of receipts and expenses with only the producers’ certificate and expense vouchers as proof. Omissions of receipts are detected frequently in these statements.

· Income from foreign tours, participation in reality shows, endorsements and modelling are understated and even suppressed.


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Printable version | Oct 15, 2021 2:27:28 AM | https://www.thehindu.com/news/cities/mumbai/now-showing-at-your-nearest-screen-how-bollywood-evades-tax/article10128954.ece

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