GST Likely To Boost Movie Theatre Operators' Profitability. Here's Why

Many multiplex operators have said that the GST rate of 18 per cent tax on cinema tickets below Rs 100 under is too little a relief and not enough to spur growth.

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GST Likely To Boost Movie Theatre Operators' Profitability. Here's Why

GST is likely to prop up operating margins of multiplex players by 250 basis points, says Icra

GST or Goods and Services Tax is set for a July 1 rollout. The government has announced a midnight launch on June 30 for the new indirect tax regime. Touted as India's biggest tax reform since Independence in 1947, GST is expected to bring with it a multi-sector impact. The new tax structure under GST is seen as positive for the multiplex operators on a net basis, and expected to boost their profitability, according to domestic rating agency Icra. "This is primarily owing to the input tax credit (ITC) expected on the fixed costs that a multiplex incurs like rental, CAM, electricity, etc.," the agency said in a note.

GST, once implemented, is likely to prop up operating margins of multiplex players by 250 basis points, says Icra. Under GST, movie tickets priced above Rs 100 have been placed in the highest tax bracket of 28 per cent. Icra, however, said this is higher than the industry's expectation of a standard rate of 18 per cent. Movie tickets costing up to Rs 100 will attract a tax rate of 18 per cent.

"Overall, we expect the impact of GST to be positive, which is; however, lower than the expectation of the industry players. Further, the expected gains will also leave room for passing on the benefits to the end customer that will improve footfalls and occupancy levels, thereby further aiding the profitability of the players in the medium term," said Shubham Jain, vice president and sector head at Icra.

Currently, entertainment taxes that multiplex operators have to shell out vary from state to state.

Finance Minister Arun Jaitley had said earlier this month that in several states, the existing incidence of entertainment tax is 100 per cent, where as in the GST regime after paying 28 per cent tax rate input tax credit can be availed.

Many multiplex operators have said that the GST rate of 18 per cent tax on cinema tickets below Rs 100 under is too little a relief and not enough to spur growth.

According to the Multiplex Association of India (MAI), the sub-Rs 100 movie tickets account for only around 10 per cent of total ticket sales volumes, contributing only 6 per cent by value in revenue. "This is too little. The prospects of the industry would be adversely impacted and it will hamper growth," Multiplex Association of India president Deepak Asher had told news agency Press Trust of India.

Shares of multiplex operators Inox Leisure and PVR have fallen between 3.5 per cent and 6 per cent since June 11, when the GST Council brought movie tickets below Rs 100 under the 18 per cent tax bracket, as against 28 per cent proposed earlier.

Here are some other things Icra pointed out:

Besides entertainment tax paid by multiplexes - ranging from nil to 66 per cent - some screens also pay local duties

Under GST, only entertainment tax is to be subsumed thereby leaving a cushion for the local bodies to levy additional taxes to cover for potential revenue loss

Currently, around 12-16 per cent of the multiplex screens are partially/fully exempted from entertainment tax. On an average, entertainment tax is around 29% of net box office collections for the domestic industry.

With GST being applied for all screens, without any exemptions and assuming no change in the local taxes being levied, the impact on net box office collections is expected to be overall neutral.

The food and beverages segment, a significant contributor to multiplex revenues, has been recognised net after VAT charges

Under GST, food and beverages rates will vary from 12 per cent to 40 per cent depending upon the composition of the F&B items with the majority expected to be falling within the 18 per cent category. This is likely to negatively impact the multiplex industry as currently the tax is around 11 per cent of the net F&B segment revenues.

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"Players whose proportion of F&B revenues are high will have a higher negative impact. Multiplexes may resort to price hike in F&B to offset the impact," Icra added.

GST will subsume a variety of central and state levies. The Goods and Services Tax Council has earlier set rates - ranging from 5 per cent to 28 per cent - for a multitude of goods and services under GST.

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