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Monday, November 5, 2018

"Local Barriers to Global Ambition", by Vivan Sharan and Mohit Kalawatia, for CreativeFirst, 13 July 2018

Link to Article

Recently, India celebrated the first anniversary of its Goods and Services Tax (GST) regime. The GST was introduced with the intention of eradicating a bevy of taxes, to achieve a ‘one nation, one market, one tax’ framework. However, as an exception, local bodies such as municipal corporations and panchayats were afforded the ability to impose additional taxes to harness local revenue streams. At the outset, this carve out seems fair, particularly since India’s local bodies struggle to remain solvent despite corporatisation. Public services are rarely charged at rates that can sustain their effective delivery – for instance, citizens pay negligible amounts for waste collection in most municipalities. Conversely, indirect taxes make for better optics in populist politics.

Coterminous with the implementation of the GST, states such as Tamil Nadu, Kerala, Maharashtra, and Punjab, had passed legislations authorising their local bodies to levy such taxes. Perhaps the most egregious departure from the intended outcome of a unified tax regime is Tamil Nadu’s Local Authorities Entertainment Tax Act, 2017.

First, it is a well-settled principle in Indian jurisprudence, that any legislative action must first pass the test of Article 14 under the Constitution, which mandates ‘equality before law’. One facet of such an obligation on legislative authorities is the responsibility to act in a manner that is not arbitrary. While state legislatures can implement “class legislations”, these should be based on reasonable classifications. This means that although a state can treat different set of people differently, such treatment should be based on intelligible differentia and not on artificial or whimsical grounds. That is, such classification must be based on clear constitutional principles like those relating to social welfare.

Conversely, classification solely on the basis of language, having no nexus with defined social welfare outcomes backed by empirical data, violate the spirit of Article 14. Classification on the basis of language has also been recognised as discriminatory by the Supreme Court in Aashirwad Films vs Union Of India & Ors (2007).

Second, whether intended or not, the imposition of differential tax rates on films is reminiscent of industrial policy rather than an optimal process of tax administration. Perhaps without intending to, the local body is indulging in picking winners. Lower taxes on Tamil films may lead to viewership that is based on acute price sensitivity of Indian consumers, rather than quality cinema. This in turn, may reduce the competitiveness of Tamil films in the long run by creating an artificial demand.

Such protections also tend to underprepare local industries to respond to technological change and shifts in consumer preferences. For instance, broadcasters across European countries with strong “cultural protections” such as in France are struggling to adapt to digital markets.

Luckily, Indian broadcasters, which do not have to adhere to analogous local content quotas, have had no trouble anticipating and responding to digital realities. Millions of Indians of all ages now subscribe to Video on Demand platforms, created or supported by local broadcasters.

Third, the notion of “competitive federalism” for the tax administrator has always been inconsistent with the academic imagination of the term. In the early days of e-retail many state governments and local bodies copied each other, presumed a loss in revenue from the changes in local supply chains, and imposed additional taxes as offsets. With the GST, many of these actions were rationalised, but outliers like Tamil Nadu can always perpetuate another race to the bottom. This form of federalism is also antithetical to the imperative of promoting cultural diversity. Why should residents of Tamil Nadu, including minority groups from other parts of the country, have differential access to films from other states? What if other states follow suit?

Fourth, discriminatory taxation on films based on language could have several unintended consequences for India’s political interests abroad. From Afghanistan to Canada, and even in remote areas such as Mongolia, Indian cinema has helped the country punch above its weight in geopolitics. This is a core element of India’s “soft power”, often described as the ability to co-opt rather than coerce. But, the quality of Indian cinema must keep pace with global demand in the 21st century – which is witnessing shifts owing to digitalisation. India’s coercive defence sector capabilities are often unable to keep pace with its global ambition. Therefore, it is even more important than ready avenues for enhancing soft power are not throttled by regressive incentives.

But local bodies, which often struggle to address more mundane challenges such as double entry bookkeeping, cannot be expected to act strategically in the larger national interest. The Union Government should therefore issue appropriate guidance, and conduct trainings for legislators on the construction of rational tax regimes. While doing so, it should also call for lower taxes on production and co-production of local content, to enable greater supply of quality Indian cinema to all markets – local, regional and global.



- Vivan Sharan is a Partner at Koan Advisory Group, where he steers advocacy efforts. He is also a Visiting Fellow at the Observer Research Foundation, and a Member of the National Committee on Media & Entertainment, constituted by the Confederation of Indian Industry.

- Mohit Kalawatia is an Associate at Koan Advisory Group. He is a legal professional, looking at digital payments, financial markets, and corporate governance issues for the firm.

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