The Comptroller and Auditor General (CAG), the supreme audit institution of India, has unearthed many innovative tax-evasion tactics prevailing in the Indian film industry, (not just Bollywood), and has advised the tax-collecting authorities to have a re-look at many such transactions and realise the evaded income tax.
Though the CAG has specifically mentioned only a handful of such cases where Bollywood celebrities and leading production houses have evaded income tax, if the Income Tax Department were to go full steam ahead in plugging the loopholes as suggested by the CAG, the national exchequer could swell by hundreds of crores of rupees.
Celebrity actors like Ranbir Kapoor of Bollywood, top hero of Telugu films Nandamuri Taraka Rama Rao and super-hit films like Dabangg 2 and Chennai Express have come under the scanner of the CAG report number 31 of 2017 (Performance Audit) on the entertainment sector which was tabled in the Lok Sabha on July 4. This list promises to include scores of celebrities of the Indian film industry encompassing the entire regional cinema, not just Bollywood, in coming weeks and months if the taxmen were to get their act together and follow the CAG’s suggested roadmap.
The entire report can be accessed here.
How the Film Industry Uses ‘Films Shot Abroad’ as an Excuse
A highly innovative way of evading tax by leading film actors and production houses, which the CAG report has blown the lid off, pertains to a little known rule under which filmmakers or actors claim benefit of tax exemption with regard to films shot abroad. We know that the cash-rich Indian film industry, particularly leading production houses of Bollywood, have of late shown an increasing tendency of shooting their big-budget films in multiple foreign locations.
The CAG report has mentioned two specific examples: involving Ranbir Kapoor and Nandamuri Taraka Rama Rao – the former for his much publicised film Ae Dil Hai Mushkil and the latter for his Telugu blockbuster Nannaku Prematho. In both these cases, the actors claimed that since they rendered their services (acting) on foreign soil and their services were used by specially-created companies located in countries where the shooting for these films took place and since these services amounted to “exports”, they were not liable to pay any taxes under Rule 6A(1) of Service Tax Rules, 1994.
The CAG report sums up the Ranbir Kapoor case in the following paragraph:
Ranbir Kapoor acted in the Hindi movie titled ‘Ae Dil Hai Mushkil’ produced by M/s. Dharma Productions Pvt. Ltd., shot both in India and New York. He received a consideration of Rs 6.75 crore from a foreign company, M/s ADHM Films Ltd., (UK) based in London for film shot in UK and did not pay service tax of Rs 83.43 lakh treating the same as export of services.
The case against the Telugu star is summarised thus in the CAG report:
Similarly, during the examination of records of Mr. Nandamuri Taraka Rama Rao, a Cine Artiste in Hyderabad ST Commissionerate, we noticed that under an agreement (July 2015) with producer M/s. Vibrant Visuals Ltd., London, U.K, the artiste received an amount of Rs 7.33 crore for acting in the Telugu movie titled ‘Nannaku Prematho’ and claimed exemption from payment of service tax of Rs 1.10 crore treating it as export of services.
In the latter case, after the CAG’s objections, the Telugu star was slapped with a notice and told to deposit the evaded tax of Rs 1.10 crore. However, in case of the Bollywood star, the Information and Broadcasting ministry took a lenient view in response to the CAG’s queries and appeared to let him off the hook.
But the CAG took a contrary stand. Sample this remark of the CAG report:
The reply of the Ministry is not acceptable since this service (acting service) is an integral part of the movie being produced in India by M/s. Dharma Productions. Hence to hold that it was not used by the establishment in India is not right. Moreover, similar observation was accepted by the Ministry in case of Mr Nandamuri Taraka Rama Rao. Further, there is a need to examine the complete loop of transactions between all the parties (viz., M/s. Dharma Productions, M/s. ADHM Films Ltd. (UK) and Mr. Ranbir Kapoor) to verify if due service tax has been levied in this case or not.
The CAG has thus shot down the argument that the payment to the artist for the portion shot abroad was arranged from foreign companies, thereby the service was made to look as export of service with no tax liability.
The Cases Against Dabangg 2 and Chennai Express
The cases against two Bollywood blockbusters Dabangg 2 and Chennai Express are given below:
During the examination of records of M/s. Arbaaz Khan Production Pvt. Ltd. and M/s. Red Chillies Entertainment Pvt. Ltd, the assessees assigned copyrights of the music/sound recordings of their respective films Dabangg 2 and Chennai Express to M/s. Super Cassette Industries Ltd., a music company, for a perpetual period on consideration of Rs six crore and nine crore during 2012-13 and 2013-14 respectively.
The CAG objection:
In both instances, the assessees did not pay service tax treating the rights as granted for perpetual period. However, we noticed that the assessees did not relinquish their rights and imposed conditions on the music company to promote the music in film and to receive royalty share from further exploitation of the assigned rights over and above the agreed consideration. Thus, the assignment is a temporary transfer of rights, on which a service tax of Rs 1.85 crore becomes leviable.
(Rajeev Sharma is a strategic analyst and columnist who tweets @Kishkindha. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)