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DTH firms expect GST to add 3% to their bottom line
MUMBAI: The balkanisation of entertainment tax has gravely impacted the profitability of the Indian direct-to-home (DTH) companies. In a sector where average revenue per user (ARPU) has stayed low, competition for subscribers has been fierce and multiple taxes have been an overload, the road to profitability has been slow.
It is only a couple of years back that Dish TV became the first DTH company in India to turn profitable at the net level. Videocon d2h, the DTH arm of the Videocon Group, posted its maiden quarter net profit in the three-month period ended 30 June 2016.
Entertainment tax has pinched the DTH operators hard, varying from state to state. On average, entertainment tax ranges between 7% and 11% of the DTH companies’ revenues, depending on the geographical composition of their subscriber base.
However, there is new hope for the DTH firms with the passing of a national goods-and-services tax in Parliament. Service tax (15%) and the state-level entertainment tax will get subsumed under the GST, promising to effectively lower the tax outgo of the DTH companies.
According to preliminary estimates, the DTH sector could land up with an annual tax saving of about Rs 600 crore (Rs 6 billion) if the GST reigns at 18–19%.
A further 4% saving on capital goods import would effectively mean an additional saving of about Rs 150 crore (Rs 1.5 billion) per annum, industry experts say.
Dish TV managing director Jawahar Goel is optimistic that the GST would add 3% to the DTH sector’s bottom line.
“The tax administrative system will become cleaner. The implementation of GST will mean an addition of 3% initially to the bottom line of DTH companies. Subsequently, this should go up to 4%,” Goel tells TelevisionPost.com.
The combined revenue of the six private DTH companies would be close to Rs 15,000 crore (Rs 150 billion) in FY16. Total EBITDA of the six players would be around Rs 4,500 crore (Rs 45 billion).
Dish TV’s average entertainment tax is around 7% of revenue. The company reported operating revenue of Rs 3,059.9 crore (Rs 30.6 billion) in the fiscal year ended 31 March 2016. The company’s EBITDA stood at Rs 1,024.9 crore (Rs 10.25 billion) and operating profit margin at 33.5%.
According to preliminary estimates, Dish TV would save about Rs 100 crore (Rs 1 billion) as entertainment tax if GST comes into force in April 2017. This is assuming GST is at 18–19%. However, this does not factor how the local bodies would go about on levying tax on DTH service.
Airtel Digital TV’s revenue stood at Rs 2,917.8 crore (Rs 29.18 billion) and EBITDA at Rs 997.6 crore ( 9.98 billion). EBITDA margin was at 34.2%.
Videocon d2h posted operating revenue of Rs 2,856 crore (Rs 28.56 billion) and adjusted EBITDA of Rs 801.3 crore (Rs 8.01 billion) in FY16. Adjusted EBITDA margin was at 28.1%.
The other three private DTH operators, including Tata Sky, Sun Direct and Reliance Digital TV, do not disclose their financial figures.
EY partner, indirect tax, Uday Pimprikar believes that DTH companies would benefit marginally on the tax front. Along with a service tax of 15%, the average entertainment tax for the DTH industry ranges from 9 to 11%.
“The present entertainment tax regime is fairly primitive and there could be an initial benefit of 3–4% for the DTH companies after the GST gets introduced, but the delta will come down. Local bodies are expected to come out with legislations to collect entertainment tax. It is difficult to ascertain at what level this would settle down. But even at a preliminary estimate stage, we expect the DTH sector to enjoy marginal benefit on the tax front under the GST regime,” says Pimprikar.
Goel, however, believes that the local bodies would not levy entertainment tax for DTH service. “This could be imposed on services like video parlours,” he says.
On the capital goods front, the DTH sector could see a 4% gain due to lowering of duties. DTH companies pay special additional duty (SAD) at the rate of 4%, which may not be necessary under GST.
In FY16, DTH companies would have invested around Rs 4,000 crore (Rs 40 billion) in capital goods (set-top boxes). With a 4% benefit, this would amount to a tax saving of Rs 160 crore. Dish TV’s benefit would be to the tune of Rs 30 crore (Rs 300 million).
“All DTH operators on the IRD side would benefit under GST because of the larger basket of credit availability,” says Pimprikar.