Improve Tax Framework

(a) Tax Incentives

Filmmaking can be encouraged by providing certain tax incentives. Considering the tremendous potential that the film industry has in terms of generating revenue, providing tax breaks will only augment the revenue generation process. Based on the incentives offered by various countries in the world, we have outlined below what can be provided by India to migrate film production to India.

(i) Runaway Film Production
Certain counties like Canada or Iceland offer tax incentives for migrating production to a local site in their country. Such types of projects are called "Runaway Film Productions". These incentives are given to produce a film in a country other than the country where it is primarily designed for exhibition. In these cases, tax incentives are given in the form of tax credits equivalent to a certain percentage of labor expenses incurred in those countries. These types of incentives are linked to a certain type of cost incurred for production and not to the profits made on the film. For example, in Canada,²⁶² taxpayers are taxed at both federal and state level and tax incentives are also offered at federal and state levels. At federal level, tax credits are offered as follows:

• For films shot in Canada by Canadian tax resident companies, the tax credits are allowed at the rate of 25% of eligible labor cost, which is capped at 48% of production cost. Thus, the maximum effective tax credit rate works out to 12% of eligible production cost. In order to be eligible to claim these tax credits, the film must be certified by the Canadian Audio Visual Certification Office ("CAVCO") and must meet at least six out of 10 CAVCOs laid down Canadian content points.
• For films shot in Canada by foreign companies, tax credits are allowed at the rate of 11% of the Canadian labor expenditure. If one assumes that 50% of production cost is labor cost, then the effective rate of tax credit would work out to 5.5% of production cost. For such production houses, CAVCO has not laid down any points criterion to be eligible to claim tax credits.

In addition, there are state-level tax credits from state-level taxes depending on the state where the films are shot.

(ii) Investor-based incentives
In this category, usually investments made to purchase/invest in a film or special purpose film companies are allowed as a deduction. Currently, the United Kingdom, Australia, the Netherlands, New Zealand, Ireland, Germany, etc. offer such type of incentives. In the United Kingdom²⁶³tax incentives are available to a film financier in the form of a 100% tax deduction on the cost of acquisition of qualifying films in the year of acquisition. In order to take the benefit of such tax incentives, sale and lease-back structures are widely used in the U.K. Australia²⁶⁴ gives the following three types of tax incentives for film financiers and investors:

• Under division 10BA of the Australian Income Tax Act, 100% of the investment in an individual film is allowed as a deduction in a single year.
• Alternatively, under division 10B of the Australian Income Tax Act, 100% of cost relating to the ownership of copyright in a production is allowed as a deduction over a period of two years.
• Film Licensed Investment Companies (FLIC): It also allows a 100% deduction to an investor for the amount spent towards shares purchased in a FLIC.

(iii) Export incentives
Many developing countries such as Jamaica, India, etc. offer tax incentives for the export of film and film software. Currently, India offers such types of tax incentives for the export of film software. However, this is proposed to be withdrawn in a phased manner by the end of the financial year, 2003-04. India may consider extending the benefit available for 100% export- oriented units to the companies engaged in production for film software as an inducement to migrate production of films to India.

(iv) Indirect tax relief
This is related to the indirect tax relief for shooting a film in a particular country or state. For example, in the U.S.,²⁶⁵ states such as California, North Carolina and Missouri offer concessions and exemptions from state-level sales tax and hotel occupancy tax, depending on the number of days filmmakers stay and shoot in that state. India could offer the following incentives:

• Exemption from hotel occupancy tax, i.e. luxury tax, hotel expenditure tax, etc.
• Sales/service tax exemptions on:
  • Lease, rental or purchase of production equipment
  • Post-production services
  • Purchase of raw films and chemicals
• Reduction of entertainment duty payable by cinema/theater owners

(b) Co-production Treaties

Co-productions involve two or more production companies co-financing and producing a film or television program. They are particularly successful where each producer can utilize their own country's national tax breaks or government film production subsidies as a result of co-production. India could get into a bilateral treaty with any other country, which will then enable both countries to determine the terms of any co-production that will take place in India or the other country henceforth. Currently, India has not entered into any co-production treaties but it is currently in talks with Canada and the treaty should be concluded within the next few months.²⁶⁶ Similarly, India should enter into co-production treaties with other countries such as Australia, the U.K., the U.S., Switzerland, Mauritius, Austria, New Zealand, Singapore, Malaysia, etc. Some of the aspects that can be advantageous to a country that enters a co-production treaty are:

(i) Benefits that are available to national films in both countries may be made available to these co-produced films.

(ii) The best use of both the jurisdictions for the purposes of locations, shooting crew, studios, equipment, distribution, etc.

(iii) Temporary admission of cinematograph film equipment can be exempt from import duty and taxes.

(iv) Projects that have a very high budget which otherwise could not be possible can be made possible with co-production.

(v) People of the contracting countries can be easily allowed to enter and reside in the other country for the purpose of film shooting or production.

(vi) The development and promotion of the entertainment industry in both countries and also the development and promotion of international relations. In spite of various factors weighing negatively on Bollywood, several recent developments have created a potential to build a bridge between the Bollywood and Hollywood and bring them together. These driving factors and developments are enhancing Bollywood's future and reducing the chasm between the two industries.