With Parliament clearing the Bill to amend the Cable Television Networks (Regulation) Act in December 2011, the stage was set for a countrywide transition to the Digital Addressable System, or DAS, regime in four phases. Cable operators in the DAS regime can transmit only digital signals to homes through a set-top box equipped with a conditional access card and a subscriber management system.

The October 31, 2012, deadline for completion of phase one (covering Delhi, Mumbai, Kolkata and Chennai), the recent approval of the Department of Industrial Policy and Promotion’s proposal to increase FDI in the broadcast distribution sector from 49 to 74 per cent, and the Telecom Disputes Settlement and Appellate Tribunal’s order striking the placement and carriage fee restrictions — all of these reflect the Government’s commitment towards ensuring a smooth transition.

Digitisation of the broadcast sector is expected to result in smoother revenue-sharing processes and, ultimately, improved yields across the pay-TV value chain through greater transparency on the number of subscribers. While consumers will benefit from improved content quality, digitisation will also open the floodgates for value-added services such as Internet-on-cable, video-on-demand, pay-per-view, and gaming. Viewership measurement and rating systems are also expected to improve significantly due to greater transparency on the sample size.

On the flip side, the industry faces tax issues that could inhibit growth. Currently it pays value added tax (VAT) on sale of set-top boxes, and service tax and entertainment tax on subscription revenue.

To get set-top boxes installed and service activated, customers are charged installation and activation charges, on which service tax is levied. In an effort to build a strong subscriber base, a majority of players have shifted from sale of set-top boxes to providing them without charge on entrustment basis. While VAT cannot apply on such a transaction, authorities in several States are seeking to levy it on the grounds that installation and activation charges are recovered from the customers towards the cost of the set-top boxes. This would lead to double taxation, as service tax is already levied on installation and activation charges.

Furthermore, the industry is grappling with issues surrounding tax deducted at source, or TDS, on margins earned by distributors on the sale of set-top boxes. It is debatable whether the margin earned is a ‘commission’ and thus subject to TDS (10 per cent), or a ‘discount’ that is not subject to TDS.

While the FDI reforms are a positive step towards achieving the digitisation goal, rejection of fiscal incentives such as custom concessions and income tax holidays for service providers, and pending tax issues could inhibit growth. The television industry needs prudent fiscal legislation to perform at full potential, and seamlessly achieve the digitisation dream.

(Jehil Thakkar is Partner and Head of Media and Entertainment, KPMG in India)

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