How GST will impact DTH, cable TV and broadband biz
MUMBAI: The tax-ridden direct-to-home (DTH) companies will find major relief from the Goods and Services Tax (GST) rate of 18% fixed for the sector. The multi-system operators (MSOs) will also stand to gain materially on the cable TV side of their business, but their broadband segment will be taxed higher by 3%. According to preliminary estimates, Dish TV expects to gain by Rs 160 crore a year once the GST regime comes into force. One of the leading DTH players in the country with a net subscriber base of 15.5 million as of 31 March, Dish TV reported revenue of Rs 3014.4 crore in FY17. Videocon d2h is also expected to have an almost similar material benefit.
Thus, the combined entity should gain by around Rs 300 crore annually after the GST gets operational, according to preliminary market estimates. Videocon d2h is set to merge with Dish TV and the new entity will be named Dish TV Videocon. The Competition Commission of India (CCI) has already given its approval for the proposed merger. Application for approval from the National Company Law Tribunal (NCLT) has been made and after obtaining all clearances, the amalgamation is expected by early October.
“GST at the rate of 18% is a significant positive for DTH companies like Dish TV. Currently, they have a tax incidence of around 23%. Even if Dish TV decides to pass on 50% of the tax saving, they will stand to gain and we should see an upside on the stock price,” an analyst at a broking firm said.
Under the current tax regime, service tax is a flat 15% while entertainment tax varies from state to state. The service tax and entertainment tax together work out to anywhere between 21% and 24% on average, depending on the geographical distribution of the subscriber base of a DTH operator. The GST will subsume the service tax and entertainment tax and the rate has been fixed at 18% for cable TV and DTH services. The GST on set-top boxes (STBs) is higher at 28%, but the impact will be neutralised as full set-off will be allowed.
MSOs have also welcomed the introduction of GST as it would help in streamlining their business and the taxation system. Said Hathway Cable & Datacom CEO, video business, TS Panesar, “The central government’s bold initiative to bring GST as ‘One Nation-One Tax’ will bring in the much-needed transparency and ease of doing business in India. The council’s decision on the tax rate of 18% for cable TV services is an extremely positive development for the industry as compared to the existing structure.
The structure it introduces will surely benefit the overall MSO industry as the entertainment tax, CVD and SAD will now be subsumed into GST.”
Digicable Network managing director and CEO Jagjit Singh Kohli believes that GST will ease the friction between MSOs and local cable operators (LCOs) regarding payment of entertainment tax. “MSOs operating in high entertainment tax states like Uttar Pradesh and cities like Mumbai (rural Maharashtra has a different rate) stand to benefit from GST. But more than that, it will lift the disputes between MSOs and LCOs centring around entertainment tax,” he said. Agreed Panesar, “As an MSO, we will charge the LCO a prescribed GST rate which LCOs can in turn claim as input credit and hence be tax neutral, thus benefiting them. The introduction of GST will definitely help improve the relation between MSO and LCO, and also contribute towards growth across the industry and the country.”
In states where entertainment tax is low like Gujarat, the impact will be negligible. GTPL Hathway, which is in the process of coming out with an initial public offering (IPO), will gain partially as slightly more than half of its cable TV subscribers are from Gujarat. In places like Mumbai where the entertainment tax is high, the GST will have a more positive impact on the MSO.
However, the impact is not uniform across MSOs. In certain states, there can actually be a negative impact. MSOs operating in Kerala will stand to lose as there is no entertainment tax in the state. With the GST being at 18%, they will have to bear an additional 3%. Currently, the levy is only on service tax, which is at 15%.
“In Kerala, there will be a negative impact of Rs 40-45 crore in a year for the cable TV and DTH sector as a whole. As for us, we will pass it on to the consumers,” said Asianet Satellite Communications president and COO G Sankaranarayana.
For the broadband service, MSOs will also have to pay tax 3% higher than what they are paying as service tax currently. Hathway Cable & Datacom has 0.6 million broadband subscribers at the standalone level as of 31 December 2016. The MSO plans to invest up to Rs 1,000 crore in the next three years to expand its broadband business. Atria Convergence Technologies CEO Bala Malladi believes that the GST will have an inflationary impact on the industry, especially because there is now hyper competition in the broadband sector after the launch of Reliance Jio. Broadband service providers may have to partially absorb the extra tax burden.
Bangalore-based Atria, which is India’s third-largest wired broadband player by subscribers behind BSNL and Bharti Airtel, will continue to aggressively expand its broadband business.
“The GST will have an adverse impact on our broadband business while being neutral on the cable side. We are contemplating absorbing a significant portion of the extra tax burden while passing a part of it on to our customers. On the cable side, there will be no impact as it is the LCOs linked to us who pay entertainment tax. Our expansion plans for broadband will not be impacted,” said Malladi. Even on the cable side, MSOs fear that local bodies like municipalities will come out with entertainment tax. There are already rumours that some states will empower their municipalities to levy additional taxes. Even if one state starts it, other states may be encouraged to follow.
If this happens, the upside that DTH operators and MSOs expect from the GST will be lost.
“We are confident that state and local bodies will not levy additional taxes as these would have a negative impact on customer prices and defeat the purpose of GST,” said Panesar.