Twist in the Tax-Break Tale Puts Multiplexes in a Tight Spot

The multiplex industry, which was reeling under heavy losses due to the Covid-19 pandemic, is in for another rude shock as various state governments that had industry to attract investments are now seeking a return of the concessions citing breach of contract.

States such as Uttar Pradesh, Maharashtra, Haryana, West Bengal, Tamil Nadu and Karnataka had dished out sops, which included a waiver of entertainment tax for up to five years, to multiplexes.

Tax experts say the incentives with respect to entertainment tax were given on the condition that the multiplex the would continue operations for five years from the end of the exemption period. However, due to Covid -19 induced lockdown, many multiplexes couldn’t complete this period. Though they have shown the intent to continue the business once the environment is conducive to exhibit movies, a few state governments have now started the recovery process.

ET has learned that some of the multiplexes have received recovery notices for contravention of the five-year continuation condition.

A few of them in UP have challenged this recovery in the Allahabad High Court, stating that the properties remained closed during the pandemic due to a government order.

Legal experts representing the multiplexes said the principle of force majeure should take effect in this situation and these sops should continue.

“As the intention of the multiplex is continuation of businesses and they have not surrendered the licence to exhibit movies, the objectives of the scheme and public interest will come into play,” said Abhishek A Rastogi, partner at Khaitan & Co.

“Such notices are baseless and will not stand in the court of law,” said a top executive of a large multiplex chain. “we haven’t received any notice yet, but even if we do, we will challenge it. Also, the governments first have to refund the entertainment tax which got subsumed into GST.”

After the introduction into GST, a number of multiplexes have filed petitions in various high courts seeking a refund of the entertainment tax as promised to them under the tax-holiday schemes of states.

For instance, in UP.the previous Akhilesh Yadav government had doled out a five-year tax exemption, where in multiplex companies were allowed to charge and retain entertainment tax under different slabs. The multiplex companies could retain 100% of entertainment tax charged in the first year, 75% in the second and third years, and 50% in the fourth and fifth year of operations.

However, with the implementation of GST from July 1,2017, all the tax sops promised by the state governments were done away with, no clarity on continuation of the schemes that were still in effect at that time.

Tax holidays result in significant saving for the multiplex industry. In 2016-17 the total amount of exemption was close. Rs.120 crore. A senior executive at a small multiplex chain said several state governments had on paper approved refunds, but were yet to give them. “we are yet to receive the money due to us, if they start sending such notices, it will result in the closure of smaller chains” he said. S-ET

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