Are local films too heavily taxed?

By M.M.S. Marthawienata

JAKARTA (JP): The Indonesian film industry has been faithfully contributing to the country's development in the form of various tax payments, especially in the regions, since in most regencies or municipalities the entertainment tax is still a major revenue earner.

But profits made from films are quickly disbursed in too large amounts to never be recovered, simply because regional administrations use such funds for purposes other than film making. The irony is, now that the industry seems to be on its last legs, it is being left alone to fend for itself.

Maybe you are asking: Weren't the films by Garin Nugraha and N. Riantiarno, Bulan Tertusuk Ilalang and Cemeng 2005/The Last Primadonna respectively, subsidized with funds from the National Film Board and from the state budget, each receiving Rp 680 million (US$302,222), all derived from taxes?

Indeed! But the use of state funds for film production was possible only after particulars concerning film guidance were included in the broad outlines of the State Guidelines for the first time in 1993, thanks to the effort of representatives of the film industry in the House of Representatives.

Nonetheless, little known actors in the film world like Matt Domba -- who is seen more and more these days sitting on the stairs of the Haji Usmar Ismail Film Center in Kuningan, South Jakarta lamenting the gloom in his world and that of other lower film levels -- quip that, to date, only those two films have been subsidized.

Another question you might ask is: Haven't the various regional administrations that make use of the entertainment tax funded film production in cooperation with producers affiliated to the Indonesian Film Company Organization, either in Jakarta or in the provinces?

That's right! This kind of cooperation -- the result of an appeal made by Rudini when he was minister of home affairs -- resulted in films like Oom Pasikom.

But this kind of cooperation stopped short with the decline in the film industry in the mid 1980s. The situation has grown from bad to worse, while the dream of creating a conducive climate for film production and distribution is farther away from being realized.

Your next question might possibly be: Haven't appeals by film authorities for the reimbursement of the entertainment tax received attention, from the Jakarta administration in particular, whose tax returns have increased from 50 percent in 1985 to 75 percent in 1992?

Correct. The Jakarta administration was not only the first to disburse the entertainment tax, it also repaid the progressive entertainment tax of about 20 percent to 33.33 percent from Jan. 8, 1986 onwards. This was later revised into only 5 percent to 30 percent as of April, 1992.

However, the entertainment tax returns of the Jakarta administration were not distributed to members of the All Indonesian Theater Organization and film producers in the Indonesian Film Company Organization alone, as the money was also used to train film personnel.

Matt Domba is sure to ask another question though: What about other provincial administrations which have enjoyed the benefits of entertainment tax collections the most?

People in the film world have repeatedly requested on various occasions, as long ago as before the national film industry showed signs of decline, to categorize Indonesian films as a non- taxable product, unlike today, which lists them as taxable regardless of profits or losses.

According to Regulation No. 1, 1993 of the Ministry of Home Affairs, the entertainment tax, officially called taxes on viewing and running films in theaters, should be no more than 30 percent for major theaters and 10 percent for smaller cinemas.

Most regional administrations, however, opt for the maximum amount. That is why young Indonesians in middle and lower income groups have to pay higher entertainment taxes for first class entertainment provided by nightclubs, discotheques and karaoke halls which pay only 10 percent in entertainment tax.

Aside from these, films, which are supposed to function as a medium for information, education, culture, entertainment and economy cannot play their roles since ticket prices plus the high entertainment tax make them inaccessible to viewers with a small budget.

Direct tax collection from film viewers imposes losses on films which do not sell well because the producers pay the same amount of taxes as those whose films reap profits. This means that it is hard for a producer to breakeven since the tax has to be paid even before the production cost is recovered.

In the end, high risks like these discourage people, including those in the banking community, from investing in the film industry. At the same time, film produces have become fearful of making quality products which demand a large amount of funds.

That is why film people want lower entertainment tax rates than that of nightclubs so that films can attract a larger audience. There are even hopes for the scrapping of the entertainment tax to ensure progress in the film industry.

This should actually not cause losses to the regional administrations if we bear in mind what Coordinating Minister of Industry and Trade Hartarto once said, that 80 percent of the film market in Indonesia is controlled by imported films which should actually be taxed a higher rate.

The problem is, would the Indonesian government have the courage to make a decision of a discriminative nature involving imported films when the U.S. government is putting pressure on the Indonesian government, following a request of the Motion Picture Export Association of America?

Fearing protests from the American association, which was capable of forcing the U.S. government to deploy the "Special 301" Act in 1988 to put pressure on any business partner suspected of any unfair practices, a decrease in entertainment taxes have to be properly weighed.

On the other hand, the Indonesian film industry does not only have to pay entertainment taxes. It is also liable to import tax, value-added tax, and luxury tax on items for imported production equipment. The import tax ranges from 10 to 60 percent, the value-added tax 10 percent and the luxury tax is up to 20 percent.

Based on the newest rates of the 1994 import taxes, at least 16 types of film production equipment come under luxury items which includes mixers, amplifiers/preamplifiers, compressors/limiters, projectors and spares, tape recorders and syncromotors and telecines.

While the entertainment tax slows down the pace of the payoffs of production costs, these three types of taxes on technical service only raise production costs. A lower entertainment tax would certainly make local films more competitive.

Increasing competitive rates would slowly restore the Indonesian film industry and eventually enable it to enter foreign markets as a superior export product pending the onset of free trade after 2020.

The question is, do we allow Hollywood to reap the benefits of the comparative advantage once it is free to enter the country after 2020?