Are local films too heavily taxed?

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?