Economics of Sandalwood: Why IT raids in Kannada industry were only to be expected

For an industry which was exempted from Entertainment Tax for over a decade, GST came as a big blow to the Kannada film industry. Ever since GST came into effect in July 2017, the industry, which had settled into a slumber over disclosing its earnings, was in a fix.

“Just a few months after GST came into place, the amount of tax collected from the industry dropped by 30%. Initially, there was a little leeway given so that the producers and actors could settle in with the change. But the tax collection kept going down steadily. This gave rise to suspicion of tax evasion,” an Income Tax official said.

On January 3, Sandalwood stars and big budget film producers woke up to raids by Income Tax sleuths. The I-T officials say that they managed to unearth Rs 109 crore of unaccounted income during the raids. The raids occurred at the homes of actors Puneet Rajkumar, Shivarajkumar, Yash and Sudeep. Producers Rockline Venkatesh, CR Manohar, Jayanna and Vijay Kiragandur were also raided.

I-T officials say that the high profile stars and movie producers were under its radar ever since the GST’s Intelligence Wing tipped them off regarding possible tax evasion by the actors. However, it was the discrepancy in the earnings declared by the multiplexes, single screens and the producers, which led the I-T officials to launch an investigation into the alleged tax evasion.

“There are many single screens which do not use the services of digital service providers for screening films. Multiplexes do, so it is easier to keep tabs on tax evasion. On the other hand, the income of certain big-budget films declared by single screens did not match the income declared by the producers - it was not adding up,” an I-T official said.

Soon after the raids began, film distributor Prashanth Sambargi said that the producers and and actors were being raided as they had not disclosed their actual income.

“Basic Professional tax was not paid by any film actors and any film technicians in Karnataka. Film actors did not declare the actual remuneration they received. Two of the top heroes accepted a villa and a flat from a builder in lieu of partial remuneration. None of the film actors, musicians and technicians has submitted their professional service bill including GST,” Prashanth Sambargi said.

These raids on the actors and producers had brought one crucial aspect of Sandalwood into the spotlight - where did the money come from? TNM spoke to a few actors and producers, who speak about the economics of the industry and why the I-T raids were a long time coming.

The I-T raid on CR Manohar and the mystery diary

According to officials with the Income Tax Department, Congress MLC and producer of the film The Villain, was questioned by the sleuths earlier in 2018.

“CR Manohar has been raided multiple times over the past few years. Over a year ago, he was raided and we had found a diary in his possession regarding the payments made to several persons. Recently, it came to our notice that they were film actors. The tip-off was received from a person who is a part of the industry,” an I-T official said.

However, the Income Tax officials began the investigation into alleged misappropriation of assets and tax evasion only three months ago. Sources with the I-T Department say that the GST filed by multiplexes and single screens regarding the income generated through ticket sales did not match the income declared by the producers. Sources also said that the actors who were searched, had not disclosed their actual income.

“One of the actors had enough money to buy his in-laws posh cars. He also managed to pay off a huge amount, which was outstanding as loan. If he had actually made only as much as he had declared, there was no way he could have generated so much money to pay off the loan and buy two cars worth crores of rupees. Over the past one year, we have operated on the suspicion that the industry had become a centre for converting black money to white,” the I-T official added.

The economics of producing a film

Speaking to TNM, Keshav*, a Kannada movie producer, says that the raids did not come as a shock to him. One of the industry’s signature modes of operation, he says, are angel investors who loan money to producers.

“Not a single producer risks investing his own money in a film. There can be multiple financiers for a film but only the producer and may be one or two people who are working for the film will actually know how much money is invested in a film. When the media reports on the amount spent on big budget films, the amount is generally very, very inflated and we must keep in mind that only 5-6% of the films produced actually generate profits,” Keshav says.

Keshav says that big budget film producers allegedly leak the “amount invested in the film” to the media just to create a hype. Another producer, Raghu*, who corroborated Keshav’s statement, says that it is a marketing technique to draw the attention of fans and movie-goers.

“There is a reason behind this. There are only six film distributors in the state and they have leased out all the movie theatres across the state. A producer can either approach the movie theatres directly to release the film or approach the distributors. Since distributors control all the theatres, producers have to go through them or the film will not be screened,” the producer stated.

If the film is made with a small budget starring niche actors, more often than not, the distributors end up buying the film’s rights and then screening it to recover the investment cost.

“For instance, there was a film which was released a year ago. The movie was made with Rs 2 crore investment. One of the distributors bought the rights for Rs 80 lakh. But this is not so with big budget films. Hence many producers create a hype and say they have invested a lot of money in a film. Once it has been announced unofficially, it then becomes an avenue for them to convert black money to white. They will show that Rs 100 crore or Rs 70 crore was spent on a film when in reality the cost would be much lesser,” Keshav says.

Ragu says that it is due to this hype, that big budget films sell TV rights, dubbing rights and audio rights at very high costs even before the film is released. “These days, producers make huge profits if the films are screened for two weeks in theatres. No one declares their actual income. Before GST, it was very easy to not come under the radar of the tax officials and this has become a sort of pattern in the industry,” he added.

Industry insiders say that it is very difficult to ascertain the actual cost and revenue generated by a film as big budget film producers allegedly accept money from financiers based on oral contracts.

“This money is not on paper. Most of the producers themselves have real estate or other businesses. They end up investing black money from there into the film,” he added.

The discrepancy in declared income

In the early 1990s, successive governments brought down the entertainment tax rates to 30% in order to promote Kannada films. The tax was altogether exempted in the mid 90s for Kannada, Tulu, Kodava, Konkani and Lambani films. Subsequently, Sandalwood began generating a revenue of over Rs 200 crore per annum.

Industry insiders say that during the time of tax exemption, the industry became a breeding spot for several rich and influential businessmen to invest black money into the production of films.

“Many of the producers who were raided have other businesses. We were looking not only at the income generated from films but also at their other businesses. There was suspicion that the money invested was lower than projected, and the profits made in these films were higher. Also, the income declared by the actors as opposed to the assets they own did not match. If they are able to produce receipts for it, then well and good. But they were not able to do so during the time of the raids,” an I-T department official said.

Income tax officials say that the earnings declared by the actors in question were lower than the income they had declared two years ago. The fluctuating market value of the actors also drew suspicion, sources say.

Speaking to TNM, a senior actor in Sandalwood says that after GST was introduced, several actors declare only a small portion of the income earned. “In the official contract between the actor and producer, the remuneration declared is lower. The rest of the money is exchanged in a cash transaction. This was bound to happen because of the secrecy in the financial dealings and the unclear financial situation in the industry. When no one knows where the money is coming from, suspicion naturally arises,” the senior actor says.

*Names changed on request