The government has clarified most of the commonly-used film screening arrangements in the country are not a 'taxable service' and will hence not attract any service tax, providing India's $2 billion-plus film industry extra cheer on a day three Indians have the Oscars.

A circular issued on Monday by the Central Board of Excise and Customs (CBEC) said theatre owners will only need to pay service tax if they lease out their premises to a distributor and get a fixed rent for screening a film. This is because the service provided by the theatre owners will then be categorised as 'renting of immovable property for furtherance of business or commerce', which is a taxable service.

The CBEC's circular comes in the wake of requests from its field officials asking it to clear the air on the tax provisions applicable in case of film screenings and whether theatre owners were required to pay service taxes on amounts received from film distributors. The confusion is partly because of an absence of standard practices in the business and the multiplicity of business models followed by film distributors.

Usually, movie producers sell film rights regionally to distributors, who in turn enter into different types of agreements with theatre owners in their regions. In some cases, the distributors lease out the move halls from the owners for screening the movie for a fixed rent and bear all profits or losses.

Alternatively, a theatre owner and the distributor enter into a revenue-sharing contract under which a percentage of revenue earned from ticket sales goes to the theatre owner and the balance goes to the distributor.

The CBEC's latest clarification means that barring the arrangement wherein a distributor leases out the hall and the theatre owner receives a fixed rent from the distributor, all other arrangements will be exempt from service tax.

Screening of movies in a theatre is not a specified taxable service. However, the wide scope of business support service was resulting in interpretational disputes. The present clarification puts to rest all the disputes and is a welcome one for the entertainment industry, said Bipin Sapra, associate director, Ernst & Young.

The service tax exemption will also cover the most common arrangement under which theatre owners screen a movie for fixed number of days and the proceeds from ticket sales go to the distributor, with the theatre owner receiving a fixed sum depending upon the number of days of the film is screened.

Here, advertising and other marketing expenses are borne by the distributor and theatre owners are paid a contracted fixed amount by the distributor irrespective of the fact whether the movie runs well or not. There is, however, no rental arrangement between the theatre owner and the distributor.

Some tax officials wanted this arrangement also to be brought under the ambit of the service tax, arguing that the theatre owners provided 'business support service' to the distributor, which was a taxable service. However, the CBEC has disagreed with this interpretation.