NEW DELHI: With the annual budget coming up, the Federation of Indian Chambers of Commerce and Industry (Ficci) is lobbying for a 10-year tax holiday for the animation, gaming and VFX industries.

Ficci says the sector, which holds tremendous promise, is suffering because the present government policy is to subsidise foreign productions in India, whereas Indian companies are burdened with a slew of taxes.

Ficci has raised an important cultural point that insiders say might sit well with I&B minister Priya Ranjan Dasmunsi, who has been talking of Indian values rather loudly of late. Ficci feels that due the tax burden, Indian animation companies are not able to produce Indian content and hence an entire generation of Indian children are growing up on a staple of foreign superheroes.

The industry body has also proposed the removal of CVD duty for a period of 10 years. The high-end machines used for the production attracts an import duty, Ficci says, adding that at present the duty structure is high: basic duty of 12.5 per cent, CVD of 16.32 per cent, special CVD of 4 per cent.

After including educational cess, the overall duty comes out to be 36.8 per cent, it explained.

The provision for Service Tax is financially hitting Indian animation studios extremely hard, Ficci has said in its budget wishlist.

"Most of these studios are those that are developing a large amount of original content. Those studios that are export oriented and are thus under STPI are not exposed to the Service Tax at all, whereas the ones that are making or planning to make any Intellectual Property (original Indian content) in India for any client or broadcaster have to pay a service tax of 12.2% (this is going to be @ 12% in the new financial year, as per the latest budget)," says the Ficci paper that indiantelevision.com accessed.

"We all have seen a rapid boom in the software industry, thanks to their exemption from the service tax. There is a big potential for Indian animation studios to grow manifold from where they are right now, the major success of the animation sector will be in creating the original Indian content and distributing it globally," says the paper.

It argues that if the country can make special efforts and can exempt animation industry from paying service tax, it would really contribute to a great extent towards promoting the industry and also the traditional and creative artists.

Explaining the issues in the sector, the Ficci note despairs that the animation as an industry in India is covered under STPI, but STPI predominantly holds good for a BPO nature of work, where outsourcing is the main module and most of the studios which are getting benefited from STPI have to make sure of an export commitment of more than 85 per cent.

As a result, it holds, many Indian studios wanting to produce original content based intellectual property and use art and talent from India to produce animation stories do not get any such benefits.

As creating original content in India attracts custom duty and also the freshly levied sales tax (VAT) on off the shelf software, sales tax of 12.2% (which might increase further) and further also the income tax component, the Ficci paper has held.

Together, these act as a major deterrent against studios producing and creating original content with an Indian heritage base or any other indigenous original content creation within the shores of the country.

Currently, there is just no encouragement of developing original Indian content to be put forth to the entire world in the form of animation.

This is leading to more and more studios working on foreign content and is leading to a severe lack of animated Indian stories in our domestic television schedules. In fact in the current scenario there is not one television channel that is exclusively dedicated to the kids showing original Indian content.

"Hence," Ficci argues, "our next generations of kids are growing up on a staple diet of foreign superheroes and legends while their exposure to Indian history, culture and heritage is being restricted to school textbooks. Storybooks and comics are being quickly replaced by television content and specially animated television content.

Ficci has also demanded that the tariff barrier on gaming consoles be reduced, as it is acting as a hindrance to developing such consoles in India and putting the related software sector in a tight spot.

The paper has argued that the entire tariff of approximately 36.74 per cent is passed through to the customers, translating to high prices for such consoles, which affect affordability and therefore access.

High tariffs, it says, also lead to the growth of a grey market in products, which for the gaming consoles market in the country stands at 300,000 units, and leads to a loss of revenue to the government.

Ficci feels the growth of the grey market also limits the government's ability to ensure high quality and safe experience for customers that desire this exciting entertainment device.

Pricing and affordability are key aspects that can enable the development of the gaming consoles market in India. Rationalization of the tariff structures will therefore mean a more affordable pricing structure that will enable greater market access for such consoles.

"A recent study conducted by a market research agency, estimates that by lowering the CVD alone, which currently stands at 16.32 per cent, will result in projected import of gaming consoles to the tune of 400,000 units in the next five years," the paper says.

Ficci quotes a Nasscomm study and says: "According to Nasscomm, a game that would cost around $3 million to $6 million to develop in the United States can be produced for only $500,000 to $3 million in India.

"In fact 25 per cent to 30 per cent of the revenues from a blockbuster console-based game, which often match those of a blockbuster Hollywood movie, amounting to $250 million or upwards, is the developers cost," it adds .

In addition to this competitive edge of development cost arbitrage, Indian software developers also have the potential to tap into the potentially diverse domestic market for gaming and develop customized games in vernacular languages, thereby broadening the scope of the Indian gaming market.

Though the Nasscomm study acknowledges that currently the gaming market in India is undeveloped, it projects a potential growth with a CAGR of 78 per cent, amounting to $ 300 million by 2009 . It also projects that the current employment scenario in India in this sector can grow from approximately 600 people employed in the gaming industry in 2005 to approximately 2,000 professionals in 2007.