One Nation, Many Taxes? Reassessing OTT Regulation after the Supreme Court’s Entertainment Tax Verdict

[Charvi and Saloni are students at Rajiv Gandhi National University of Law.]

The recent Supreme Court ruling affirming the constitutional validity of both central and state on broadcasting services has introduced significant complexities for the media and entertainment sector. While legally justified, the dual taxation framework has created operational uncertainty, escalated costs, and placed additional strain on cable / direct-to-home (DTH) service providers, many of whom were already facing financial distress. This decision may have far-reaching implications not just for traditional entertainment service providers but also for the digital entertainment industry, with the potential to disrupt the industry’s ecosystem at a structural level.

On 22 May 2025, the Supreme Court delivered a ruling that significantly transformed the tax regime in India, affecting not only platforms and service providers but also viewer patterns. 

What the Supreme Court Said: Breaking Down the Asianet’s Decision

The bench of Justice BV Nagarathna and N Kotiswar Singh, in the case of State of Kerala and Another v. Asianet Satellite Communications Limited and Others, held that both the central and state government can levy tax on a single transaction constitutionally, if the tax is levied on different aspects of the same transaction separately. This is called ‘aspect theory’, a well-settled principle in tax law.

The court clarified that Entry 97 in the Union List of the Constitution of India allows the imposition of service tax on broadcasting services by the central government, as broadcasting is considered a form of communication and thus comes under the Union List. At the same time, the court affirmed that Entry 62 of the State List empowered state governments to levy taxes on “luxuries including, entertainment”. Therefore, both Parliament and state legislature are acting within their respective constitutional domains, and there is no overlap or encroachment of powers in the taxation of broadcasting services and entertainment activities. This does not lead to double taxation as two different legislations are taxing two varied facets (aspects), even if the activity is the same.

Anticipated Implications for the Digital Ecosystem

Over-the-top (OTT) refers to technology (services or platforms) that delivers streamed content via internet-connected devices. In the present time, OTT platforms come under the ambit of 'online information database access and retrieval services', and are taxed at 18% under goods and services tax (GST) regime. This is a centralized taxation scheme, which can only be levied by the Central Government on the OTT service providers. The current rule applies to both Indian and Foreign service providers. Before GST, states taxed entertainment at vastly different rates—15% in Tamil Nadu, 110% in Jharkhand. 

The judgment does not address OTT platforms directly; however, it has the potential to dramatically alter the taxation regime for digital platforms by setting an important precedent. It has provided the constitutional basis to bring OTTs under the state’s taxation by contextualizing the scope of entertainment in such a manner that will allow dual taxation, both at the Centre and the state levels. 

The court has interpreted the term “entertainment” in a very expansive manner. The court observed that, “Advances in technology have resulted in varied forms of entertainment through various media and in a variety of ways, not only in a public place but also in the confines of private space such as a home, through mobile or a cell phone or smartwatch and other personal devices, etc. The expression ‘entertainments’ must be given a broad, liberal and expansive meaning.” 

The OTT platforms that provide entertainment through subscriptions will eventually be classified as "entertainment" under Entry 62, List II, which is comparable to the cable / DTH services that are subject to taxation in this instance. This will embolden the states to frame regulations to collect taxes for the benefit of local authorities. As a result, this would give the state power to collect taxes on content being consumed online in our private spaces under the label of “entertainment.”

With the advent of this judgment, a looming sword of double taxation hangs over the heads of digital entertainment platforms, which can prove to be financially burdensome for both OTT service providers like Amazon Prime Video, Netflix, Hotstar, as well as consumers. It can introduce uncertainty in a sector that once functioned under the streamlined GST regime. Furthermore, allowing the states to interfere with or regulate entertainment by giving them the power to tax could result in unjustifiable censorship, which can cause irreparable damage to the democratic spirit of the country.  

The problem in question is not hypothetical. Some governments that are struggling financially are already looking into other options, such as welfare fees and regulatory cess, that could get around the GST restrictions and target digital entertainment. Recently, the legislative assembly of Karnataka has passed the Karnataka Cine and Cultural Activists (Welfare) Bill 2024, allowing imposition of a cess at a rate of 2% on movie tickets and OTT platforms. The Haryana Municipal Entertainment Duty Act 2019 is another example on the same lines. Even IPL match tickets in Tamil Nadu are subject to both GST and entertainment tax; this practice may soon be extended to digital platforms. Hence, this ruling may start a domino effect towards state-specific tax systems, with the possibility of acting as a potential precedent for other states to follow suit. 

Key Concerns and Legal Challenges

The ruling poses a threat to federal cohesion. The GST framework in India was established to consolidate indirect taxation into a singular system, thus removing the intricacies of the fragmented tax regime. If states start imposing their own levies again, especially on digital services, we risk going back to a fragmented pre-GST regime, at least in spirit. It defeats the idea of “One Nation One Tax”, as GST was envisioned to be. 

This single finding has the potential to upend the long-standing belief that the Center has the authority to control all forms of broadcasting and that the States can only intervene when public order is compromised.  Karnataka’s decision to implement a cess on cinema tickets and OTT services serves as a pertinent example. 

Another point of contention is ambiguity for digital startups. Startups in the OTT content industry are currently mired in a regulatory quagmire. Are they providing a service? An entertainment product? The classifications are legal labels, but they have significant tax repercussions. Much of such legal jargon has not yet been established, and if defined, it can be difficult to separate one from the other in the absence of interpretation by the courts.

The situation is further complicated by shifting the burden onto subscribers.  As a company’s taxes increase, the fees imposed thereafter also escalate. This constitutes hidden inflation, not of the essential goods, but of the digital lifestyle. Furthermore, these "luxury" platforms are no longer optional as our reliance on technology grows. Hence, the ultimate financial burden would be borne by the consumers in the form of higher subscription fees, fewer discounts, and restrictions on the content being offered.  Attacking the affordability of these services may have far-reaching consequences.

The OTT services operate on a pan-India level. The country's OTT market is expected to reach USD 7 billion by 2030. The industry will become susceptible to erratic taxation, particularly if state-specific taxes become more common. The dual taxation method may not overtly restrict competition, but it has the effect of exacerbating the already existing distortions between big and small players, thereby adversely impacting fair competition. In the long run, such practice entails higher consumer prices, difficulties with compliance, and leaving investors with legal uncertainty.

Conclusion

The broad legal reasoning adopted by the court may be invoked in future disputes, raising concerns regarding a roadmap for future regulation and taxation. Applying the aspect theory here may result in jurisdictional overreach and risk upsetting the delicate federal balance enshrined in the Constitution of India.

This judgment opens the floodgates for the reintroduction of these levies under the label of entertainment within Entry 62 of the Constitution of India. At this stage of judgment, even though reviews are possible, they may be unlikely to succeed. Hence, there is an urgent need for the Ministry of Information and Broadcasting and the Ministry of Finance to intervene to address this pressing concern of regressive taxation policies and ensure uniformity.

In Canada, the government adopted the Digital Service Tax Act, which imposes a 3% tax on digital services revenue (DSR) that is attributed to Canada. The taxpayer is only liable for tax if the DSR exceeds CAD 20 million per year. In Indonesia, VAT was implemented for digital service providers who serve more than 12,000 Indonesian consumers each year. Similar criteria may be implemented in India to address some of the issues that the anticipated double taxation regime may raise.

The OTT platforms should keep a close eye on any regulatory changes that the states are planning to introduce to prevent compliance risks and overlapping of levies. Compliance will now depend heavily on how services are classified and where they are consumed. How lawmakers strike a balance between fiscal independence and regulatory coherence will determine the long-term effects on the entertainment sector.