Rebate option takes some sting off enhanced service tax

MUMBAI: Even as service tax has gone up from 8 to 10 per cent, within the advertising and media fraternity it has not had too much of a negative impact, particularly because the industry was fearing a four per cent jump.

Another very welcome change, at least on the face of it, is the brief mention of the rebate on service tax. Although some aspects of the rebate component are not very clear as to its execution process, broadcasters, advertising agencies, as well as advertisers have appreciated the gesture, but are still waiting to read the fine print of the notification.



Says P&G's country media manager Shashi Mandapaty, "We see this as a very positive move; that we can offset service tax against excise duty. So, this definitely seems to be a move in the right direction and we have been waiting for this for a long time now."

Nihal Kothari, head of taxation of the country's largest consumer of advertising services, HLL was however, more cautious. "Well, there has been an increase in the service tax component, so budgets in advertising will have to be scrutinised to that effect. In respect of the rebate on service tax, there is still no clarity on the issue in terms of how one is going to prove that the services rendered for advertising were for goods that have been manufactured or imported by the advertiser."

Kothari added, "While in certain services, a clear relationship can be determined (telecom for instance), a lot of services will find this as a barrier and hence the execution of this rebate system and compliance of the whole process is key in ensuring benefits to advertisers. Also, finally advertisers are concerned with the total net outflow of money, and hence here the rebate factor may just be a good recourse once of course clarity and compliance take place."

As regards the steady rise in the service tax percentage (from 5 to 8 to 10 in this budget) these last few years, there seems to ba a common consensus in the industry that over a period of time it will be on par with excise duty.

AAA of I president and CMD of Madison Communications Sam Balsara says, " The advertising community should not be too worried about the two per cent increase in service tax as this is going to be offsettable against excise and customs duty on the goods produced or imported by the advertiser. This is good news for us in that the earlier 8 per cent and now the 10 per cent which advertisers pay will get ploughed back into advertising,"

Another point Balsara made was, "It is a good budget overall for the country, but it was dissapointing to see that the FM did not deem it fit to do something for the advertising industry considering advertising is the fuel for the modern economy. And to attain that seven to eight per cent sustained growth for the country, advertising is the most effective way in which this can be achieved."

FCB Ulka's executive director NG Alai points, "There will not be any ramification on the industry as such with the increase as in the long run it will even out. The passing mention of a rebate on service tax, at least hopefully will not increase the cost of advertising per se. What I see coming, is that over time service tax will be at par with excise. As if you look at the service sector, its contribution to the whole GDP is almost 50 per cent."

Leo Burnett's finance director Harish Parmeshwaran elucidates, " Effectively services on the whole are going to be bombed. Also there seems to have been a mention about redefining of services as currently the definition of a service has been very narrowly defined, which might just mean extending the meaning of a service. The bottomline however is that in the short term, ad spends and the media industry may see a knee jerk reaction. Although, what will really be interesting to see is how ingeniously one can capture more services across the board, to ensure a higher collection of service tax."



Broadcasters say that finally it's the client who is effected and hence the increase in service tax and the rebate possibilities impacts the client directly. However, they believe that at least one could expect an increase in the level of collection figures.

Star India's senior VP ad sales Kevin Vaz states, "Well one was expecting it to go up anyway, and at least, I am happy about the fact that there seems to be some kind of clarity now.

So is this going to be the beginning of the peace process between the advertisers, agencies and broadcasters? Well, that's really a tough question to answer.

P&G's Mandapaty adds, "Whether this will solve all our problems, one is still not very clear as one has yet not had a chance to look at the fine print of the notification."

To sum it all, the ramifications of service tax as applicable to ad agancies after the budget 2004 are as follows:

*Service tax raised from 8 per cent to 10 per cent.

*A new welcome change of rebate on the service tax component has been included which is essentially service tax from now on will be offset against excise and custom duties for goods manufacured or imported by a company.

*The execution and compliance will be crucial in ensuring effective facilitation.

*In the short run, agencies as well as broadcasters will be affected, as ad spends of advertisers have already been fixed, and secondly due to the total quantum of taxes levied on advertisers which amounts to almost 50 per cent of the cost, it will then in turn tell on advertising as advertisers decide to cut corners.

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