GST: How concerned should the advertising world be?

MUMBAI: The Finance Act of India 1994 (defines ‘advertising’ as the sale of space or time services, and any such facility offered by an advertising agency or person is considered a taxable service. Why the need to put such a dry perspective to an otherwise vibrant and creative business?

The answer is closely related the top trending topic among both netizens and citizens : Goods and Services Tax AKA GST.

This very definition highlights that the advertising fraternity, much like any service sector industry functions in compliance with ‘Service Tax’ that is levied by the central government, whether it is on the advertiser, the seller or the agency facilitating. Therefore any major rehaul of the service tax system makes an impact on the sector -- be it good or bad.

So far industry observers and stakeholders have identified two key areas where GST has direct or indirect implication on the advertising industry of India -- first is the incidence of tax or tax burden levied on the service sector, and secondly, cost of adapting new processes to deal with new tax regime.

“In compliance with the general commentary on the issue, industry is predicting that the tax on services is likely to go up due to GST. Clearly, from our perspective, that will not be a welcome piece of news. Especially at a time when India is looking to speed up the process of economic growth, in which this industry has a very vital role to play. It would be in the country’s interest, our industry’s interest and that of our many clients’ that this activity is incentive-ised rather than the other way round,” the newly elected AAAI president and Publicis south Asia CEO Nakul Chopra observes.

“We hope that the government in its wisdom, will hopefully keep the taxes at the current level or minimise any hikes,” Chopra adds.

Elaborating on his second point of concern, Chopra says: ”The government has been working for some time on the IT backbone which is required to handle the immense change in the process in transitioning from Service Tax era to GST. This can also have a lot of implications for our industry and our members. Manufacturing industry, to which excise and sales tax, are already on similar processes that is projected to implement GST. It won’t be a large shift for them. Whereas service tax is administered in a completely different way and has been a central levy. Hence, for the advertising industry it is a totally different story.“

Currently it is being taxed at 15 per cent after progressively going up over the years.

When it comes to the advertiser - media owner equation, barring radio and television media, most other print and digital forms of advertising enjoyed tax exemption under special provisions from the government, until finance minister Arun Jaitley removed digital advertisement from ‘Negative list of Services,’ in Budget 2014, and brought digital ads under the purview of service tax. This, observers, believe has already made the ecosystem more challenging for digital media to compete with the rest, being the late entrant in it. Although, it is true that analysts have also projected that GST will facilitate a larger digital penetration in the country as it would ease up the logistics in the tech industry.

Echoing Chopra’s concern, Dentsu Aegis Network chairman and South Asia CEO Ashish Bhasin opines: “As of now the advice from noted consultants seems to be that GST will actually make taxation much more complicated, particularly for advertising agencies, who operate in multiple states because there will be a Central GST and State GST, which will increase the complexity contrary to the government’s intent.”

Bhasin hopes the government will be able to focus on this area and address this issue urgently so that the bill achieves its intent of simplification and ease of business, even for the service industry.

Much of which will depend on the exact rate that is yet to be decided. Till now the discussions were mostly on whether the amendment will be made in the first place, is what most industry stalwarts had to say. But now there will be a more focused debate on the taxation rate and the method of administration.

The concerns over the bill haven’t completely overshadowed the promise of an economic growth that the new tax regime is expected to bring with itself. Bhasin feels that GST willl be brilliant for business in general, once it settles down. "Some industries will gain significantly, not just by the adjustment of rates but by the simplification of the process," he says.

“If GST has a lot of positive impact on our clients, that eventually would benefit us as well. The onus is upon us as an industry body to address the concerns so that the advertising industry can make the most of the positives that come with GST,” Chopra states.

Most industry observers believe that some sectors that were heavily taxed like the automobile category will now see government levies being more than halved. That will lead to a reduction in costs for the end consumer, which is likely to lead to a surge in sales, that will then lead to more spends on advertising and marketing, and that could then lead to a spurt in business for the advertising industry – both in terms of creative and media planning and buying.

“Now the industry can look at it as a glass half empty or half-full,” says an advertising veteran. “The bullet had to be bit sometime, the best time is now. Yes, the administration and paper work of what appears to be a complicated exercise involving Central GST, State GST and an IGST,, but in the long run we will learn to live with it. So I guess we will have to go with both the positive and negative impacts and reap the benefits when everything settles down.”

Bhasin is willing to look at GST beyond its short-term impact on the sector. "There may be some interim inflationary effect because of the potential increase in rate from 15 per cent service tax to say 18 per cent of GST but I think since the set off is going to be available, other benefits will far outweigh this disadvantages,” he adds on an optimistic note.

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