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Online & mobile advertising service tax levy: Industry says ouch!

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MUMBAI: Budget 2014 brought with it the announcement that the 12.36 per cent service tax would be levied on online and mobile advertising also. These two were earlier exempt from the levy which was applicable to advertising on television. Finance minister Arun Jaitley, however, chose to continue to keep the much larger print media sector out of the tax net. Service tax on advertising on TV had been hiked to 12 per cent (plus 3 per cent sucharge) from 10 per cent in 2012, by the then government. The new levy will come into effect from a date to be notified after the passing of the Finance Bill.

Indiantelevision.com spoke to digital agency heads to check out whether they were ok with the inclusion of online and mobile advertising under the service tax umbrella.

“Okay to be on par with others”

Online marketing and ad agency Pinstorm Technologies  founder & CEO Mahesh Murthy doesn’t think that it is a big issue. “We are now a grown-up industry and though the tax that'll be mopped up here will be just around Rs 500 crore, I'm okay with us being treated on par with taxes on broadcast,” says Murthy.

“The grey area here is what exactly constitutes advertising in the online world. Is a Facebook post by a brand an ad? What about a tweet by an influencer? What about native content-driven solutions being used by sites like Buzzfeed? I believe the definition of what exactly constitutes digital and mobile advertising would help a lot. Right now there isn't any clarity,” observes Murthy.

It can be noted that all agencies were charging service tax as it was in non-exempt category. Only recently it was moved to the exempt category.

Online digital agency ibs MD Sabyasachi Mitter thinks the industry will be going back to how things were a little over a year back.

“At the agency the billing complication is reduced as we don't need to raise different bills for media cost and commission. Also, reconciliation becomes easier. For most clients who take input credit it will also not be a big deal. What will happen is for clients who release pay orders for all inclusive budgets, the spendable value will go down, ” mentions Mitter.

Vdopia APAC VP Preetesh Chouhan says bringing online advertising in the service tax ambit will help digital players understand whether the medium has arrived or not.

“As a video advertising company, our numbers show that we are witnessing an amazing organic growth of both online and mobile audiences and this is not going to change. So my opinion is that tax levied will not affect how brands are allocating spends on digital media. It could be a good opportunity to see if we have made the final transition from niche to mainstream advertising,” says Vdopia VP-APAC Preetesh Chouhan.

“Time to re look at online advertising budgets”

Digital L&K Saatchi & Saatchi CEO and managing partner Anil Nair expected this to happen.

According to him it will mean that brand managers and media companies will have to relook at their online budgets and account for accommodating the service tax component now given that their overall budgets are already fixed.

“It may augur well for social media though as monies could be diverted into content, apps etc. While online display will see a marginal cut back for a couple of quarters till it picks up again,” says Nair.

"While some sections of the industry are not happy with the online and mobile advertising being included under the service tax, we believe that the philosophy of pruning the negative list in order to promote GST in the industry, is in the right direction and thus inclusion of such services in the taxation is a small price to pay in the short-term," said PricewaterhouseCoopers leader- entertainment & media practice India Smita Jha.

Foxymoron co-founder Suveer Bajaj believes the finance minister's decision is likely to have a negative  impact as most brands and large corporations have already budgeted their online media spends for the year.

“This would imply that these marketing and advertising budgets would eventually get undercut. Owing to the fact that, online and digital advertising in India is fairly nascent, this move might discourage new entrants to the industry and allocation of spends towards digital marketing. The speedy rate at which the industry was evolving now faces a setback,” adds Bajaj.

Bajaj, however, says the budgetary initiative to set aside  close to Rs 500 crore for the digital India programme to ensure connectivity at the grass-root level is laudable. “Brands and organisations on digital will now also focus on the rural markets, if they haven't already so through the online mediums. Going forward, there will be a paradigm shift in the communication and marketing strategies by digital and technology agencies to specifically target this new audience by including unique and innovative rural marketing campaigns,” he opines.

HDFC Life senior executive VP marketing Sanjay Tripathy thinks this move will have an impact on the growth of this medium. He also states that this might lead to cut down on marketing spends in the coming days.

According to Future Group president (customer strategy) and CEO (Bengal warriors & T24) Sandip Tarkas the announcement is a bit of a hit but not a surprise. “As we move towards a GST regime, this anomaly had to be removed. This also reflects the growing size of online ad market which is large enough to be taxed,” says Tarkas.

Industry leader and Hungama Digital Media Entertainment MD & CEO Neeraj Roy speaks for the entire online industry in this comment he sent out to publications.  “The aspect of bringing back online advertising into the service tax ambit, whilst it is still a fledgling segment, is almost a conflicting action and not a welcome move.”

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