In a recent development, the Centre and states broadly finalised the contours of the law that will govern the levy of goods and services tax (GST). However, according to media reports, a number of states said that the April 1, 2017 deadline for GST looks difficult to meet and that a realistic target could be June or July this year.
Given that GST is on everyone’s mind and it will have to be implemented this year, EY (formerly Ernst & Young) has released a report on the implications of GST on several sectors including Auto, FMCG, Film, Real Estate, Government, Power and International Advertisers to name a few. The levy of GST will impact different sectors in different ways but one thing that will remain common is the impact of GST on advertising spends.
According to the report, the sectors which will be positively impacted with regard to advertising are Manufacturing Companies, Traders, Film and International Advertisers.
Banking and Financial Services, Real Estate and Service Providers such as Telecom, Logistics, Real Estate Agents etc will not be particularly affected by the levy of GST.
Interestingly, the EY report says that five sectors will be impacted negatively when GST is levied- Classifieds/B2C advertising, exempt sectors such as Education and Hospitality/Healthcare, Government, Power and Tours and Travel.
For Manufacturing companies (such as Auto, Consumer durables, Engineering companies and equipment, FMCG etc), the key positive impact of GST will be that they can use input credits to set off output liabilities.
Loss making entities having accumulated credits could initiate budget curtailment due to cash blockages in credits. Advertisers could ask for invoices to be addressed at numerous locations (based on their location-wise GST liabilities)
For Traders (such as importers, retailers etc), as currently credit of service tax on ad spends is not available as set-off, they also will be entitled to use GST input credits to set off output liabilities.
Sales budget could increase to the extent of service tax cost in the current tax regime and the need will be to educate sales teams to prevent downward rate pressure due to optical increase in ad budgets.
In the Film sector, the positive impact will be that client in film business will get full GST credit as against current proportionate service tax credit. GST will also result in reduced cost in advertising.
For International Advertisers, GST implication on agency commission will depend on the role of agency. If the agency is considered as ‘intermediary’, commission could be liable to GST but if an advertising transaction is treated as exports, the agency won’t be taxed, leading to reduction in total cost to advertiser.
Coming to the neutrally impacted sectors for GST, in Banking and Financial services, currently, 50% of service tax charged on ad spends is a cost to advertiser but the sector is likely to have some reversals of credit under GST (proportion yet to be finalised). This could mean increased cost for advertisers, depending on reversals applicable. Advertisers could also ask for invoices to be addressed at numerous locations (based on their location wise GST liabilities)
In Real Estate, no GST will be applicable on property sold after construction while under-construction property sold will be liable to GST. Developer could get proportionate credit – based on sale of under construction property/completed projects. Effective increase in tax rate would be more for print media, which is currently not taxable.
Service providers will be entitled to use input credits to set off output liabilities. For loss making entities, having accumulated credits could initiate budget curtailment due to cash blockages in credits.
According to the EY report, five sectors will witness a negative impact of GST. For Classifieds/B2C advertising (end consumer), the impact of GST will be increase in tax rate - increase in advertising cost to end consumers. There will be downward pressure on rates/budgets and an effective increase in tax rate would be more for print media if such print media is liable to GST (which, as mentioned earlier, is currently not taxable).
As sectors such as education, healthcare and hospitality sector are expected to be exempt from GST, they would find any tax on their marketing spend an increased cost resulting in increased cost for advertisers, depending on applicable rates.
Government would find any tax on their marketing spends an increased cost and advertisements to Governments are expected to be bifurcated statewise, based on dissemination. Deals with Government departments will be concluded after agreeing to state wise bifurcation.
The Power sector may be exempt from GST and it would find any tax on marketing spend an increased cost. However, if electricity is considered as zero rated supplies under GST, refund of GST credit should be available to these companies.
Only partial input credit is available to Tours and Travel companies (which pertains to domestic purchases). Hence, a portion of the GST cost will not be available to such companies to use against output liabilities. Given that such companies spend most of their advertising budgets on print, which is likely to be taxed under GST, the total cost of advertising will increase. Also, the total GST cost on advertising spends will not be available to them for set-off purposes.