Sectors like FMCG, consumer durables, retail, and automotive will benefit from the forthcoming Goods and Services Tax regime rollout because of reduced advertising costs, claims an E&Y report on the impact of GST on advertising released on Thursday. These sectors will be able to advertise more within the same budgets allotted for advertising when the new tax regime comes into play. Some sectors like banking and financial services, alcoholic beverages will, however, feel the brunt as the effective cost of advertising will increase under the regime, the report said.
The FMCG industry spent approximately Rs 12,492 cr on advertising (32% of the total adex) in 2016. Once GST comes into effect, this industry will be able to avail full input tax credit because most FMCG companies have set up their factories in excise free zones, as area-based exemptions are likely to be withdrawn under GST. Therefore, FMCG advertisers will be able to advertise more in the same budget as the cost of advertising will reduce. The report cautioned that FMCG companies will need to educate sales teams to prevent downward rate pressure due to optical increase in advertising budgets.
Similarly, the automotive sector, which is the second biggest advertiser (Rs 4,030 cr adex in 2016), is expected to have a positive impact under the new regime. Auto companies engaged in the import of completely built units were not eligible for input tax credit of service tax charge in the pre-GST regime as their output tax was only subjected to state VAT. Under the GST regime, such companies would benefit from availing full input tax credit. Therefore, auto companies will also be able to advertise more in the same budgets. Much like FMCG and auto companies, consumer durable companies will experience a reduction in advertising costs as well.
Sectors such as e-commerce, BFSI and Alcoholic Beverages will be negatively impacted by the GST rollout. In the case of the e-commerce sector which contributes more than Rs 1,500 cr to the nation’s advertising pie, loss making companies in the sector that have accumulated credits could initiate budget curtailment due to cash blockages in credits. In addition, depending on working capital requirement of e-commerce companies, advertising budgets may increase or decrease. Sectors like BFSI and alcoholic beverages will be forced to spend more for the same volume of advertising under the new regime. The negative impact is because banks will have to continue to reverse partial input tax credit under the new regime just as they did under the pre-GST regime.
According to the report, companies in the banking and financial services sector will be able to advertise less in the same budget, as effective cost of advertising will increase under GST regime. The BFSI sector spent around Rs 1,400 cr on advertising in 2016. The third largest advertising spenders - telecom companies - will weather the impact of GST. As per the report, telecom companies, which are eligible to avail input tax credit of taxes charged on advertising spends, will continue to avail full input tax credit of GST charged. Therefore, GST rollout may not heavily impact the telecom sector in any way.