In 2014 Finance Minister Arun Jaitley brought sale of space or time slots for ads on online and mobile platforms under the ambit of service tax. Mid last year a 6 per cent equalisation levy that would be applicable to services received by a non-resident not having a permanent establishment in India from an Indian resident who carries out the business. With every such move, digital advertising got more expensive for Indian advertisers and affected the growth of the digital marketing industry as a whole.
In the run up to the Union Budget, we asked experts in the field of digital marketing to share with us their insights on the impact of service tax on the industry and their expectations from the budget. With the backdrop of demonetisation and the third year of taxing online and mobile advertising, industry leaders and experts sought a fillip for the industry in terms of taxation incentives, a uniform tax code and clarity on the taxation policy and regulations.
Describing the problem with the current taxation system, Rajiv Dingra, Founder-CEO, WAT Consult said, “There was a time when to promote digital advertising there was no tax on digital advertising. This helped companies like ours to grow quickly and enter the media planning and buying industry. Currently, we need to pay 12-15% tax more or less immediately, while we actually need to wait for a period of 50-60 days to receive our payment from the client. This incapacitates young digital advertising start-ups from taking up large media mandates. If digital India needs to take off, then digital advertising also has to grow. Globally a large part of the advertising industry is powered by digital advertising, but that’s not the case in India. In India, about 10-12% of advertising is digital. In spite of all this, the industry is growing at 30-35%.”
Remove taxation, revive industry
Ashish Shah, CEO and Founder, Vertoz Media said that spending on media takes a hit when taxes are levied, stifling growth of the industry. “Media plays an integral part in the growth of emerging markets. Since October 2014, when service tax was levied on the online industry, growth has been slow and steady. It is primarily due to the technological innovations, infrastructure and globalization. In the era where the current government is advocating digitalisation, it is important to revisit the tax implications to this industry and revive the growth in proportion to awareness and its necessity,” he said.
Shah added, “B2B businesses are impacted by indirect taxes and that shifts their profits. Increased taxes compel business houses to decrease media spends. Easing the taxation would encourage business houses to add increased budgets to media spend rather than otherwise. That would act as a catalyst to online and digital industry growth. It would also encourage the Indian online industry to compete with emerged markets and set growth trajectory for its future potential.”
Dingra echoed the thoughts of Shah, he said, “If we really want to enable small and young entrepreneurs and start-ups we need to ensure that digital advertising becomes easier, simpler, and cheaper. My expectation is an abolition of service tax on digital advertising, and the option to make the payment to the government when we receive the payment from the client.
Zafar Rais, CEO, MindShift Interactive, pointed out that indirect taxation has affected media budgets. “Equalization Levy on digital ads is one of the recent factors implemented in the past year which has had an impact on the media budgets. We are definitely looking at this reducing or its removal in order to avoid the excess tax payments,” he said.
Speaking about the much anticipated GST roll out, he said, “the increase in service tax automatically has an impact on the overall advertising and marketing budgets allocated, where amounts are looked at as a net. This is will aid in the transition towards GST as we won’t feel the sudden impact of a higher tax percentage.”
Tax on print advertising
Industry experts also demanded a uniform tax code which will tax all advertising mediums equally, including print advertising. The print medium is still exempt from service tax, making it the only medium that is not taxed.
“ Not long ago most of the advertising spends by corporates was through print media. Digital advertising budget still forms a small portion of overall ad spends. Applying service tax on digital and not on print is difficult to understand or accept. Ideally, if it’s levied, it should be done for all other mediums of advertising as well, to be fair to all. The government needs to take the initiative for digital as a category to be competitive and to promote the current government’s Digital India initiative. All forms of advertising and communication is the key to the growth of the economy and ideally the government should encourage the industry by levying less taxes.” Veera Ghyara, Co-Founder and Business Head, Webmaffia.
Dingra said that of the various mediums, print and television are established sectors, and that players in these sectors have deep pockets. He reasoned that because of those two attributes of the print industry, levying tax on advertising in print should be considered.
Ashish Patkar, Founder and CEO, Monk Media Network, expressed discontent at the inclusion of digital advertising under the service tax ambit. He said, “a lot of the print publishers are exempt from paying service tax so to a large extent it is unfair that an old industry gets the benefits while a new emerging one gets burdened. It will be a masterstroke if the government gets the Digital Advertising industry out of the service tax regime but unfortunately, I don't see it happening.”
Impact of Service Tax
Contrary to popular belief that the new taxation law had severely curbed the growth of the industry, Sanjay Mehta, Jt-CEO, Mirum India, said “I don't think that the service tax aspect has impacted growth of digital advertising in any significant way. Most of the clients who spend on this medium, are brands, for whom this is not a net-cost, due to the set-off option. Only the recently introduced Swachh Bharat Tax, is a net extra cost, and in that sense a burden.” Although, he added, “From a digitisation drive perspective, the government should consider reducing or removing taxation on digital products and services, which are consumed by the end consumer, and for whom the tax becomes a net additional cost burden.”
Shekhar Banerjee, COO, Madison Media, said “We are seeing a significant shift of advertiser media mix towards digital and this is on the back of changing media landscape. Across categories, digital is playing a significant role across consumer journey and we do not see it getting impacted because of service tax levy. This shift if backed with proof of ROI is here to stay and will continue growing.”