Broadcasters, advertising agencies and companies are fighting over the issue of who is going to take the brunt of the 5 per cent service tax levied by Finance Ministry. But everybody agrees that the tax will worsen prospects for growth in a flagging economy.
According to Amit Khanna, chairman Reliance Entertainment, “The tax is unfair and unjustified. The same product is taxed at multiple points, leading to a cumulative tax burden of 20 per cent to 25 per cent on the consumer. Unless the service tax on advertising spending is made VAT-able, this levy will be a drag on an already-burdened industry.”
The advertising agencies in turn, will pass on the tax to clients if broadcasters refuse to pay up.
But in a slowing economy with sharply shrinking ad spends, it will be very difficult for advertising agencies to squeeze their clients by asking them to pay the new tax? In a recessionary period, a tax on advertising will dampen growth prospects in the consumer goods sector,” says Mr Bharat Patel, chairman, P&G.
India, where annual broadcast advertising spending is worth about Rs 3,500 crore, has one of the lowest ad spend-to-income ratios anywhere in the world. Nations like China, which spent 11 per cent less than India on advertising in 1993, have jumped ahead of India’s ad spends by 21 per cent today.
“By and large, corporates have a fixed annual advertising budget. A tax on that will lead to a contraction of the market,” says a Ficci official. In the face of a recession, a new tax on advertising looks very ill-timed, indeed.