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Media Buying Agencies: Mixed reaction to hike in service tax

12-July-2004
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Media Buying Agencies: Mixed reaction to hike in service tax

What’s going to be the direct impact of Union Budget 2004-05 on the fast-paced Indian media buying industry? The Finance Minister’s move to increase the service tax from 8 to 10 per cent has evoked mixed response from media buying and planning agencies.

While some media agency chiefs opine the hike in service tax will not have a major impact on the industry, there are others who argue that the proposed increase will be a setback for media revenues.

On the impact of the hike in service tax, StarCom Wo-rldwide managing director India (west & south) Ravi Kiran observes that any tax increase will obviously put a downward pressure on the real purchasing power of our client’s budgets. “But in our view, such pressures are short-lived. Over time, all of us find ways of deploying our investments more effectively. No tax system can ever stop that,” he adds.

It was three years ago that the government had increased the service tax from 5 to 8 per cent. According to Mr Kiran, If a company which has a turnover of Rs 500 crore invests 10 per cent of it, which is Rs 50 crore in marketing a two per cent additional service tax burden will mean an outgo of Rs 50 lakh to Rs 1 crore more, depending on the media mix used. “This no doubt is a significant amount, but I am sure we will improve the productivity of our investment— enough to offset this negative impact. That’s the fun in our business,” he explains.

According to a media analyst in Mumbai, the hike in service tax will be a slight setback for the ad industry as advertisers may cut down the ad budget to absorb the impact of the increase. In contrast, a CEO of a leading media agency in Mumbai says: “The industry was expecting a hike of 4 per cent. The 2 per cent hike will not have a major impact. Because, advertisers will try to renegotiate their contracts to absorb the 2 per cent hike.”

Says Optimum Media Solutions (the media buying wing of Mudra Communications) executive vice-president Amit Ray: “For a while, each constituent will try to pass it on to others. After a while, it’ll all get streamlined because, if paying service tax is the law of the land, it’s a law that people have to comply with.”

Media Directions (the media buying and planing wing of RKSwamy\BBDO) CEO Sandeep Tarkas says: ‘‘The hike in service tax is going to result in some amount of reduction in the real adspend. On the other hand, the increase in FDI for the insurance sector will open up new doors for media business,” he adds.

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