Service tax on online ads: Industry unhappy

Government's decision to include digital and mobile advertising in the service tax gambit sparks mixed reactions, but an overwhelming majority feels that it is a retrograde step that may impact a fast-emerging medium

Sohini Sen & Sarmistha Neogy | Mumbai | July 11, 2014

The Union Budget this year was perhaps one of the most looked forward to budgets in recent times. With the change in government, there were a lot of expectations from each and every industry. While some were left pleased, some others can see challenging times ahead.

Finance Minister Arun Jaitley, in his maiden Budget speech, said that online and mobile publishers and ad networks will now come under the purview of service tax once again. Incidentally, online and mobile advertising had been included in the negative list for service tax in the Budget presented in April 2012.

With the current service tax rates in India being at 12.36%, this sudden tax levy can impact the online industry hard. Here is what industry spokespersons had to say about it.

Dr Subho Ray, President, IAMAI:

Subho Ray

Unfortunately, the Budget while continuing with the broad trends of the previous two budgets, has curiously decided to reimpose service tax on the industry at a time when the industry, based on the Prime Minister's pre-poll announcements and the great support that the medium had provided to the PM personally and to the current ruling party, was expecting some more hand-holding and support from the government. For the industry, this has come as a very unpleasant surprise.

I am hopeful that this was just a proofing error in the large budgetary exercise and once this is brought to the notice of the Finance Minister and other senior officials, this announcement would be withdrawn. We appeal to the Finance Minister to withdraw the announcement at the earliest.

Prasoon Joshi, Chairman CEO, McCann Erickson India:

Prasoon Joshi

Both mobile and online are emerging mediums and will continue to grow. I don't believe applying service tax on these mediums will affect its growth in the long run. Clients will be able to claim CENVAT credit and offset against their service tax liability.

Tushar Vyas, Managing Partner, South Asia, GroupM Interaction:

Tushar Vyas

After a two-year gap, digital and mobile spends will be subject to service tax again. This will negatively impact the advertising spends, as part of spend outlay will be diverted to tax. Especially small and medium advertisers will get impacted the most as many of them are not able to offset service tax. The digital medium is still in infancy and small in the media mix. A two-year period is not long enough for the digital industry to get benefits. Move to reimpose service tax is contrary to otherwise digital-friendly budget announcements. Digital medium has a large advertiser base (almost as big as print) and will impact current advertiser base as well as adoption of the digital medium by the SME segment.

Neeraj Roy, MD & CEO, Hungama Digital: 

Neeraj Roy

It is heartening to see mention of areas such as animation and gaming in the budget as such. However, digital, mobile and internet have to be seen as a co-fabric in the overall growth story of the nation. But then again, we must remember, it has been only six weeks of this government. The Budget is reflective of the fact that they are interested in the technology field as well.

Mobile and digital are the most significant ways of advertising for small and medium sized brands which make a name for themselves using these mediums. That a 12% tax will be absorbed by a Rs 3,000-crore industry is not how we should look at it. Digital and mobile advertising has led to re-imagination of the business. While I am optimistic of the government's intention, there is a need for deeper rooted, strategic drive and initiative to embrace internet and mobility.

Atul Hegde, CEO, Ignitee Digital:

Atul Hegde

I do not think that the service tax implication will have an adverse impact on digital advertising budgets. Investments in digital advertising were not spurred by the lack of service tax, but rather by brand marketers recognising the reach and impact online and digital media can potentially deliver. We expect that today's digital savvy marketers will continue investing in the medium. The provisions by the government, on the other hand, reflect the exponential growth the sector has experienced over the last two years. It is a sign that online and mobile advertising are now being recognized at par with other media.

Vineet Gupta, MD, 22feet Tribal Worldwide:

Vineet Gupta

Service tax has not been a major factor in the way brands allocate their marketing spends across mediums. So I don't see the significance of these mediums in the overall mix getting impacted in any way.

However, this decision will definitely have a negative impact on the overall category spends as I do not see brands increasing their budgets on account of this announcement in similar proportions. They will have to provision for it from the existing pool. This in turn will impact overall spends on the medium and agency billings, especially, in the current fiscal.

Suveer Bajaj, Co-founder, FoxyMoron:

Suveer Bajaj

The recent announcement of levy of service tax on online media and advertising might create a negative impact as most brands and large corporations have already budgeted their online media spends for the year. This would imply that these marketing and advertising budgets would eventually get undercut. Owing to the fact that online and digital advertising in India is fairly nascent, this move might discourage new entrants to the industry and allocation of spends towards digital marketing. The speedy rate at which the industry was evolving now faces a minor setback.

On the other hand, the budget has positively set aside close to Rs 500 crore for the digital India programme to ensure connectivity at the grassroot levels. Brands and organisations in digital will now also focus on the rural markets, if they haven't already so through the online mediums. Going forward, there will be a paradigm shift in the communication and marketing strategies by digital and technology agencies to specifically target this new audience by including unique and innovative rural marketing campaigns.

Vamsi Vanka, Chief Media Officer, Razorfish:

Vamsi Vanka

I believe that like everything, this also has two sides. On one hand it will become difficult for the agencies to manage the budget of the clients and also maintain their own profit pie. But on the other hand, I strongly believe that like every tax regime, it is a point of disruption; it is happening now but will cease to be an issue six months down the line.

Zafar Rais, CEO MindShift Interactive:

Zafar Rais

Though the budget encourages start-ups and technological advancement via online centralised payment model, cheaper mobile phones & LCD/LED monitors, the aspect of bringing back online advertising into the service tax ambit is not a welcome move as it affects the digital marketing industry and the brands as most corporations align their budgets in advance and the move will result in an undercut, leading to a negative impact, both for advertisers and brands. A lot of agencies and brands will get hit because they are heavily invested in Facebook, Twitter and YouTube and other online platforms for marketing and advertising.

Ritesh Singh, CEO, ARM Digital:

Ritesh Singh

From the brands' side, they will have limited budget, they will not increase it because of the service tax. Therefore, agencies will have to re-juggle it. Pressure will fall upon everybody. For a start-up like us, whose growth plans are extremely aggressive, it comes very heavy on us. The only solution to this is that, industry bodies like IAMAI should be made bigger and stronger to monitor the cash flow, who is paying the taxes, who is not. If these things fall in place, then it becomes manageable.

Arvind Sharma, President, AAAI:

Arvind Sharma

I feel it is a very good Budget. They have tried to remove some of the wasteful concessions and the irrationality that had crept in to the system. The Budget speaks about development in infrastructure and manufacturing. Though it is too little time, their move is in the right direction.

However much I may not like a specific decision taken by the government, I think the whole 'raj' of concessions for long term is not good. Past experience shows that when there is clarity and confidence, most people move forward with the decision. And going by this Budget, I think people do have clarity and confidence.

Benny Augustine, CFO, Web Chutney:

Benny Augustine

I would have been happier had the Budget maintained the status-quo. The thing is that clients will not increase their budget. So, the tax is will have to be absorbed by the business. In print, they will continue to not have service tax. The government should realise that this segment is going to grow. They should have given leverage for a few more years for this industry.

Kushal Sanghvi, Head, World Wide Open:

Kushal Sanghvi

Clients are always looking out ways and means to cut budget; they look at net payout and not from the tax components perspective. They will still expect the work to be delivered and will ask the agencies to adjust. Therefore, by default it will impact the small and mid-sized agencies but I won't say the quality of work will get hampered.

Hari Kidambi, GM Strategy & Operations, Talenthouse India:

Hari Kidambi

It's a good thing that the government has acknowledged the welfare of media. The decision to include mobile and digital advertising may impact the industry this year because big spenders would have frozen their marketing budgets. But next year, there should be no impact. The medium is growing very fast and the government is pushing it as well, what with our PM being tech savvy.

Small players, instead of staying away, will continue to pump in money to digital and mobile because to them TV is still not affordable in most cases. Medium and small players may reallocate their budgets, but they cannot afford to not advertise in such a changing scenario.

Shachin Bharadwaj, CEO & Founder at TastyKhana.in:

Shachin Bharadwaj

One of the dampeners is the introduction of service tax on digital advertising. This will make marketing a bit more expensive for e-commerce companies. Overall, the budget sends positive signals – Rs 10,000 crore for small enterprises, tax holiday on power sector, investments in infrastructure and also more tax savings will increase the take home money for people and hence the spending capacity.

Smita Jha, Leader- Entertainment and Media, PwC India:

Smita Jha

While some sections of the industry are not happy with the online and mobile advertising being included under the service tax, we believe that the philosophy of pruning the negative list in order to promote GST in the industry, is in the right direction and thus inclusion of such services in the taxation is a small price to pay in the short-term.

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