E&Y report: How GST will impact ad spends across categories

Ernst & Young has released a detailed report of how GST will impact advertising across the category. Sectors like FMCG and consumer durables show a positive impact on advertising spends but EY anticipates a negative impact on sectors like e-commerce, banking and financial services. Sectors like real estate, telecom and insurance are not expected to have any significant impact.

Trade impact

Every manufacturer, service provider and trader will be impacted positively in the GST regime provided his income is liable to the new tax.

The advertising budget for manufacturers will increase by one per cent as credit of Swachh Bharat Cess (SBC) at 0.5 per cent and Krishi Kalyan Cess (KKC) at 0.5 per cent was not available in the pre-GST regime. In GST, full credit of GST (either at five per cent on print advertisements or 18 per cent: on non-print advertisements) charged on the advertisement spent will be available.

The advertising budget for service providers will increase only by 0.5 per cent as in GST; full credit of GST (either at five per cent on print advertisements or 18 per cent on non-print advertisements) charged on the advertisement spent will be available. Credit of Swachh Bharat Cess (SBC) at 0.5 per cent was not available in the pre-GST regime.

For traders, the advertising budget will increase by 15 per cent as credit of service tax at 14 per cent, Swachh Bharat Cess (SBC) at 0.5 per cent and Krishi Kalyan Cess (KKC) at 0.5 per cent was not available in the pre-GST regime. In GST, full credit of GST (either at five per cent on print advertisements or 18 per cent on non-print advertisements) charged on the advertisement spent will be available.

GST’s impact on industry-wise advertising spend

FMCG and consumer durables and automobile sectors will be able to advertise more in the same budget as cost of advertising will reduce because earlier most of the companies in FMCG sector had their factories set up in excise-free zones. Hence, in the pre-GST regime, FMCG sector was not eligible for full input tax credit. In the GST regime, the sector will be able to avail of full input tax credit as area-based exemptions are likely to be withdrawn.

Consumer durables and automobile sectors were engaged in import of manufactured durables. They 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. In the GST regime, such companies would benefit from availing full input tax credit.

The news is not very good for the e-commerce, banking and finance sectors. Under the GST regime, banking sector companies will be able to advertise less in the same budget, as the effective cost of advertising will increase, while for e-commerce, depending on the working capital requirement of the company, advertising budget may increase/decrease.

Under the pre-GST regime, e-commerce companies were eligible to claim input tax credit of service tax charged on advertisements. However, loss-making e-commerce companies having accumulated credit balances on account of huge advertisement spends would be negatively impacted. This is because the accumulated credit would increase in GST on account of increase in rate of tax on print and non-print advertisements.

Under the pre-GST regime, the banking sector was suffering partial reversal on their input tax credit. Under GST, banks would continue to reverse partial input tax credit. Thus, the impact would be negative as the rate of tax has increased on print and non-print advertisements.

Depending on the proportion of sale of under-construction properties vis-à-vis completed properties, real estate advertisers will be able to advertise more (in case of proportion of 'under construction' properties is more) in the same budget as the cost of advertising will increase or reduce accordingly.

Under the GST regime, domestic airlines would suffer an incremental increase in rate of taxes on output as well as input. However, there would be no major impact as full input tax credit of GST charged will be available. Therefore, there is not much change in the advertising spend. But for airlines flying internationally, the increased cost for advertisers (depending on reversals applicable) could accordingly impact the number of advertisements in the same advertising budget. In GST, the quantum of input tax credit reversal may increase or decrease vis-a-vis the pre-GST regime. The quantum is dependent on the share of revenue earned from transportation of passenger or cargo.

Cigarette companies will be able to advertise more in the same budget. Cigarette companies have restriction on advertising their products in mass media. Promotional material installed at dealers’ premises was not fully eligible to claim input tax credit under the pre-GST regime. It is possible that under the GST regime, the tax charged on such material may be available as input tax credit. Alcohol companies will advertise less in the same budget on account of increased cost of advertising. Alcohol for human consumption has been kept out of the ambit of GST. Hence, the pre-GST tax regime continues to be applicable on the sector. Due to increase in rate of print and non-print advertisements, the overall cost of advertisements will increase. Advertisements for surrogate products will be based on sectors in which those products fall.

Retail, hotels and hospitality sector will be able to advertise more and cost of advertising will reduce. Under the pre-GST regime, retailers were not eligible to claim input tax credit of service tax charged on advertising spends. Under the GST regime, retailers will be eligible to claim full input tax credit. Hotels and banquets were liable to service tax, state VAT and luxury tax in the pre-GST regime. Hence, hotels were not eligible to claim full input tax credit of service tax charged on advertising spends. In GST, hotels and banquets will be eligible to claim higher input tax credit as compared to pre-GST regime.

Increase in tax rates for advertisements to be an increased cost to governments; this would result in reduction of advertisements in the same budget. Due to the increase in rate on print and non-print advertisement, the overall cost of advertisements will increase. Insurance sector advertisers will be able to place a similar number of advertisements in the same budget as there is no major change in effective cost of advertising.

The entire tax charged under GST to petroleum companies will be an increased cost. Thus, effective sales budget could reduce to the extent of tax cost. Petroleum companies will advertise considerably less in the same budget on account of increased cost of advertising. The petroleum sector has been kept out of the ambit of GST. Hence, the current tax regime continues to be applicable on the sector. In the current regime, petroleum companies were eligible to claim input tax credit of service tax charged on advertisement services against excise duty liability. However, in GST, input tax credit charged will be partially available and hence, it will be an additional cost on the advertisement spends.

Gold jewellery retailers' advertisers will be able to advertise more in the same budget as cost of advertising will reduce. (depending on quantum of increase in credits). Under the pre-GST regime, gold jewellery retailers were not eligible to claim input tax credit of taxes charged on advertising spends. Under GST regime, gold retailers would get input tax credit of taxes on advertising spends, thereby increasing the effective budget.

Education institutes and tour operators will be able to advertise less in the same budget, as effective cost of advertising will increase under the GST regime. Under the pre-GST regime, services provided by educational institution and tour operators were exempted. The exemption has been continued under GST regime. Due to the increase in rate of print and non-print advertisements, the overall cost of advertisements shall increase.

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