Industry POV

How GST Will Impact the Indian Advertising Industry

14 May 2017

The Indian Government is all set to bring in Goods and Services Tax (GST) in a few months from now. It is being deemed as the biggest tax reform in the country till now. GST will be levied at multiple rates ranging from 0 per cent to 28 per cent. GST Council has finalized a four-tier GST tax structure of 5%, 12%, 18% and 28%, with lower rates for essential items and the highest for luxury and de-merits goods that would also attract an additional cess. 

Though the common sentiment in the market is to wait and watch, some stakeholders across different industries are busy evaluating on how much they will gain or lose from it. It is expected that the advertising industry will be subjected to a higher service tax which will move up from 15% to 18%. This means that the brands might end up paying a little more as part of the service tax. 

The industry opinion is divided on how advertising will be hit with GST. One of the published reports pointed that GST will lead to an additional volume of media spends as it will reduce the cost of creating an ad. The report released by Kotak Mutual Fund points that the companies which gain from the lower cost od creating a creative will likely plough back it in advertising, increasing their ad spending by about 10%, or more than Rs 5,000 crore, over the previously projected 10-12% growth for this fiscal year. 

As per the model GST law tabled by the Government, expenses incurred on advertising will be available for input credit on taxes paid on advertisements, however, under current taxation laws, advertising spend is treated as manufacturing expense and no input credit on sales tax and VAT is available. On the other hand, the industry is unanimously happy that it will bring transparency in the system which will benefit everybody.

Ashish Bhasin, Chairman & CEO, South Asia, Dentsu Aegis Network thinks that GST which was supposed to simplify life will complicate life as far as service industry is concerned, particularly for agencies that operate out of several markets. "That's so because of the sheer number of registrations and returns that one must file. Also, the whole focus is on the manufacturing side, I don't think enough attention has been paid to the services side. That said, it will take some time to settle down. The benefit will be that the clients will have easy flow of goods, so there will be efficiencies in their business as well as some clients who were not able to get full set of the service tax, now they will be able to get. What will depend upon is also the final rate applicable? Now, service tax goes up to around 15%. The slab for our industry is not clear yet. If it falls in 12%, it will be good, if 18% then there will be bigger hit," shares Bhasin.

He further adds that in the long run, GST will be good for the industry and economy. "Whenever the economy does well, generally advertising does better. In the short run, there will be 2 hiccups - implementation issues and the teething problem. The other thing is globally, it has been observed that whenever GST has been introduced, there is a little bit of emptying of the supply chain in the first couple of quarters. So, whatever goods there are there with the wholesalers and retailers, they stop purchases from the company and try to empty that out so that the new goods can come in with the new tags. So, there will be a temporary slowdown. I think, these will be short-term problems. In the long run, it will be good for the entire economy, and hence advertising. It has generally been observed that if GDP grows by 8%, then advertising grows by 12%, which is 1.5 - 2 times. However, the down sight is also there that if GDP comes down by 1%, advertising comes down by 1.5-2%. Advertisers might be able to claim better but then the rates might go up so that might negate it. I don't think there will be any direct benefit here. Generally, governments indication is that they want to be revenue neutral," mentions Bhasin.

To this, Habeeb Nizamudin, CMO, IPG Mediabrands India adds that the GST rollout impacts manufacturers, service providers, marketers, and media in varying manners and has certain geographical related aspects that may have a stated advantage or disadvantage depending on the nature of the item considered. To look at impact from an immediate term perspective such as growth in Adex, reduction in advertising costs etc, would be pre-mature as well as speculative at best for it will take atleast one quarter of the financial year for each industry to settle into understanding the cycle of the GST implementation across various points of the business. Even after that most businesses will maintain a contingency/provision to address any upheaval because of GST.

Naresh Gupta, Chief Strategy Officer, Bang in the Middle mentions that the service tax is going from 15% to 18% so there is a clearly three percent hit. "This is the only difference that it will make to the advertising industry as there will more tax levied on. It affects clients also as they will pay three percent more. I do not think it will impact the agencies positively as there will be some balancing the brands will do and for a period of time, there will be adjustment that from where the industry will take the three percent out from. The revenues of the agency will be intact. However, that three percent gets added up everywhere be it production, fee, media, or other things. And if a brand is a big spender, it is a huge sum. One will not just open his purse and spend more money. Everyone will want to keep their budgets intact. However, I have never seen any tax changes having a positive impact on advertising, which means that the spends go down. In the small run, agencies will feel a little bit of pinch, but I think in the long run, it will even out.
On the other hand, Nitin Makdani, Business Head & VP, HS Ads, thinks that the advertising industry will not be affected with the GST rollout. "It is the manufacturing industry that will be impacted the most, but not the services industry. Advertising industry being a part of the services category will not be hit. The service tax is expected to go from 15% to 18%, and hence if a brand was paying a Rs 15 as service tax on a spend of Rs 100. However, with the new system in place, input credit of 18% would be available on the tax paid on advertising expense, which was not available before. So, this will not make much impact on the spends. However, most brands would like to keep their advertising spends intact and not increase the budgets. Initially brands might want to adjust the volume of advertising to manage the ad budgets but eventually it will not affect the ad agencies in the long run."

A senior broadcaster on condition of anonymity mentioned that GST roll-out is going to be good for our industry. "Initially, there will be lot of teething problems. While they have said the roll-out will be on July 1, there may be a month or two delay in the implementation. But, I think big players are already prepared themselves for it. They must have worked out everything. For the small players, there will be initial problems but once it's all sorted, it's going to be the best thing for the country economy. It will enable and make things better for us. Advertisers will increase their ad spends. I think 2017-2018 is going to be a good year for advertising." 

Till the government rolls out GST, there will be clearly a wait and watch period, in which both brands and agencies will try to understand the impact of the new policy and adapt themselves to it.