Industry expects digital costs to go up post levying of service tax

Finance Minister Arun Jaitley has announced that service tax on “sale of space or time slots for ads” on online and mobile platforms will be levied once more in his Budget speech on July 10, 2014.

As per the Union Budget 2012, online and mobile advertising were placed in the “Negative List” (The Negative List was introduced in 2012 to reduce the number of services on which this tax applied, which at that time numbered 119). This removed them from the ambit of service tax, which basically meant that mobile operators, VAS providers and publishers such as websites, blogs, etc., did not have to pay for allowing advertising.

However, the Minister stated during his Budget speech that this negative list had been reviewed to broaden the tax base. Print continues to remain exempted from service tax.

The main fear in the industry seems to be that the levying of service tax on online and digital will cause ad rates to go up as the increased cost gets pushed down the value chain till it reaches the advertiser. “The biggest impact I can see is that inventory costs will increase and it will make advertisers more ROI-focused,” said Abhay Doshi, VP - Product Management and Marketing at Flytxt.

Similar thoughts were echoed by Suveer Bajaj, Co-founder of FoxyMoron. According to him, most brands have already budgeted their online media spends for the year and so this news could lead to marketing and advertising budgets getting undercut.

Neeraj Roy, MD & CEO of Hungama Digital Media Services also called the move a “conflicting action”, while Zafar Rais, CEO, MindShift Interactive opined that social media and digital agencies could face a negative impact. “On one hand, they are talking about increased digitisation, e-governance, etc., and on the other hand, they are starting to tax online and mobile advertisers. This dichotomy is disappointing,” said Ashish Bhasin, Chairman & CEO South Asia, Dentsu Aegis Network.

The unexpected move caught agencies and digital players by surprise, especially since mobile advertising in particular is still at a nascent stage in the country. Will the service tax have an adverse effect on it? “Re-introduction of service tax in this emerging and growing sector is surprising. We will have to wait and watch the impact on growth of mobile advertising in India,” said Sameer Shah, Co-founder & COO of Bonzai Digital. Bajaj also added that 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,” he added.

However, not everyone believes things could get that dire. Smita Jha, Leader (Entertainment & Media Practice) at PricewaterhouseCoopers India does not feel that the addition of the service tax will have such a direct adverse affect as increasing ad rates. She also argued that inclusion of the online and mobile advertising under service tax regime is on a rational principal of pruning the negative list of exemptions. “Since this segment was always taxed, even prior to the negative list being introduced, re-inclusion of the same seems logical step in the journey towards GST, which is a positive move in the long run,” she said.

Similarly, Preetesh Chouhan, VP-APAC, Vdopia also did not feel there would be much of an effect. “We are awaiting official confirmation and details of the same. My opinion is that tax levied will not affect how brands are allocating spends on digital media.  It could be a good opportunity to see if we have made the final transition from niche to mainstream advertising," he said.

Even Atul Hegde, CEO of Ignitee Digital feels this is recognition of how far digital marketing has come over the last two years. According to him, investments in digital advertising were not spurred by the lack of service tax, but rather by brand marketers recognizing 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,” he opined.

Doshi, though, pointed out that the digital ecosystem consists of a number of middle-men or “brokers”, for example, ad networks, publisher aggregators, ad exchanges, etc. According to him, the margins for all these players are so low that they will not be able to absorb the increased cost, which will have to be passed on to the advertiser.

Sanjay Tripathy, Senior EVP-Head (Marketing, Product, Digital & E-Commerce) at HDFC Life also agreed that costs will increase for brands. “We all have limited budgets. If 20-30 per cent of our spends are going on mobile and online and if I have to also incorporate the service tax, it becomes a big amount,” he said.

Meanwhile, Dr Subho Ray, President, IAMAI, was hopeful that this was just a proofing error in the large budgetary exercise and would be withdrawn once brought to notice. “Through this communication, we appeal to the Finance Minister to withdraw the announcement at the earliest,” he said.

The digital advertising industry has been among the fastest growing sectors in India in recent years. According to the Pitch-Madison Media Advertising Outlook 2014, the digital advertising sector grew at 32.4 per cent and is expected to grow by 29.5 per cent in 2014 as well. The Modi Government has been vocal about its support for digital initiatives. In fact, there are a number of initiatives announced in this Budget too that will boost Internet and mobile services in the country. However, the levying of service tax once again on the fledgling online advertising space has left a bitter taste for advertisers and the digital ecosystem. 

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