HOW GST WILL IMPACT THE AD INDUSTRY’S GROWTH

BY IMPACT Staff

Overall, experts see larger margins for companies on the back of heightened GDP growth, the benefit of which is passed on to consumers or put into brand-building and advertising. We analyse the scenario for each sector in the M&E industry

By Dipali Banka

Finally, the deed is done. The Rajya Sabha passed the Constitutional Amendment Bill paving the way for the Goods and Services Tax (GST), the largest ever tax reform in the country. Economists say that a well-designed GST Bill will add 2% to the total GDP growth of the nation. Cut to the Indian media and advertising industry, which has been growing at a rate 1.5-2 times that of the GDP over the years. Can we then infer that with the implementation of GST, the media and advertising industry’s growth will increase by 3.5-4%, i.e., 1.5-2 times the expected growth of the GDP? A lot depends on how the Bill is designed eventually, and the riders that come along with it.

Right now, the GST proposition is like buying a big mansion with only the outer four walls around it. The landscaping, architecture and interior designing is going to take a lot of effort and time. Having a uniform tax structure for a country so vast with varied services across varied regions is going to be a humungous task. Each and every business house will have to make changes in their systems, reporting, administration, valuation and operations in order to comply with the uniform tax rate of GST. The media and advertising industry won’t be an exception. The GST regime may be painful in the short term, but it will be path-breaking over the medium to long term. Here, we take a look at how each sector in the domain may be impacted and what are the challenges and opportunities lying ahead.

Print: For the Print industry, GST is not good news. So far, Print players were completely exempted from service tax. With GST, whether they will have to pay uniform tax at the expected rate of 18% or not will be clear once further details of the Bill are worked on. “Suppose Print companies have to pay the uniform GST, it will have a negative impact on their operating margins, which is generally around 25%,” says Amarjeet Maurya, Senior Research Analyst, Angel Broking.

“Print companies in India import newsprint. Today, newsprint is not liable to any import duty. But if with GST, newsprint becomes taxable then they will have a huge import credit. And it will be a huge challenge to match off those credits across their printing locations and sales offices across different States. Even if they are exempted, it will be a cost. In both cases, it is going to be a little negative for the Print companies,” explains Utkarsh Sanghvi, Associate Director - Tax & Regulatory services, EY.

The Print industry, it seems, is being represented by the Indian Newspaper Society (INS) to present their case before the Finance Ministry.

Broadcast: For broadcasters and Radio companies, where advertisement is big income, it is not going to be much of a challenge because their transactions are business-to-business in nature. So they will be able to recover the additional tax from their advertisers. “Also, the fact that input credit will now be available to content producers – film, TV and broadcast - will also help bring production costs down to some degree,” says Jehil Thakkar, Partner and Head, Media and Entertainment, KPMG. The entertainment tax that the broadcast companies were paying on the subscription income will get subsumed in GST. “While it will take some time, in the long term, they will be able to recover more value out of the subscription revenue compared to today,” adds Sanghvi of EY, explaining, “The only challenge is the rule that if you are providing service to the government, you have to allocate the GST across States where the advertisement is shown. So, if I have a pan-India advertisement for a government client, I will have to raise 30 invoices to the government. That will be a huge increase in compliance.”

Creative & Media agencies: For advertising and media agencies, the tax rate may go from 15% today to 18% (or the rate ultimately determined by the GST council). Creative agencies may be able to recover the increase in tax from their clients as the transactions are B2B in nature.

However, for media agencies that do a lot of media placements, the question will arise whether they will be considered principals or agents in GST. “If they go with the principal-to-principal arrangement, the quantum of credit will be 20% of media cost and generally they don’t make more than 5%. So, they will be managing 20% of the total media spends credit as an asset in the books. And a small lapse in the credit will eat into their thin margins. Overall, it’s quite complicated for media agencies,” says Sanghvi.

OOH and Radio: OOH and Radio are not going to be impacted much as the transactions are B2B in nature and an increase in rate will be recovered from the clients.

DTH and Cable: The distribution business (cable and DTH) is likely to be the biggest beneficiary given that entertainment tax will now get subsumed into GST and overall taxation levels will come down.

DTH and cable services are subjected to service tax and also an incremental entertainment tax.  While service tax and State level entertainment tax shall be subsumed in the GST, the effective entertainment tax incidence is expected to reduce. “However, the overall impact on the tax and revenue side will depend on the quantum of entertainment tax imposed by local bodies.  Under the GST regime, the tax cost on procurements for DTH and cable service providers should reduce on account of larger availability of credits,” says Uday Pimprikar, Partner, Indirect Tax, EY.

Events Industry: For event companies, it is overall positive because the entertainment tax on events have got subsumed in GST. “If someone was to watch an IPL match in Mumbai, he had to pay 25% entertainment tax and 15% service tax, which means almost 40% on the ticket price. That will go down to 20%. So, I think it is an overall positive for the events industry,” says Sanghvi.

 Multiplexes: “For exhibitors in high entertainment tax States, the overall tax rate will be lower and will help them reduce the price of tickets and aid footfalls. This will also benefit the film industry,” says Thakkar of KPMG. As of today, film exhibition is subjected to punitive entertainment taxes which are imposed at a retail level and are not fungible against any taxes charged on the procurements made by multiplexes such as service tax on rentals, VAT on goods procured, etc. A unified GST chargeable through the supply chain should significantly mitigate the cascading impact of taxes and thereby reduce cost.  However, entertainment taxes imposed by local bodies may be considered negative if they are imposed at punitive levels and are not recoverable from the general public.

Film Producers & Studios: To date, bulk of the expenditure incurred by film producers and studios is liable to service tax and also VAT.  Given that theatrical revenue is exempted from most of the output taxes, large part of the taxes charged on the procurements are not available to be set off against output tax liability and therefore is a cost. The cascading taxes generally amount to almost 7-10% of the overall procurement cost.  Imposing GST through the supply chain should allow the producers and studios to set off these taxes, thereby reducing costs materially, explains Primpikar of EY.

Compliance & challenges

The GST Bill will bring in several implementation and compliance challenges – the change to IT systems and the fact that now companies with multi-state operations will have to register and file returns in multiple locations as opposed to a central operation – will create some issues.

PwC, in its recent report on ‘Decoding the model GST law’, lists a few concerns that the media and entertainment industry may need to analyse and examine with regard to impact on their business. As per the structure of GST, each intra-State supply would attract Central GST as well as State GST. For inter-State supply, IGST would be applicable. Hence determining the State of supply of the services becomes crucial. According to the report, companies will have to update customer database to ensure correct raising of invoice (in case of Broadcast, DTH and cable); revamp IT system to be in line with the place of supply for various transactions and file representation for continuation of centralized registration option for CGST.

Another concern will be valuation of services. Presently, the value of taxable services is the gross amount charged by the service provider. Under the GST regime, transaction value would be considered for payment of tax, with various inclusions. “The tax-payer would be required to submit documents substantiating the cost of provision of services, amount towards profit, and general expenses, etc. In other words, the new valuation concept for services would require in-depth preparation of back-up documentation by the tax-payer. This is not warranted under the current service tax law,” states the report. Hence service providers will have to be mindful while setting prices for services provided by them, and would need to take the prevailing market prices into consideration.

Opportunity for ad growth

Proper implementation of the GST Bill is likely to reduce cost of capital goods, lower logistics costs and add efficiency. This would mean larger margins for companies, the benefit of which would be either passed on to the consumers or put into brand-building and advertising.

“Overall, GST should be value accretive to the advertising industry. As India grows into becoming a true single market, consumerism will rise. The distribution, availability and price of goods will all improve. E-commerce, FMCG and retail will all benefit. This in turn will drive the need for national campaigns, larger ad spends as we develop more truly national brands. This will all lead to the growth of the ad industry,” says Thakkar of KPMG. “While a percentage of growth is difficult to predict, over the medium and long term, the increased economic activity in the country will certainly increase the growth rates of the advertising industry.”

Tags : Impact Feature