The GST Council has set the rate for advertisements in print media (currently exempt) at 5%. Further, advertisements in non-print media are to be taxed at 18% which is an increase from 15% in the pre-GST regime. With the finalization of these rates, the industries are evaluating the impact of GST on the volume of advertisements in their respective sectors. We have attempted to list down, in this article, the impact of GST on the advertising budgets for the following trades and subsequently a broad impact on the key economic sectors.
Most of the manufacturers do not have an output tax liability under service tax. Hence, currently, Krishi Kalyan Cess (‘KKC’) at 0.5% spent on the advertising would be a cost to the manufacturer in addition to Swacch Bharat Cess (‘SBC’) at 0.5%. This lead to a credit blockage of 1%. Manufacturers would benefit under GST since the full credit of GST charged on the advertisement spends (5% on print advertisement and 18% on non-print advertisement) would be available as input credit leading to a 1% increase in the advertisement budgets.
Traders have no output liability under service tax or excise. Thus, in the existing tax regime, Service tax at 14% was unavailable as a credit to the traders in addition to 0.5% SBC and 0.5% KKC. Entire credit of GST either at 5% or 18% would be available to the traders under the GST regime. In light of this, the impact for the traders would be highly positive as the advertisement budgets would increase by 15%.
In the pre-GST regime, SBC paid on the advertisement spends is a cost to the service providers. There appears to be a positive impact on the service providers due to the availability of full credit under GST increasing the advertising budgets by 0.5%.
Having provided a generic impact on the different types of trade, we have further attempted to provide an impact for the key sectors in the Indian economy below:
FMCG companies were mostly located in these excise-free zones thereby enjoying tax holidays and were not eligible for full input tax credit. Under GST, such companies would be eligible for the entire credit as such exemptions are likely to be discontinued. Thus, due to a reduction in cost, FMCG advertisers can advertise more in the same budget.
Consumer Durables and Auto
Consumer Durable and Auto companies located in the excise-free zones were currently ineligible to claim full input tax credit. As such exemptions are likely to be discontinued under the GST regime, such companies would be eligible for full input tax credit. Consumer Durable companies and Auto companies engaged in import of manufactured durables and completely built unit respectively, were not eligible for input tax credit of service tax charge in pre-GST regime as their output tax was only subjected to state VAT. In GST regime, such companies would benefit from availing full input tax credit.
Under the pre-GST regime, e-commerce companies were eligible to claim input tax credit of service tax charged on advertisements. However, GST would negatively impact loss making e-commerce companies having accumulated credit balances on account of huge advertisement spends as accumulated credit would increase in GST on account of increase in rate of tax on print and non-print advertisements.
Banking and Financial Services
Due to the continuance of partial reversal of the input tax credit under GST and the increased rate of tax on the print and non-print advertisements, there would be a negative impact of GST on the Banking and Financial services leading to lesser advertisements in the same budget.
In GST, developers shall continue to be eligible to claim input tax credit against liability of under construction properties as is available in the pre-GST regime However, since GST is not leviable on sale of completed properties, developers may suffer reversal of input tax credit. Depending on 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 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, since entire input tax credit would be available, the impact of GST on their advertisement budgets would be neutral. For airlines flying the international sector, in GST, the quantum of input tax credit reversal may increase or decrease vis-a-vis the pre-GST regime. Since the quantum of reversal is dependent on the share of revenue earned from transportation of passenger or cargo, airlines with more cargo transportation revenue are likely to be better off as compared to airlines with passenger transportation revenue.
Cigarettes companies have restriction on advertising their products in mass media. Promotional material installed at dealers’ premises were 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 For Human Consumption
Pre-GST tax regime continues to be applicable on the sector as alcohol for human consumption is outside the ambit of GST. Due to increase in rate of print and non-print advertisements, the overall cost of advertisements shall increase.
Under the pre-GST regime, retailers were not eligible to claim input tax credit of service tax charged on advertisement spends. Under the GST regime, retailers shall be eligible to claim full input tax credit. Hence, retail advertisers would be able to place more advertisements in the same budget.
Hotels and Hospitality
Hotels were not eligible to claim input tax credit of service tax charged on advertising spends due to the levy of various indirect taxes in the pre-GST regime. In GST, hotels and banquets will be eligible to claim higher input tax credit as compared to pre-GST regime thus resulting in reduction of cost of advertising.
Government is not eligible to claim input tax credit either under service tax regime or GST regime. Due to increase in rate on print and nonprint advertisement, the overall cost of advertisements shall increase.
Current tax regime continues to be applicable on the petroleum sector since it is outside th ambit of GST. Currently, 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.
Power and utility
Similar to the provisions of the pre- GST regime, under GST regime also, power companies would continue to be ineligible to avail input tax credit of the GST charged. Due to increase in rate of print and non-print advertisements, the overall cost of advertisements shall increase.
Under the pre-GST regime, Telecom companies are eligible to avail input tax credit of taxes charged on advertisement spends. Telecom companies shall continue to avail full input tax credit of GST charged. Insurance companies would continue to avail full input tax credit of GST charged on the advertisement spends as under the current regime. Thus the impact on the advertisement budgets would be neutral.
Gold Jewellery Retailers
Contrary to the pre-GST regime, under GST regime, gold retailers would get input tax credit of taxes on advertisement spends, thereby increasing the effective budget for advertisement spends.
Under GST, with the reduction in the number of products being exempted, reversals on account of exempted revenue would reduce and input tax credit of taxes charged on procurement shall be available. Thus, the impact on the textile sector is slightly positive.
With Educational Institutions continuing to be exempt in the GST regime, no input credit would be available to such institutions. The impact of GST on such institutions appear to be negative in view of the increased cost of advertising.
Tour Operators are likely to have a negative impact on the GST regime, since the services provided by Tour Operators have continued to be taxed with no input tax credit with a higher rate of tax, leading to an increase in the cost of advertisements.
In order to make most of the advertising budgets and provide customer satisfaction Advertising agencies and Media Owners should assess the GST impact on the advertisers.