The 5 % Bugbear

THE Budget speech of Finance Minister P. Chidambaram on July 22 dragged an old ghost back into the life of the advertising industry. A service tax of 5 per cent was proposed for advertising services. This is reminiscent of three earlier occasions in the past 15 years when a levy on advertising services, direct or indirect, has been proposed—and argued out—by the industry. On August 12, tentatively, the ad industry, along with the Indian Newspaper Society and leading media companies, is looking forward to presenting its case to the finance minister this one more time. The mission: to nip the tax issue in the bud rather than negotiate its composition.

As yet the details of the tax are unavailable, leaving the industry speculating. The 5 per cent could be levied on total billings of the agency or on the 15 per cent (of the billings) that it take as commission. Either way, the advertising fraternity is opposed to it. Says Mike Khanna, chief executive of the Rs 601-crore HTA, the country's leading agency: "We are against it fundamentally." First of all, the Constitution speaks of freedom of commercial speech. Besides, advertising is seen as a catalyst for economic growth which the Government claims to favour. A tax of this sort, feel the ad men, would curb rather than fuel growth.

Says P. Venugopal, managing director, Clea Advertising and Marketing Ltd: "If the gross billings are taxed, most of us would have to shut down." Agencies claim to make a net profit of 4 to 5 per cent of gross billings. Even if the commission is taxed, it is still a substantial burden. Since the last Budget, the agencies are already forfeiting 1.15 per cent of their 15 per cent share as tax deducted at source (TDS). The advertising services tax would mean giving up another 0.75 per cent of earnings (5 per cent of the 15 per cent commission is 0.75 per cent of the total billing).

Khanna feels the tax has to be an indirect one. That is to say the client or the advertiser is taxed while the agency only serves as a collection point. The tax has to be eventually borne by the advertiser—much like, say, the service tax on sharebrokers which is passed on to the client.

Even if the clients bear the cost, it will still affect both ad agencies and the media adversely. In the short term, this could mean buying less media as budgets remain inflexible. Agrees Irfan Khan, general manager, corporate communications, HLL: "As advertising costs rise, we look at even more cost-effective methods to communicate as we have to keep up the level of communication." In the long term, even if companies absorb the cost, they will look at ways and means of controlling mass media costs. Like fast-moving consumer goods (FMCGs) have shifted, en masse, to television which offers more cost-effective packages and more chance to narrowcast communication. If the proposed tax results in sharper negotiation with media companies, it could indirectly affect the revenues of ad agencies. Besides, the agencies will get stuck with an enormous amount of unproductive paperwork and the cost of getting it done.

Small, unaccredited agencies, more than a thousand in number, account for a third of total ad industry revenues. To share the benefit of the 60-day credit that accredited agencies get with publications, these small agencies route their press advertising through these accredited agencies. In return, they share the commission. Also, these agencies often work on a 5 to 12 per cent commission, much lower than the 15 per cent stipulated by the Advertising Agencies Association. This is, of course, an unofficial arrangement with the client to bypass the stipulation. A tax on the official commission can then prove fatal.

But isn't a 0.75 per cent tax small enough for a company to bear? Counters Khanna: "If it is so minuscule, then where is the need to levy it at all?" The industry feels that the argument could go on and on. But once the taxman prises open a tightly-shut door, additional tax burdens will follow in the budgets to come. Even if it does not initially affect the growth graph of larger companies, it will yet be a thorn in their side. And that's what the industry chieftains, armed with competent legal opinion, have set out to remove from the root. The mid-August meeting will tell whom the stars favour finally.