“The key to revenue growth is tax reform that closes loopholes and that is pro-growth. Then with a growing economy, that’s where your revenue growth comes in, not from higher taxes”
– John Hoeven
2017 has been a landmark year for the Indian economy. It has withstood a lot of churns and challenges owing to the demonetization drive, government’s push towards a cashless economy, and focus on expanding the tax base across sectors. The second half of 2017 witnessed the rollout of Goods and Services Tax (GST), the biggest game changer in taxation since independence. An act which was in the pipeline for 16 years, GST subsumes as many as 15 indirect taxes, making India one large market-place. A plenty of expert opinions and in-depth analyses are available for the discerning on the roll out, and the sectoral outlook post-GST. Our attempt here is to present a 10,000 ft view of the tax reforms on the segment that is close to our heart – Advertising and Marketing (A&M).
A&M fall under the ambit of Service industry. In the 5-tiered GST tax slab, this sector will be subjected to a service tax of 18%, an increase by 3% from the earlier 15%. While this increased tax burden may seem like a damper for the industry, the verdict on the consequences is divided. The short-term effect of the rate differential might be negative to neutral to absorb the tax load. The long-term effects, however, can be better evaluated if we familiarize ourselves with the standout addition of the GST tax reform – Input tax credit.
The Input tax credit is expected to be a shot in the arm for all sectors, and advertising and digital marketing agencies are no exception. The accrued benefit from the input credit system, could mean more money in the coffers for clients to invest in ad spends. While the first few quarters might be a learning curve for all involved, the overall assessment is that the advertising costs will come down and investments would grow. In the immediate future, a revenue neutral fallout of the GST is the most likely outcome.
A reform of this magnitude always comes with its teething problems. Initial hiccups will exist with deciphering and cracking the new ‘Good and Simple’ tax, especially in the A&M sectors that share close synergies with other sectors. Ad agencies with operations across geographical locations need to fine tune their implementations to demarcate the state, central, and inter-state GST taxes while invoicing their clients.
The GDP is projected to grow eventually once the benefits of GST percolate through the system, bringing in the much needed transparency and compliance. The general rule of thumb is that a fillip to the economy translates to more business to advertisers, typically in the order of 1.25 to 2 times the GDP. With the ever expanding digital revolution and e-presence of the consumers, cyber creatives might get the lion’s share of the new ad spends. The earnings from the Indian operations of the foreign technology juggernauts – Facebook, Twitter, Google, and Yahoo were not subject to any tax in India till recently. However, the 6% Equalization levy or ‘Google tax’ imposed since June 1, 2017 brings these non-resident companies under the tax radar. This might elevate the advertising costs of a company using their online services.
Spending where it matters (Sectoral spenders and thrifters)
The potential big spenders post-GST are FMCG, automotive, and consumer durables firms which have seen a tax rate cut. These sectors also enjoy a cess tax credit of 0.5% to 1% which could translate to inflow for the ads. Though the percentage is small, the number becomes significant especially for the industry behemoths.
Banking, Realty, E-Commerce, Financial services, and Hospitality might cut their marketing budgets or alter their go-to-market strategy to compensate for the higher tax rate.
The pricing and marketing strategy are likely to see a welcome departure from the usual eyeball grabber schemes like discounts, freebies, and offers post-GST.
For the Indian businesses, change is the new constant. Will GST be a ‘Good and Simple’ tax or a ‘Guiled and Stumped’ tax – it’s a wait and watch game for everyone!