1. GST to boost companies ad spend; here’s why

GST to boost companies ad spend; here’s why

The Goods and Services Tax (GST) regime will enable most businesses, particularly traders, to up their advertisement budgets.

By: | New Delhi | Published: June 17, 2017 5:58 AM
GST, market watchers, consumers While market watchers say that instead of spending more on advertising to create demand, marketers can pass on the benefit to consumers directly.

The Goods and Services Tax (GST) regime will enable most businesses, particularly traders, to up their advertisement budgets, according to an EY report. With credit to be available on the GST (service tax) paid while making payments to advertisers, traders could save on taxes and be able to increase their ad spend by as much as 15%. Manufactures and service providers could increase their advertisement budgets by 1% and 0.5%, respectively, thanks to enhanced input tax credit facility.

In the current regime, traders pay 15% tax on their advertisement spend bill, which includes service tax of 14% and 0.5% each for Krishi Kalyan Cess (KKC) and Swachh Bharat Cess (SBC). However, since the traders pay state VAT, they can’t take credit of the service tax as the central VAT and state VAT chains are not integrated and no cross-credit is available between them. So, the entire service tax on advertisement is a cost to the traders at present. The GST will integrate both the tax chains and traders could mitigate their tax outgo on advertisement.

The service providers will be able to save 0.5% of their current ad cost. Under GST, full credit of tax paid for print advertisement (5%) and for non-print advertisement (18%) would be available to offset their output tax liability, the report said.

However, industry observers say that there are mixed views as far as the immediate impact on advertising is concerned, post the roll-out of GST. “Advertising spend in the three-six months could witness a drop, as companies would not be able to advertise with those media firms which are not GST-compliant. Also as advertisers prepare for GST, it would take some time to adjust to the new regime. But in the long run, we can expect a rise in ad-spend,” observed CVL Srinivas, CEO, South Asia, GroupM – a media planning company from the house of WPP Group.
As for manufacturers, a lot also depends on the tax slab a product fall under. For example in case of product like biscuits which post roll out of GST will fall under the 18% tax slab, manufacturers may resort to advertising to push an increase in sale.

“If price of biscuits rise post July 1, then there would be a need for manufacturers to ensure that demand for biscuits increase and for that they would resort to advertising, hence spending more,” said Pravin Kulkarni, former general manager, marketing at Parle Products.

While market watchers say that instead of spending more on advertising to create demand, marketers can pass on the benefit to consumers directly.

“Instead of spending more on advertising, companies can also pass on the benefit to consumers by reducing price of products. After all, there have been examples in the past, where a huge spend on advertising hasn’t translated into doubling of sale,” explained senior brand consultant, Chandan Nath.

The Indian media and advertising industry, grew by almost Rs 5,500 crore – adding another 12.5% to Adex to reach Rs 49,480 crore in 2016. The categories that have contributed most to the overall growth in 2016 are the FMCG sector with a 32% share in the overall ad-spend followed by automotive category at 10% and telecom at 8%.

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Interestingly, e-commerce that had taken the media market by storm in 2015 contributed only 4% to the total pie in 2016. In fact, investment by e-commerce category decreased by more than Rs 500 crore across television, print and radio in 2016. In 2017, the advertising industry is expected to grow at a rate of 13.5% to reach Rs 56,152 crore.

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