Impact of GST on the Growth of Digital Advertising Agency
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Impact of GST on Digital Advertising Services

In a recent study, it was predicted that digital advertising industry has tremendous potential to grow exponentially in the coming years. A growth rate of 33.5% (CAGR) has been forecasted for the next three years. With such a high growth rate, it can become an industry worth more than Rs 255 billion. However, the sudden entry of GST in the Indian economy has left industry experts speculating about the growth trajectory of the industry. To better understand the effects of GST on the industry, it is important to comprehend the role of this sector in the Indian economy.

Irrespective of the nature of the business, advertising industry supports all other industries in their growth and promotion. It creates competition among businesses, makes the market more animated and customers more educated about top brands. Eventually, when a business doesn’t invest adequately in advertising it fails in competition; moves slowly in the market competitive and loses customers’ attention. Therefore, in every economic scenario, advertising plays a crucial role in leading brands towards success.

According to the latest report by Ernest & Young (EY), industries like FMCG, Automobile, and Consumer Durables will be able to advertise more due to GST at their current advertising budget because companies would enjoy full input tax credit. Whereas, there is also an extensive list of industries, including oil & gas, banking, logistics, and education to whom advertising will be more expensive than ever. The rise of service tax from 15 percent to 18 percent is, of course, a matter of concern for many industries which are unable to attract any incentive. Also, due to a drastic change in the taxation process, advertising industry that operates from multiple locations can experience some unwanted hiccups in first few quarters under the modified tax regime as they have to maintain both Central GST and State GST.

[ Read: Types of GST ]

Ad Agencies come under service sector which is liable to pay extra 3 percent tax under the GST regime, i.e., 18 percent instead of 15 percent. Who will bear this additional burden? As brands are the receivers of these services so the burden would evidently shift to them and they will subject to pay higher fees to their agencies. Industries which are offered to avail Input Credit can somehow minimise the impact of 3 percent increase in service tax, but for rest of the others, it may discourage their advertising plans. The overall impact would be negative as to ensure the same level of reach and impact for a particular ad campaign on traditional media; businesses shall be compelled to set higher budgets after the implementation of GST. On the other hand, digital advertising is blessed with more advanced and less expensive advertising tools and media that enable agencies in controlling the cost to a great extent.

While increased tax burden on sectors like e-commerce, banking and finance services, logistics, oil & gas, education, power & utility, hospitality and many others can negatively influence ad budgets of thousands of companies. These brands cannot compromise with promotion and image building activities, but making them more costly is not a worthy decision. So, for smart marketers, it’s time to switch onto the more impactful and highly cost effective alternative – i.e., digital advertising. Running an ad campaign on digital platforms always saves money. The recent study of Kotak Mutual Fund also claims that organisations which are capable of creating a creative at reduced cost would enjoy additional 10 percent spending on advertisements due to lower production cost.

Digital advertising is growing at a rate of 14 percent per annum in India, and in 2016-17, it has joined the club of $1 billion or above industries. After GST, the overall ad share of the digital media is expected to reach 24 percent by 2020, means 100 percent more (double) to its contribution in the Pre-GST era. Besides having the edge over TV and Print Media on the basis of more interactive and engaging content, advertising on a digital platform is highly cost efficient and calculative as well. India is celebrating a digital revolution, and by 2022 there will be more than 800 million smartphone users in the country. Moreover, the unprecedented growth of social media, native advertising, content marketing and programmatic is luring both customers and marketers towards digital advertising.

Being the part of service industry advertising sector has pay 3 percent extra tax, and those larger firms which operate from multiple locations cannot avoid the complexities resulted from SGST, CGST, and IGST, at least for first few months. As a result, traditional advertising will be more expensive for businesses. Digital Advertising can play a counterbalancing act in this direction as it is equipped with smart and cost effective solutions. So, to rationalise their budgets and advertising goals, business should opt for digital advertising, which is the future of the industry.

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Niteesh Singh
Niteesh Singh
Niteesh is a Tax Researcher and Content Lead at H&R Block (India). He holds an MBA with a specialisation in BFSI domain. In his career spanning over six years, he has helped thousands of people understand taxes in a simple and effective manner. Outside work, Niteesh is an astronomy geek who is also involved in wildlife conservation activities.