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Online & mobile advertising will now have to swallow service tax pill

MUMBAI: Online and mobile advertising is being given a bitter pill to swallow. Still in a nascent stage, the two sectors will be included in the service tax dragnet while print media will continue to be sheltered.

Arun_Jaitley01Clearly, the hand-holding period is over. While Union Finance Minister Arun Jaitley has kept print media under the negative list, digital advertising has moved out. Experts have expressed concern about this move, stating that this will hurt the fledgling industry which is pegged at Rs 2900 crore (Rs 29 billion) by Internet and Mobile Association of India (IAMAI).

The online and mobile sector was brought under the negative list two years back as a gesture of support to this fledgling industry. “The legitimate expectation of this industry was that such exemption would continue for at least 3-5 years as is normally the case. For the industry, this has come as a very unpleasant surprise,” IAMAI said in a statement.

In his maiden budget speech, Jaitley announced extension of the 12.36 per cent service tax on online and mobile advertising. The two sectors were enjoying exemption from service tax under the negative list along with print media, while radio and television advertising was subjected to service tax.

Said Hungama Digital Media Entertainment MD & CEO Neeraj Roy, “While it is still a fledgling segment, the act of bringing back online advertising into the ambit of service tax is almost a conflicting move and not a welcome one. Though it is very encouraging to see the government paying more attention to the internet and supporting animation and gaming, I view the initial allocation as a small step in the right direction. China has a near USD one trillion internet economy. India will transition from 2G to 4G and add another 400 million mobile internet users over the next three years. We need an unprecedented push towards digital for a significantly higher consumer adoption as it will spark productivity across sectors.”

Leading mobile advertising exchange Vserv.mobi co-founder and CEO Dippak Khurana added, “The new government’s maiden budget proposes to levy service tax on online and mobile advertising which we believe will adversely affect the industry’s growth.

“It looks like a differentiated treatment as traditional print media remains unaffected by the tax burden, but new digital media which is actually driving innovations will have to bear the brunt. Currently, India’s exponential mobile penetration and app consumption patterns are driving the growth of the mobile advertising industry, and this move could hamper innovation efforts of the entire ecosystem comprising mobile development start-ups, advertisers and publishers. While the budget is in favour of small-scale set-ups and entrepreneurs, the provision for taxation is detrimental in nature for budding developers and publishers,” Khurana added.

MindShift Interactive CEO Zafar Rais also added that it will negatively impact the industry. Rais said, “With service tax being added to online and mobile advertising, digital/web/social media agencies will surely face a negative impact.”

However, mobile video and rich media advertising firm Vdopia Inc VP – APAC Preetesh Chouhan believes that the levy of service tax will not impact the industry and that it will actually be a good opportunity.

“As a video advertising company, our numbers show that we are witnessing an amazing organic growth of both online and mobile audiences and this is not going to change. So, my opinion is that tax levied will not affect how brands are allocating spends on digital media. It could be a good opportunity to see if we have made the final transition from niche to mainstream advertising,” stated Chouhan.

Taking a similar stance, PricewaterhouseCoopers (PwC) India leader – entertainment and media Smith Jha said, “While some sections of the industry are not happy with the inclusion of online and mobile advertising in service taxation, we believe that the philosophy of pruning the negative list in order to promote GST in the industry is in the right direction and thus inclusion of such services in the taxation is a small price to pay in the short term.”

Clients’ perspectives

TastyKhana.in founder and CEO Shachin Bharadwaj said, “One of the dampeners is the imposition of service tax on digital advertising. This will make marketing a bit more expensive for e-commerce companies. There are many other initiatives promised, but what needs to be seen is the implementation plan.”

Giftease.com CEO Vivek Mathur added, “The budget seems to have made the right signals of intent on steps to revive the economy but stopped short of meeting expectations on firm steps, and the anticipated bitter pill is missing. Reinforcing intent on GST helps, but the will to push this through over the next few months remains to be seen.”

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