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Product placements to get taxing

March 09, 2006 12:08 IST

Product placements are set to become more expensive with the finance ministry bringing the sale of advertisement space on Internet, buildings, vehicles, motion pictures, television serials, video and music albums, mobile phones, ATMs and films under the ambit of the 12 per cent service tax.

While print media has been specifically excluded, the revenue department has said, "Sale of advertising time in television and radio by any person other than a broadcasting agency or organisation is covered."

In a circular to all chief commissioners, the revenue department said while corporates or firms involved in sponsoring an event would come under the ambit of the tax, the organisers of the events would not be liable to pay service tax.

With regard to air transport of passengers travelling by business class, the department said the liability to pay service tax would be on the aircraft operator, which is the service provider. Also, the levy would not be applicable to transit passengers who did not leave the customs area.

It also clarified that Indian Railways would be excluded from service tax on transport of goods in containers.

"Suitable abatement for the amount paid by service providers to railways for haulage services will be prescribed separately. The levy would therefore be restricted only to that portion of the consideration received and retained by the service provider for the services provided," the department said.

Regarding service tax on Automated Teller Machines, the department said outsourcing of ATMs and their related services such as operation, maintenance, management of hardware and software and cash replenishment by banks and other financial institutions would be taxable.

Industry experts say the government's move to bring the sale of ad space under service tax can apply a bit of squeeze on the industry, since advertising budgets are likely to remain finite and make clients more demanding.

With service tax going up from 10 to 12 per cent, the annual advertising spend on the electronic media, about Rs 5,000 crore (Rs 50 billion), will see Rs 600 crore (Rs 6 billion) set aside as tax.

Rohit Ohri, senior vice-president, JWT, pointed out that the clients' advertising budgets for the year had been frozen and so they and the advertising agents would have to find ways to save money. Clients and ad agencies would thus have to start prioritising products and strategies.

Amitesh Rao, vice-president, Publicis, said the increase in service tax would indirectly and adversely affect the advertising agencies and media buyers, which would probably have to share the burden of the levy.

Although it was still not clear which components would be passed on to buyers, clients may negotiate a reduction in commissions of advertising agencies and media buyers.

However, O&M's chairman and national creative director Piyush Pandey said the impact might not be significant since the "finance minister has said there will be ways of offsetting the service tax against other taxes".

S Madhavan, executive director, PricewaterhouseCoopers, said the service tax was more like "a pass through and not a net cost".

Since advertising for manufacturing companies was an input service, they would be able to offset this against excise duty. Similarly, service providers advertising on-line could offset the service tax with the same they charge from their clients.

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Monica Gupta & Nayantara Rai in New Delhi
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