Smaller advertisers may need to take a fresh look at their online strategy as a fallout of the government’s plan to levy an equalisation tax of 6 per cent on online advertisement services offered in the country by non-resident entities, according to digital ad agencies.
“What is raising questions is that the 6 per cent levy will have to be deducted by Indian advertisers who buy and pay for the online ads. Honestly, we cannot expect Google to quietly absorb the cut. The concern is that it will, in all likelihood, pass on the levy to the advertisers themselves by charging a higher ad rate,” Chaaya Baradhwaaj, founder and MD of Mumbai-based digital ad agency BC Web Wise, said.
“The move has raised eyebrows because India’s digital economy is booming. If Indian advertisers end up bearing the impact of the equalisation levy, it could be detrimental to some segments of the industry without having any direct impact on the margins of the large ad service providers themselves,” she added.
The Union Budget introduced the equalisation levy on the global advertisement platform, which offer their services in India and do not have a permanent establishment for payments exceeding Rs 1 lakh. It also put the onus of such a levy on the user of the service.
Separate legislation
Further, as the levy is not introduced as part of the Income Tax Act but as a separate legislation under the Finance Bill, global firms that offer such services in India cannot claim a tax credit in their home country under the double taxation avoidance agreements, experts point out.
“Clients for whom online advertising is important will continue to do so despite taking the hit. Others may decide to move out of online ads and stick with print and television,” said Nimesh Shah, co-founder of another Mumbai-based digital agency, Windchimes Communications Pvt Ltd.
Ms Baradhwaaj, whose agency counts Hero and Unilever among others as its clients, noted that smaller advertisers lack bargaining power when compared to the bigger ones, which will hurt their prospects of negotiating on price.
Future approach
“Brands with larger online ad spends buy inventories in bulk. Their future approach would be to try and offset the increased cost by getting demand side platforms and exchanges to negotiate a lower cost per 1,000 impressions (CPM) for their online campaigns. This basically means bargaining for a higher number of impressions for the same ad spend,” she added.
However, smaller advertisers won’t be able to negotiate for higher impressions owing to their limited inventories, Ms Baradhwaaj said, adding that until there is more clarity on its implementation, it seems smaller online advertisers would be more affected by the equalisation levy.
The current billing works this way: Rs 100 per ad, plus the agency fee, plus the 14.5 per cent service tax. “With the levy, the equation changes to Rs 100 per ad, plus the ad agency fee, plus the 6 per cent levy, plus the 14.5 per cent service tax,” according to Mr Shah.
If advertisers end up bearing the impact of the equalisation levy, it could be detrimental to some segments
